The essay will analyze the deficiency of external funding under the signifier of bank loans in Bulgaria as an obstruction to entrepreneurship and the development of SME`s. First a general debut to entrepreneurship in the context of passage economic systems will be given followed by a short overview of the development of SME`s in the state. The essay will so turn to its chief subject, the deficiency of external finance. The analysis will be based on a treatment of entrepreneurship studies, Ministry of Economy and Energy one-year studies and old empirical documents refering the subject. The essay will look into the deficiency of external funding for SME`s in recent old ages every bit good as in earlier periods. The grounds for the deficiency of external finance will besides be discussed.

Entrepreneurship in Transition Economies

Harmonizing to Krueger ( 2002 ) successful enterprisers look for spreads in the market. The passage to free market economic system after the prostration of communism opened many such spreads in post-communist states. The old ages of pent up demand and the deficiency of supply created legion chances for entrepreneurial persons. As Estrin, Meyer and Bytchkova ( 2005 ) point out, in the early phases low-level Kirznian entrepreneurship was chiefly observed, while in ulterior phases, the stabilisation of rising prices and economic growing opened up chances for Schumperian type of entrepreneurship. The communism epoch left behind over-industrialized economic systems and in order for them to transition to market economic systems, a big graduated table resource resettlement had to take topographic point. This created legion chances for entrepreneurial activities in concluding merchandises, services and of class, international trade ( Estrin, Meyer and Bytchkova, 2005 ) .

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However, the passage procedure was disruptive, characterized with political and economical instability, widespread corruptness and high organised offense degrees. The instability of the passage procedure did non let enterprisers to take advantage of the legion chances it presented. In fact, in many instances barriers to entrepreneurship were erected. The obstructions for enterprisers which emerged during this period hampered the growing of entrepreneurship in the passage economic systems. Many bookmans have studied the different restraints on entrepreneurship in passage economic systems. Political instability, weak belongings rights, deficiency of external funding and equivocal revenue enhancement systems are normally pointed out as the chief factors impeding entrepreneurship ( Estrin, Meyer and Bytchkova, 2005 ) . This of class, comes as no surprise as all of these factors play a function in both the development of new endeavors and the growing of bing concerns.

SME`s in Bulgaria

Harmonizing to the European Commission ( Enterprise and Industry ) Bulgaria has about 31 SME`s per 1000 dwellers. This is lower than the EU norm of 40 SME`s per 1000 dwellers. Bulgarian SME`s employ a larger portion of people than the EU norm but the created added value is much lower. The European committee found that 90 % of endeavors in Bulgaria are micro houses but they merely contribute 15 % to the entire value added.

This shows less entrepreneurship in the passage economic system of Bulgaria in comparing to EU and other developed states. There are several factors which are considered to be the chief barriers to entrepreneurship in the state. The bulk of bookmans who have investigated these factors argue that developing institutions/weak belongings rights and cultural and societal values and attitudes have the most important influence on the issue. However the essay will concentrate on the deficiency of external funding as an obstruction to development and growing of SME`s in Bulgaria. Emphasis will be given to this factor as it is considered by many bookmans as one of the chief obstructions to entrepreneurship in passage economic systems ( Aidis, 2005 ) . Besides, it is normally in the top of the list of obstructions to entrepreneurship in endeavor studies carried out in such states ( Estrin, Meyer and Bythckova, 2005 ) . Enterprise studies in Bulgaria and Ministry of Economics and Energy ( MEE ) one-year studies on SME development besides support this statement.

This peculiar factor is besides interesting because it has sparked an academic argument with respects to its significance. In their paper “ Property Rights, Finance and Entrepreneurship ” Johnson, McMillan and Woodruff ( 2000 ) argued and attempted to through empirical observation turn out that belongings rights were in fact the factor with the most important negative consequence on entrepreneurship in passage economic systems. They argue that the deficiency of external funding did non significantly restrain entrepreneurship. Pissarides, Singer and Svejnar ( 2003 ) argue rather the antonym in their “ Aims And Constraints Of Entrepreneurs: Evidence From Small And Medium-Size Enterprises In Russia And Bulgaria ” paper. They find that the deficiency of external finance is so the factor impeding entrepreneurship the most, while belongings rights and political instability are far less important.

It is of import to observe that, this essay in no manner aims to belie the statements and empirical findings in support of the statement that weak establishments and cultural attitudes are the chief restraints to entrepreneurship in passage economic systems. It merely analyses the deficiency of external finance ( every bit good as the grounds for this phenomenon ) as one possible constrain on entrepreneurship in Bulgaria since a comprehensive analysis of all factors lending to the job is beyond its range.

