Journal of Small Business Management 2001 39(1), pp.
103–109
䊏 GLOBAL PERSPECTIVE
An Analysis of Entrepreneurial
Environment and Enterprise
Development in Hungary
by Georgine Fogel
The term “entrepreneurial environ-
ment” refers to a combination of factors that
play a role in the development of en-
trepreneurship. Empirical studies on the en-
trepreneurial environments of various
countries show that countries that keep
rules and regulations at a minimum, offer tax
and other incentives, and provide training
and counseling services to start-up entrepre-
neurs increase the likelihood of new venture
development (Dana 1987, 1990). Further-
more, factors such as the availability of finan-
cial resources, being in large urban areas,
and the presence of universities for training
and research are also found to be very im-
portant in increasing the rate of new venture
creations (Pennings 1982). Studies also
show that entrepreneurs face several obsta-
cles including lack of financial assistance,
lack of information on various aspects of
business, excessive taxation, and high rates of
inflation (Young and Welsch 1993; Fogel 1994).
Scholars recommend a variety of policy
options for developing entrepreneurship.
These may include providing venture capi-
tal funds, tax-based incentives, and gov-
e r n m e n t p r o c u r e m e n t pr o gr am s ;
protecting proprietary ideas and innova-
tion; investing in education and research;
rewarding entrepreneurship; and mini-
mizing entry barriers (Goodman, Meany,
and Pate 1992; Zapalska and Fogel 1998).
There seems to be an agreement
among researchers that the more condu-
cive the business environment, the more
likely new businesses will emerge and
GLOBAL PERSPECTIVE
grow. Individuals are more likely to be
encouraged to start a business when the
social environment values entrepreneur-
ship, opportunities are available, and en-
trepreneurs have sufficient knowledge
and skills to start and manage a business.
The encouragement of private business
activity has been an important element in
the economic transformation of Central
and Eastern Europe (CEE). Research
shows that small business development in
CEE countries has been influenced to a
great extent by macroeconomic factors
such as inflation rates, price stability, inter-
est rates, credit conditions, capital inflows
and outflows, and the availability of eco-
nomic inputs (capital, labor, material, and
technology). This study examines how
much progress has been made in enter-
prise development by one CEE country,
Hungary, and which elements of the busi-
ness environment could be improved to
foster entrepreneurial growth.
Conceptual Framework
The environmental conditions of en-
trepreneurial activities in Hungary were ex-
amined using Gnyawali and Fogel’s (1994)
conceptual framework. This framework uses
five dimensions: (1) financial assistance;
(2) non-financial assistance; (3) entre-
preneurial and business skills; (4) socio-
economic conditions; and (5) policies and
procedures for entrepreneurial activities.
Financial Assistance to Small Busi-
nesses. It is suggested that entrepreneurs
103
require financial assistance for at least one
of three purposes: to diversify or spread
the start-up risk, to accumulate start-up
capital, and to finance growth and expan-
sion. While the availability of financial re-
sources can be a major predictor of the
frequency of business start-ups, many
lenders are unwilling to invest in high-risk
projects or tend to withhold support until
the firm has been established successfully
(Pennings 1982). In most developing
countries and emerging market econo-
mies, venture capital companies and alter-
native sources of financing are almost
non-existent. Thus, entrepreneurs in these
countries are stymied—they cannot start a
business without financial assistance while
at the same time, they cannot secure finan-
cial assistance because they lack collateral
or prior business experience (Gnyawali
and Fogel 1994; Zapalska and Fogel 1998).
Non-Financial Assistance to Small
Businesses. It is also suggested that entre-
preneurs need support services in addi-
tion to financial assistance. In particular,
entrepreneurs need assistance in conduct-
ing market studies, preparing business
plans, and getting loans. Business incuba-
tors can play a major role in providing
services to start-up entrepreneurs (Hoy et
al. 1991), especially in areas where infra-
structure is not well developed or where
modern physical facilities are costly. Net-
works are another important source of
non-financial assistance. According to
Aldrich (1986), entrepreneurs spend
nearly half their time during the start-up
phase in developing contacts and net-
works with other entrepreneurs and re-
lated agencies. Networks provide four
essential kinds of assistance to entrepre-
neurs: (1) support and motivation; (2) ex-
amples and role models; (3) expert
opinion and counseling; and (4) access to
opportunities, information, and resources
(Manning, Birley, and Norburn 1989).
Entrepreneurial and Business Skills.
The level of technical and business skills is
also a major factor in successfully starting
and developing a small business
104 JOURNAL OF SMALL BUSINESS MANAGEMENT
(Davidsson 1991; Vesper 1983). Unless en-
trepreneurs are well equipped with tech-
nical and business skills, they may not be
able to overcome problems at different
stages of their firm’s development. Re-
search shows that the need for training
programs is greater in countries where
external assistance and preferences for
small business are limited. In Sweden,
both business-related experience and
