Entrepreneurship in Transition Economies

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Literature Review

Entrepreneurship in Transition Economies

Definition of entrepreneurship

Before we can analyze the state of the entrepreneurship in Russia, in terms of digitized newspaper, we will make clear what do we mean by entrepreneurship in the context of this work. The general definition of entrepreneurship used in this research, is the definition by Ronstadt (1998, p. 38):
“Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and/or career commitment or provide value for some product or service. The product or service may or may not be new or unique, but value must somehow be infused by the entrepreneur by receiving and locating the necessary skills and resources.”
Therefore, entrepreneurship assumes value generation. However, the value can come as from the newly developed product or service the same from the better allocation of resources. This is important to understand when we look at the digitization of the newspaper as a part of the entrepreneurial process. The newspaper does not have to invent a new form of online news media to be called entrepreneurial. The placement of the newspaper content online can be an entrepreneurial activity as well, if the ‘incremental wealth‘ was created. However to have a better understanding of the entrepreneurship in Russia, we have to define entrepreneurship in transition economies separately.
Scase differentiates two different types of business start-ups in transition economy countries: legitimate and illegitimate. Into the first one the author includes entrepreneurs and proprietors, while the second one involves anarchistic business owners, Mafia members being one of them (Scase, 2000). In our work, we refer to the legitimate type of the entrepreneurship. Therefore, we differentiate two terms: ‘proprietorship‘ and ‘entrepreneurship‘. It is important to distinguish between these two concepts, as the administration and management of business depends on which one of these two types the venture represents. In other words, the operational management of proprietor is different from the one of entrepreneur. Scase had made a clear distinction between these two concepts in his analysis of small and medium businesses in Central Europe and Russia. Proprietor and entrepreneur mainly differ in their motives. It is hard to distinguish one from another in the countries that are in the process of transition, such as Russia (Scase, 1997). Entrepreneurship is characterized by the motive of ‘rational‘ decision-making related to the opportunities’ change in the market. Therefore, entrepreneur is interested in investing revenues generated from business operations into the growth of the venture. Proprietorship, on the other hand, is rather motivated by personal interests, and enjoyments. The owner would choose to maintain his lifestyle and consumption habits rather than investing into the business growth. It results in capital assets not being used for financing of a long-term capital accumulation (Scase, 2000). Therefore, proprietorship is oriented towards consumption, and aims for a business to survive rather than grow (Goss, 1991). As it was mentioned before, it is rather easy to confuse these two forms of business administration in former Soviet Union countries, and so in Russia. In this work, we are rather focusing on entrepreneurship than proprietorship in online newspapers of Russia.
For the purpose of this work, we use a meta-analytical definition given by Paul Burns.
Entrepreneurship is an administration of a business by entrepreneurs, who ‘use innovation to exploit or create change and opportunity for the purpose of making profit. They do this by shifting economic resources from an area of lower productivity into an area of higher productivity and greater yield, accepting a high degree of risk and uncertainty in doing so‘ (Burns, 2005, p. 10)

Characteristics of entrepreneurship in transition economies

Entrepreneurship in transition economies, apart from being associated with proprietorship, has a number of other characteristics. Baumol argues that the ‘rules of the game‘ have main affects on entrepreneurship. The policies and regulations determine how the entrepreneurs will behave and how they will run their business. The transition in the economy from one phase to another affects the set of rules and the allocation of entrepreneurial potential. The number of entrepreneurs or their motives is only a secondary factor influencing the development of entrepreneurship in the transition (Baumol, 1990). The transitional nature of the environment, in such countries as Russia, shapes certain characteristics in entrepreneurship. We will explain them through three features discussed in the academic literature most widely. These are types of entrepreneurs, state’s role and environmental factors (Aidis, 2003).