External funding

The deficiency of external finance is a cardinal job for the capacity of SME to turn and develop. It is besides a cardinal issue for the capacity of SME to partake in EU structural support plans. It is a important facet of the capableness to have support from EU plans as for the bulk of SME`s it is the lone manner to supply the necessary portion of co-funding for the undertaking. The ability of the house to vie in the free market depends on its degree of invention and growing which in bend to a great extent depends on external funding. Even if the houses are capable of financing their investing with their ain financess as Johnson, McMillan and Woodruff argue, their fight is still constrained. Using ain finance makes finance more expensive because the concern revenue enhancement system is more favorable towards external funding in comparing to reinvestment of net incomes or selling portions for illustration ( MEE, 2007 ) . Not to advert the possible chance costs of the trussed capital and the possibility of liquidness jobs should the house face a hard currency flow job at a clip when it has tied its net incomes in fixed assets with low liquidness.

In 1999 the NSI ( National Statistics Institute ) carried of a comprehensive study of 211 329 endeavors in Bulgaria. Dr Dimitrov ( 2000 ) of the Bulgarian Academy of Science carried out an analysis of the information. The analysis of external funding shows that over 50 % of houses in the metropolitan countries did non seek bank loans in 1999. The per centum of such houses goes up to 70 % in the rural countries. The higher portion of houses looking for external funding in metropolitan countries can partially be explained with the higher economical activity of such countries and partially with the higher concentration of funding establishments in such countries.

Harmonizing to the study the chief ground for the deficiency of external funding is the deficiency of necessity of such funding. This is instead surprising consequence moving in favor of the statement made by Johnson, McMillan and Woodruff in their paper Property Rights, Finance and Entrepreneurship. The writers argued that, at least in the first half of the passage period SME`s did non necessitate external funding and that weak belongings rights were far more of a important obstruction to entrepreneurship. They besides province that the firm`s ain financess were sufficient to finance their undertakings and heighten growing but the enterprisers were non re-investing a important proportion of the maintained net incomes for the fright of unsecure belongings rights. If this consequence of the study is considered as grounds in support of the theory of Johnson, McMillan and Woodruff it possibly merely holds true for this peculiar period as more recent studies yield instead different consequences as the undermentioned subdivision will explicate. Besides, Pissarides, Singer and Svejnar argue that houses can be sing jobs with deficiency of external funding and still utilize their ain financess for investings. In fact their empirical analysis showed that SME which fund their investings internally are systematically SME which are sing jobs with geting external funding.

Besides, it has to be noted that the consequences from the two studies are radically different in many cases. One illustration is that Johnson, McMillan and Woodruff found that most houses in their study have used loans while Pissarides, Singer and Svejnar found that merely 37 % of SME`s in Bulgaria have done so. The latter consequence is besides consistent with the NSI information. Estrin, Meyer and Bytchkova ( 2005 ) pointed out that Pissarides, Singer and Svejnar used a good and dependable step to capture entree to finance and a instead weak step of institutional barriers while Johnson, McMillan and Woodruff did the antonym and possibly this is why the consequences differ in such a manner. However, former writer ‘s study included Bulgaria while the latter did non. This is why possibly the former may show more accurate empirical grounds for the instance of Bulgaria.

Other important obstructions ( harmonizing to studies ) in seeking external funding are the high involvement rates of bank loans coupled with comparatively short refund periods. It seems that at the clip the Bankss were non capable or possibly unwilling to supply recognition on footings appropriate for SME`s.

Harmonizing to the more recent consequences of a big graduated table study included in an analytical study on development of SME by the Ministry of Economics and Energy, external funding in the signifier of bank loans are still expensive and hard to entree for the bulk of Bulgarian SME. Merely 37 % of the respondents in the study have used recognition from retail Bankss to finance their investings. Therefore, there are no important differences in the per centum of SME who used external finance under the signifier of a bank credit/loan to fund their investings.

A important difference nevertheless occurs among the top grounds given by SME for non seeking finance. In contrast to the 2000 NSI informations, the MEE study showed that the chief ground for SME`s non seeking recognition from Bankss were the high involvement rates. Over 54 % of the respondents in the study stated this as a chief ground for non seeking finance while merely 34 % of the respondents said they did non necessitate external funding. Over 40 % of SME`s in Bulgaria besides listed the high collateral demands ( sometimes up to 200 % ) as a major ground for non seeking finance. Other major grounds were concealed costs of the recognition and heavy documentation/administrative procedures. The consequences are less supportive of the Johnson, McMillan and Woodruff statement as by 2006 the figure of SME that did non necessitate recognition dropped significantly. As stated by the writers themselves, their statement was possibly merely true for the early ( first half of the ) passage period. It could be argued nevertheless, that the high collateral demands stem from weak belongings rights.