business education were highly correlated
with the entrepreneur’s ability to start and
manage a business (Davidsson 1991).
Training and educational services are par-
ticularly important in emerging market
economies because entrepreneurs lack ba-
sic business skills (Fogel 1994). Swanson
and Webster (1992) found that 30 percent
of the Czech entrepreneurs surveyed re-
quested training in the areas of preparing
business plans, decision-making, negotiat-
ing, pricing, market penetration, handling
of cash-flow, organization, and managing
the business.
Socioeconomic Conditions. Entre-
preneurship prospers if society views it
with a favorable attitude. Societies and cul-
tures that value entrepreneurship tend to
develop societal systems to encourage it
(Vesper 1983). It has been noted that
among the Chinese, entrepreneurial role
models encourage people to go into busi-
ness, and entrepreneurs are often sup-
ported by close networks of family
members and relatives (Kao 1993; Siu and
Martin 1992). Programs that develop so-
cietal awareness of entrepreneurship have
a positive effect on small business develop-
ment and growth. Research also shows
that tax and other start-up incentives have
a positive impact on small business estab-
lishments and growth (Davidsson 1991).
Policies and Procedures for Entre-
preneurial Activities. Entrepreneurs may
be discouraged from starting a business if
they have to adhere to an excessive
number of rules and procedures. The level
of procedural requirements for registra-
tion and licensing, taxes, and financial re-
porting may either facilitate or hinder
entrepreneurial activities. Research shows
that most small businesses consider paper-
work very time-consuming and cumber-
some (Dana 1987, 1990; Young and Welsch
1993; Fogel 1994). Countries that keep
procedural requirements to a minimum
generally have a viable and dynamic en-
trepreneurial sector.
Research Methods
The research method used in this study
consisted of mail surveys and telephone
interviews of small business owners and
operators in Hungary. Assistance in obtain-
ing directories and contact lists was re-
ceived from the regional offices of the
Hungarian Chamber of Commerce, the
Hungarian National Association of Small
and Medium-Size Enterprises (SMEs), the
Ministry of Commerce and Industry in
Hungary, and the Hungarian Trade Com-
mercial Office in New York. The sample
included 280 small businesses having op-
erated for at least one year and having an
initial capital investment of $1 million
Hungarian Forint. Data were collected on-
site in 1999. The questionnaire elicited
information about the size and nature of
operations, the owner’s educational back-
ground and previous business experi-
ence, the owner’s business objectives,
financial assistance received and desired,
non-financial assistance received and de-
sired, business training needs, percep-
tions of socio-economic conditions of
entrepreneurship, public attitude, and so-
cietal promotion and recognition of en-
trepreneurial success. The questionnaire
also explored the owner’s satisfaction with
conditions in the entrepreneurial, includ-
ing taxation, incentives, credit financing,
laws, regulations, licensing, paperwork re-
quirements, and preferences given to
small business.
Findings
The majority (63 percent) of the small
businesses surveyed had been in business
for at least three years. One in five (22
percent) had been in business for five
GLOBAL PERSPECTIVE
years. Thirty-two percent were involved in
small-scale manufacturing or production
(plastics, electrical components, timber
processing, wood working, and food pro-
duction), with about two-thirds (68 per-
cent) in service activities (real estate,
engineering designs, computer technolo-
gies, restaurant operations, travel, tour-
ism, retailing, consulting, brokerage, and
professional services). Regarding size of
operations, 42 percent had fewer than 10
employees, 27 percent reported 10 to 29,
and 31 percent employed 30 or more.
In terms of the owners’ personal back-
ground, one third (33 percent) indicated
some college or university education, and
all survey participants noted several years
of work experience in the field of the busi-
ness. Although only a few (18 percent)
reported formal business training or prior
business experience, close to half (46 per-
cent) had technical training.
Regarding sources of initial capital, 25
percent indicated reliance on loans or
company-assisted funds. The majority (57
percent) relied on personal savings. In
fact, many participants maintained full-
time employment to be able to support
their business. Friends and family mem-
bers were mentioned by 18 percent as the
major source of financial assistance. Their
primary reasons for starting the business
included market opportunity (33 per-
cent), need for additional family income
(30 percent), unemployment/company
layoff (20 percent), and independence (17
percent).
Information about financial and non-
financial assistance and entrepreneurial
business skills is presented in Table 1. In
all three categories, there was a consider-
able difference between what Hungarian
small businesses received and what they
desired. In the area of financial assistance,
the three most desirable forms of assis-
tance were tax incentives, low-cost, long-
term loans, and venture capital/project
financing. Close to half the businesses sur-
veyed (48 percent) reported a need for
more tax incentives. Similarly, many (42
105
 Table 1
Small Business Assistance and Entrepreneurial Business
Skill Development in Hungary (in percent)
Types of Assistance Received Desired