Types of entrepreneurs

Bruno Dallago divides entrepreneurs in transition economies into four types: elite members, domestic, returning migrants and foreign entrepreneurs. Elite members are described as political figures. These people used to be a part of the political elite in the ‘old‘ regime. Most of them were top managers of the state-owned ventures. Dallago characterizes these entrepreneurs as rather unproductive, extremely competitive and oriented towards redistribution rather than production. Second type is domestic entrepreneurs. These are native entrepreneurs who are not a part of the elite, but have been entrepreneurs even before the collapse of the USSR. The third type of entrepreneurs Dallago describes as returning citizens who potentially can have a positive impact on the entrepreneurship, as they bring new human, knowledge and financial capital. Finally, Dallago identifies foreign entrepreneurs as a fourth type and associates them with foreign direct investments and innovation (Dallago, 1997).
In addition, Aidis characterizes entrepreneurs of the former Soviet Union countries as short-term oriented who are more focused on getting rich, and getting rich fast. This is due to the corrupted nature of government structures, where state officials get personal benefits and compromise the image of the country as a whole. As a result, entrepreneurs are risk-averse, and many of them are part-time state workers (Aidis, 2003).

State’s role

Another distinctive characteristic of entrepreneurship in the transition economy countries is the role of the state in the process. Smallbone and Welter (2001) argue that in countries with comparably slower transition such as Belarus, Ukraine or Russian Federation governments tend to over-regulate business sector. The state sees small business start-ups as an additional source of tax revenue, rather than a necessary bridge for the transition into the market driven economy. These regulations reduce the growth and further development of the private business sector. The entrepreneurship is restricted by regulations, preventing the emergence of new jobs and innovation, along with the entry of external investment (Smallbone & Welter, 2001)

Environmental factors

Finally, the environment that affects the development of enterprises can characterize the entrepreneurship in the transition economies. Environmental factors are linked to government operations we discussed above, but not limited to them. The transition process creates an intimidating economic environment for the start-ups due to the high unemployment, growing inflation and decreasing real earnings (Smallbone & Welter, 2001). The transition requires acceptance and allowance of private forms of ownership, but most of countries in transition lack the productive entrepreneurship. This results in a lack of business infrastructure, support for entrepreneurship and external investments (Aidis, 2003)

Russia as a transition economy

Transition economy assumes re-orientation of the country’s economic system from planned to market-driven. This transition brings changes into the political, social and economical environment in the country. In the analysis of the first twelve years’ transition economies, Svenjat (2002) concludes that transformation occurred in all of the transition countries. Nonetheless, the difference between advanced and transition economies got bigger. The typical characteristic for transition countries is fast adoption of reforms concerning liberalization of process, stabilization of macroeconomic environment, and privatization on a small-scale. However, those economies that stepped further and developed corporategovernance and functional legal system were more successful in the transformation than those who did not. Russia was one of the countries that neglected the establishment of a well functioning legal and banking system, along with engagement in large-scale privatization (Svenjat, 2002).
During the past twenty years, Russia has acquired an image with a scandalous political and social profile, sourced by the number of changes related to political and social issues. In addition to that, an ever-increasing process of globalization and digitization all over the world has greatly influenced the overall development of the country. Within a sudden change of government regime and a countrywide anarchy in the early 90s, companies and organizations experienced dramatic changes. Some of them collapsed, while others managed to adapt to the new ‘rules of the game‘.
The egalitarian economic system of the USSR conflicted with the principles of the market economy. On the labor market, the government calculated wages artificially in order to discourage free competition. However, in 1989 the gradual transition to free market capitalism in Russia had started (Noland & Son, 2012). The main principle of moving from a planned economy to a market economy is based on “transferring property rights from the state to the private sector”, implying that the “economic incentives are shifted and socialist central planners and managers are effectively turned into free market capitalists” (Noland & Son, 2012, p. 2). Kolodko (1999) states that transition to a free market economy is a continuous process and the change cannot happen at once because it involves modernization of the entire system, as well as implementation of new business administration principles; it requires “not only liberal regulation and private ownership, but also adequate institutions” (Kolodko, 1999, p. 234). The transition in Russia has been also characterized by the development of small enterprises. However, the dynamic was mainly conditioned by high rates of unemployment and desperate attempts of citizens to increase a life quality level (Smallbone & Welter, 2001).
Nonetheless, Shigeki (2012) argues that Russia already went through its hardest stage of transition and is on the way to a market economy. The shrinkage of GDP and extensive inflation were predominant in the first half of 90s, but the 1999 Russia’s economy grew rapidly. The depreciation of ruble allowed more feasibility for exporters, development of domestic products for a substitution of now too expensive imports. Although some doubts concerning the regulations of Russia’s banking system still remain, which might indicate that transition has not been completed in full (Shigeki, 2012). Similarly, Pankin, Fedotov, Richter, Alekseeve and Osipova (2011) state that from 2005 until the economic crises of 2008, country experienced a rapid growth of the economy, mainly due to the increased prices in the oil and gas market. Nonetheless, following the financial crisis stroke in 2008 with decreased prices on natural resources including oil and natural gas, Russia’s GDP and per capita income had dropped; followed by the increase in unemployment rates in 2009 (Pankin et al., 2011).
Therefore, having a general overview of the entrepreneurship in Russia and comprehensive understanding of the characteristics of transition economy that country prevails, we next review the trends in the media industry in Russia.