As a consequence, over 60 % of Bulgarian SME`s have financed their investings in the last 3 old ages with their ain financess. Therefore, they can non number on external funding in order to make new, higher production capacity. In other words the growing of 60 % of SME`s in the state is determined by the current production capablenesss of the house instead than the chances of the market ( MEE, 2007 ) . Access to finance is necessary so that the supply can run into demand. Pissarides, Singer and Svejnar found that Bulgarian SME`s were runing at merely about 69 % capacity as a consequence of the job.

The grounds for these still important obstructions to financing for SME are several. First, as more and more foreign Bankss were geting the local 1s, involvement rates for consumer loans and mortgages fell. This led to a consumer recognition “ roar ” since 2004 which further increased the competition among Bankss in consumer loaning while concern loaning rates did non increase significantly. The deficiency of good and more profitable consumer loans/credit and mortgages in comparing to business/investment loans create an imbalanced portfolio of the Bankss. This does non let the Bankss to impart to concerns on more favorable footings ( MEE, 2007 ) .

However, the jobs related to the regulatory environment in which the Bulgarian fiscal sector operates should non be underestimated. A big proportion of SME`s do non hold recognition history. In add-on, a important portion of SME operations remains in the “ gray ” economic system where hard currency payments facilitate gross concealment and revenue enhancement equivocation ( Vassilev, 2006 ) . Comprehensive and accurate fiscal studies remain rare. With no recognition history and equivocal fiscal records, concern programs entirely are non sufficient for the bank to accurately measure the hazards of the investing. Unfortunately this is why Bankss are seldom prepared to assist unestablished or star-up houses and the policy of most Bankss is more orientated towards imparting to established and believable endeavors ( MEE, 2007 ) .

The deficiency of recognition history and equivocal fiscal records forestalling Bankss from measuring hazard adequately consequences in higher collateral demands ( up to 200 % in some instances ) as the bank wants to firmly see itself against all possible hazards. Most common signifiers of collateral are land, edifices, machinery, and equipment. Fixed assets nevertheless, particularly the 1s in production/manufacturing have instead low liquidness ( Vassilev, 2006 ) . This of class is taken into history by Bankss as they want to see themselves and in bend this frequently leads to a important underestimate of the fixed assets market monetary values. Banks in Bulgaria besides point out that the low efficiency of the country`s legal system in the enforcement of contracts is another factor driving the collateral demands and the cost of recognition further up ( MEE, 2007 ) .


In order for an endeavor to develop and turn, finance is needed. Prior to 1989 accretion of wealth was non possible for most people because of the Communist system. This means that external finance is of import to SME`s development and growing in Bulgaria. It has become apparent that a instead little figure of SME`s in Bulgaria entree external funding. Even if it could be argued that in the early old ages of passage houses merely did non necessitate the external funding the statement is likely non keep true for the 2nd half of the passage period. In add-on Pissarides, Singer and Svejnar showed that SME which fund their investings internally are systematically SME which are sing jobs with geting external funding. Using internal finance drives the costs of finance up and this hinders efficiency, economic systems of graduated table and fight of the house, particularly in foreign markets. This in bend has a negative consequence on the entrepreneurship environment as a whole.

High involvement rates and high collateral demands appear as the top grounds for enterprisers in Bulgaria non seeking bank loans. Johnson, McMillan and Woodruff argue that these can besides stem from weak belongings rights in the state. While this is a valid statement, the essay showed that other factors besides contribute to the issue. Such factors are the imbalanced portfolio of the Bankss ( net incomes from consumer loaning compared to concern loaning ) along with the deficiency of recognition history, equivocal fiscal records and a court/legal system inefficiency ( which constitutes weak belongings rights ) in implementing contracts. All of these imperfectnesss are significantly lending towards a high hazard for the Bankss. This in bend causes higher involvement rates and forces the Bankss to seek farther insurance by implementing higher collateral demands.

In decision it has become apparent that the job with the deficiency of external funding for SME`s in Bulgaria persists and no important betterment has been observed for the last 15 old ages. As this is negatively act uponing entrepreneurship in Bulgaria counter steps should be taken. From the analysis in this essay it seems that the most important positive alteration could come from reforms in the regulative environment ( betterment in fiscal statements, lessening in “ gray ” economic system operations ) and the tribunal system ( reduced times for implementing conditions ) . Besides, it is extremely possible that betterments will be observed as houses build their recognition histories.