Financial assistance
Borrowing from friends and family 34
Short-term credit (bank loan) 18 10
Venture capital/project financing 16 18
Tax allowance and credits 6 48
Low-cost long-term loan 38
Non-financial assistance
Friends and family 35
Business networks (economic development agencies,
chambers of commerce, trade representatives, trade fairs,
industry shows 28 44
Small business management training, workshops,
and seminars 19 40
Technical assistance, management information systems 8 30
Incubator centers/industrial parks 10
Entrepreneurship and business training
Management training programs 25 52
Marketing studies and sample business plans 15 46
Customer data analysis and information system development 8 40
Advertising skill workshops 5 36
Consulting and case studies 3 24

percent) desired low-cost, long-term percent of the participants were interested

loans, and almost one fourth (22 percent)
expressed a need for venture capital and
project financing. In contrast to what these
Hungarian entrepreneurs wanted, the pat-
tern of financial assistance they actually
received reflected an overwhelming reli-
ance on personal sources. A third (34 per-
c e n t ) o f t h e b u sin esse s b o rr o we d
primarily from friends and family, and
more than one in four (28 percent) relied
on short-term credit financing.
The most desirable kinds of non-finan-
cial assistance were business network de-
velopment (44 percent), small business
management training (40 percent), and
technical assistance, mostly for manage-
ment information system development
(30 percent). The study also found that 10
in utilizing the services of incubator cen-
ters and industrial parks. Compared to the
support needed, however, the majority
(35 percent) ended up relying on friends
and family for support for the business.
Personal networking and assistance by
economic development agencies, includ-
ing the Chamber of Commerce, local trade
organizations, fairs and industry shows,
were noted as the second most important
non-financial support received. Participa-
tion in management training seminars and
programs was reported by one fourth (19
percent) of the businesses surveyed.
In the area of “entrepreneurial and
business skills,” the data indicated the
same gap between the availability and
need for business skills training. About half

106 JOURNAL OF SMALL BUSINESS MANAGEMENT

 Table 2
Perceptions of Socio-Economic Conditions for
Entrepreneurship in Hungary (percentages and means)
a
Socio-Economic Conditions Must be Improved Fair Average Good Mean
(1) (2) (3) (4)

Public attitude toward entrepreneurship 22 percent 22 46 10 2.44

Promotion of entrepreneurship success 35 32 28 5 2.03
Training of entrepreneurial skills 42 18 25 15 2.13
Recognition of entrepreneurial success 38 22 32 8 2.10
Economic growth and market opportunity 15 22 35 28 2.76
for entrepreneurs

a Rating Scale: 1 = Must be Improved; 2 = Fair; 3 = Average; and 4 = Good.