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News Media in Russia

Newspaper industry in transition economy

All the industries in Russia went through the transition period. Media sector is not an exception. Media also had to switch from the planned form of economy to the one driven by the market. Before the collapse of the Soviet Union, the media in Russia was owned and financed by the state. One of the functions of the news media in the USSR, and Russia as a part of the Union, was to distribute propaganda. The propaganda involved USSR government ensuring that the ideology of the communism is delivered and accepted by every citizen. Mass media was a helpful tool for implementation of propaganda (Braguinsky & Yavlinsky, 2000, p. 4). Radio and printed media were the distributors of propaganda and Soviet ideology. Therefore, these media were of a great importance to the leaders of the Union, with this realization government did everything to remain as the main controller and owner of the newspapers and other media. Means of information were deeply integrated into the state machine and were used as a mean to manipulate the information delivered to the society. Zassurskiy (2011) calls mass media a ‘fourth power’ of the USSR; executive, juridical and legislative being the first three. Journalists as representatives of these ‘power‘ were aiming at enlightening and agitation of the society for the ideology of the USSR, rather than objective and independent reporting of news.
After the collapse of the Soviet Union in 1991, mass media in Russia gained the possibility of private ownership. The law from 1990 allowed first legal production of private mass media. However, the printing and distribution costs of the media were too high for a private ownership. In addition, Russian news media market lost a big part of its readers due to the collapse of the Soviet Union and emergence of separate independent states that have their own media. The government subsidies were no longer forced on media carriers. Therefore, news media gained an opportunity of functioning independently from the government. However, this worked only in theory. In practice newspapers had to turn to the state for help, in order to remain competitive in the market, as for example “Komsomolskaya Pravda” and “Izvestiya” did (Zassurskiy, 2011). Therefore, one of the characteristics of Russian media in early 90s was its remaining financial dependence on the government.
The crisis of economical stability and financing of the newspapers started in early 90s. Since then, it has been a part of Russia’s transition to the market economy. Another characteristic of the newspaper industry in Russia is the content of the paper itself. Due to the financial ties with the government, newspaper industry inherited the USSR’s form of reporting. The news were presented with an angle convenient to the subsidy giver. However, reporting became less biased after the war in Chechnya. With the emergence of controversial theories about government’s role in the war, the loyalty of journalists went back to the reader. Newspapers had a chance to present the situation from their own perspective. Many journalists refused to favor government actions in their reports on situation in Chechnya. Reporters decided to discuss the conflict objectively, without influence from government. At this point, printed media repositioned itself as independent, which is also as a point where newspapers, along with other Russian media, got closer to the freedom of speech (Grabel’nikov, 1996). Therefore, one Chechnya war became a changing point for many printed media in Russia. However, it is important to look at the development of Russia’s media sector after the events in Chechnya.

