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Poland/Hungary: Can Small Business Lead To Prosperity?

Small and medium-size enterprises are a key factor in the economies of the Central and East European transition states, where successful small businesses have been expected to grow larger, create jobs, and increase prosperity. RFE/RL correspondent Breffni O'Rourke looks at such businesses in Poland and Hungary -- two of the advanced transition nations -- to see if the expectation is legitimate.

Prague, 28 March 2000 (RFE/RL) -- As the old heavy industries of Central and Eastern Europe have declined, small, flexible companies more in tune with the needs of the modern economy have sprung up to help provide new jobs.

Poland and Hungry, the two most dynamic economic players of the region, illustrate the importance of these "start-up" (beginning) companies. Poland has some 2 million small and medium-size enterprises, known by their English acronym as SMEs. They produce about half the country's gross domestic product (GDP) and employ more than 60 percent of its total workforce. The Polish SME sector has grown annually for the last nine years.

Hungary has some half a million small and medium-size businesses, which -- given the country's smaller population -- is about the same ratio per person as in Poland.

Typically, a small enterprise starts when an individual identifies a business opportunity, then uses ingenuity and a little capital to build a modest but viable business. Ideally, as the volume of business increases, employees are hired to fill jobs, and expansion then continues -- until one day a bright new factory is built to contribute to local and national prosperity.

That's the best-case scenario, at any rate. But is that really happening? Well, sometimes -- but not enough.

The big problem lies in making the leap from a small enterprise -- assembling things on the kitchen table, as it were -- to a medium-size business with serious prospects of market penetration.

In Poland, fewer than 1 percent of start-up companies have been able to break into the medium sector by employing more than 50 people. In Hungary, only about 10 percent of small and medium businesses are seen as serious contenders for continuing growth.

An SME expert with the U.S.-based Citibank in Budapest, Peter Zatyko, says one major barrier to the development of such businesses is lack of money. These companies are mostly undercapitalized and have difficulty raising affordable finance from banks:

"They (Hungarian SMEs) cannot provide the necessary collateral, being quite new companies or being in a sector where they do not have equipment or real estate, and in turn the bank judges them as too risky to lend a loan to -- and they end up with the financing of the owner, which is usually limited."

One of the problems facing the banks in deciding when to grant a loan is that many smaller businesses -- which are eager to avoid paying too much tax -- give a distorted picture of their company's profile and prospects in the paperwork they submit. And lack of money is only one of the problems. Zatyko again:

"The other part [that is, problem,] is lack of expertise or traditional entrepreneurial knowledge, which also prevents them being competitive with overseas companies, and you know usually it is not small or medium-size concerns that are coming over from the [United] States and from Western Europe. Those are bigger companies."

Foreign companies which have set up factories in transition states will usually try to find components and supplies locally -- creating major opportunities for local small businesses. But where those suppliers prove to be unreliable or unable to meet rigid specifications, the factories turn instead to imports.

Or they may create a supply chain based on other foreign companies which manufacture locally. Either way, Hungarian or Polish entrepreneurs lose out on business.

The governments in both Poland and Hungary are aware of the problem and are moving to help. An SME expert in the Polish Economics Ministry, Miroslaw Marek, outlines his government's actions:

"The state has started a number of programs to help SMEs to be more competitive. There are programs supporting, for instance, the introduction of technological changes to our [Polish] companies, or supporting human resources developments, and they are also supporting to a small extent access of SMEs to financing."

Marek also says that the extra state help comes at a time when local businesses are increasingly worried about their competitiveness as Poland moves nearer to joining the European Union. He expresses confidence in the future, saying the local SME sector is still expanding although it is already exposed to competitive pressures from the EU.

In Hungary, the government is supporting measures designed to make it easier for smaller businesses to obtain loans backed by guarantees. And under pressure to find new markets, the commercial banking sector is moving toward providing more financing for small businesses.

But Hungarian analyst Zatyko thinks that inevitably, as the countries of the region move towards the European economic mainstream, many small and medium-size enterprises won't make the grade:

"The market shakeout that happened over decades in the developed world is going to be quicker in Central and East Europe regarding market concentration -- which means SMEs are going to live a shorter life. Either they grow quickly to a bigger size company or they are going to be eaten up by the bigger ones."

The path being trodden by Poland and Hungary, the most reform-minded of the transition economies, is bound to be the same path -- perhaps with variations -- which the other countries of the region will also tread as they continue their development.