Table 3
Policies and Procedures for Entrepreneurial Activities
in Hungary (percentages and means)
a
Small Business Conditions Must be Improved Fair Average Good Mean
(Policies and Procedures) (1) (2) (3) (4)

Licensing and registration requirements 20 55 25 3.05

Small business networks 10 percent 17 35 38 3.01
Laws and regulations 12 16 72 2.60
Filing requirements (paperwork) 15 22 63 2.48
Preferential treatment 38 32 30 1.92
Taxation (incentives and exemptions) 42 28 30 1.88
Credit terms 46 32 22 1.76

a Rating Scale: 1 = Must be Improved; 2 = Fair; 3 = Average; and 4 = Good.

the respondents (52 percent) desired
more management training programs in-
cluding marketing studies, sample busi-
ness plans, customer data analysis,
information system development, and ad-
vertising. It was also found that one in five
of the businesses desired consulting serv-
ices or case study opportunities.
Data on socio-economic conditions of
entrepreneurship are presented in Table 2.
The analysis consisted of calculations of
means of five factors with ratings on a scale
of 1–4, where 1 = must be improved,
2 = fair, 3 = average, and 4 = good. The
highest rating was reported on “economic
growth and market opportunities for en-
trepreneurs” (M = 2.76). “Public attitude”
in Hungary was also rated fairly high
(M = 2.44). The lowest rating (M = 2.03)
was observed on “promotion of entre-
preneurial success,” with 35 percent reporting
it as “must be improved.” “Entrepreneurial

GLOBAL PERSPECTIVE 107

training” and “recognition of entrepre-
neurial success” were rated mostly as “fair,”
with the majority (42 and 38 percent) rating
them as “must be improved.”
Hungarian small businesses were also
asked to rate their satisfaction with seven
items identified as “policies and proce-
dures for entrepreneurial activities in Hun-
gary” on a 1–4 scale where 1 = must be
improved, 2 = fair, 3 = average, and
4 = good. Table 3 presents data on the
perception of the small businesses sur-
veyed on policies and procedures for en-
trepreneurial activities in Hungary.
Satisfaction levels were relatively low
on three items—credit terms (1.76), taxa-
tion (1.88), and preferences given to small
businesses (1.92). Laws and regulations,
licensing requirements, and the availabil-
ity of small business networks were rated
as average (2.60, 3.05, and 3.01, respec-
tively). The entrepreneurs complained
about the banking community’s attitude
toward small businesses, especially the
lack of financial assistance given to small
business in Hungary. Others commented
on high interest rates and the lack of long-
term, low-cost loans.
Overall, it was found that although en-
trepreneurial growth has increased sub-
stantially in Hungary, entrepreneurs are
faced with many difficulties. The results
indicate that small business development
in Hungary is hindered mostly by three
primary factors: (1) lack of preferences
given to small business; (2) high taxation;
and (3) the unavailability of low-cost, long-
term financing. Continued growth in en-
trepreneurial activities in the country will
depend largely on whether the small busi-
ness sector obtains preferential treatment
in financing, business skill development,
and government taxation. Entrepreneurial
growth in Hungary could be further accel-
erated by addressing these three major
concerns of the small business community.
Conclusion
Entrepreneurial development and
growth will continue to be a priority in
108 JOURNAL OF SMALL BUSINESS MANAGEMENT
CEE countries. Hungary has made much
progress in entrepreneurial development.
It was found that the five environmental
f a c t o r s a r e v e r y i m po r ta n t in e n-
trepreneurial development. Capital en-
ables small enterprises to innovate and use
advanced technology. It is also the primary
means of growth. With the accession of
Hungary to the European Union, Hungar-
ian small businesses can benefit substan-
tially from developing export capabilities.
However, in order to develop competitive-
ness in export categories, Hungarian en-
trepreneurs must innovate, invest in
technology, and use market-based man-
agement and marketing practices. Accord-
in g t o th i s s tu d y, e nt r e p r eneurial
development in Hungary has been hin-
dered by lack of preferential treatment,
high taxation, and the unavailability of
low-cost, long-term financing.
To improve the entrepreneurial proc-
ess in Hungary, it is recommended that:
(1) small businesses be given opportuni-
ties for low-cost borrowing and venture
capital funds; (2) technical support and
access to technology should be made a
priority for small business development;
(3) more entrepreneurial and business
training programs should be made avail-
able; (4) the government should offer tax
incentives and other special programs
for small business and should reduce
reporting requirements; and (5) finan-
cial and regulatory institutions in the
country should create a more enterprise-
friendly culture that supports entrepre-
neurs not only financially but also
through networks, training, and busi-
ness information systems.
Although this study is limited to one
country, the framework used in this analy-
sis may be used for examining the en-
trepreneurial environment in other
countries.
Georgine Fogel
Salem International
University
Salem, West Virginia
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