 News media in Russia after the war in Chechnya

In the first few years of the 21st century, mass media in Russia increased their share in the market. Since 2003 till 2008 the average annual growth of the market size of Russia’s media was 5.7%. Consequently, the market size grew from $6.5 billions in 2003 to $10 billions in 2008. However, in 2005, the law that guaranteed partial economical support for printed editions since 1995 was annulled. For the printed media, it meant a cut off from any financial support sourced by the federal budget. Newspapers and other printed media had to find other sources of financing, which included advertisement as a means of income. To attract more advertisers, newspapers had to expand their audience base and increase its circulation numbers. In 2003, 40% of the income from the advertisement was distributed among nine major publishers of printed media, such as “Kommersant“ and “Independent Media“ (Sodruzhestvo Bumazhnyh Optovikov, 2004). The remaining newspapers got relatively small share of income from advertisement and had to look for additional sources of financing. This resulted in newspapers being patronized by either entrepreneurs or government officials. Therefore, from 90s until today, newspapers in Russia often served the personal interests of those who supported the media financially (Vartanova and Smirnov, 2009). Despite the financial dependence the annulation of the law in 2005 had brought, news media in Russia had experienced an unparalleled growth in 2006-2007. The overall economic condition in Russia has bettered due to the higher market prices on raw materials, of which Russia is a big exporter in the world. The economic growth also increased the access of the society to the computers, Internet subscriptions and advertisement in the media. These resulted in two successful years for the economical development of Russia and its news media industry, before the economic crisis of 2008 stroke (Pankin et al., 2011).
Before the financial crisis of 2008, the newspaper industry in Russia was subject to economic growth. However, the trends and characteristics of newspapers in Russia started to change after 2008, therefore, it is important to discuss the period from 2008 until today separately.
Pankin et al. (2011) concludes that the changes in news media in Russia occurred under influence of four major factors: the rapid growth before 2008, the financial crisis, the new head of the state – prime-minister tandem and the boom in the online communication. Each of these factors has to be discussed separately.
1) The rapid growth before 2008
The rapid growth in the media sector in Russia attracted new investors from abroad, such as Norwegian Schbsted and German Wochenarbeitszeit (WAZ). Nonetheless, to stay away from the influence of state officials, foreign investors were mostly interested in local, regional media. As for the major, national printed media companies, they remained under the control of state-owned enterprises or oligarchs that are close to the government (Pankin et al., 2011).
2) The financial crisis of 2008
The second factor, the financial crisis, had caused a downturn in economics of news media. The newspaper industry lost a part of its profit from advertisers. There has been a 4-5% decrease in the income from advertisement in 2010, compared to pre-crisis period (Rossiyskaya Periodicheskaya Pechat, 2011). To get through the crisis, owners of newspapers had to look for the ways to increase or at least maintain their audience. This caused a major shift in the industry, turning newspapers into entertainers rather than sources of news. Vartanova and Smirnov (2009) suggest that today’s mass media in Russia became an entertainment-focused industry. Newspapers have become a vivid example of such a transformation. The best-selling newspapers in the country are those of entertaining nature. In the popularity ranking constructed by Rospechat along with Federal Agency of Press and Mass Communications in Russia, there is only one newspaper in the top ten that does not classify as an entertainment medium. It is newspaper “Izvestiya“ which ranked ninth and has only 2% popularity in the market (the first three newspapers in the ranking have 14%, 13% and 8%). Such a transformation is criticized by its lack of strategic planning and lack of long-term solutions (Vartanova & Smirnov, 2009)

1.2. Problem Statement
2.Literature Review
2.1.Entrepreneurship in Transition Economies
2.2.News Media in Russia
2.3. Case Introduction: Novaya gazeta
3. Research Questions
4.1. Research Approach
4.2. Data Collection and Analysis
4.3. Reliability
4.4. Validity
5.1.Printed media trends in Russia
5.2. Entrepreneurship in newspapers in Russia
7.2.Limitations and Further Research

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