By Denitsa Gancheva Student № 6274242 Social Policy and Social Work in Urban Areas 29/08/2011 MASTER THESIS Supervisors: Rineke van Daalen Patrick Brown UNIVERSITEIT VAN AMSTERDAM OPINIONS OF ENTREPRENEURS ON THE CURRENT SETTING FOR DEVELOPMENT OF SMALL- AND MEDIUM-SIZED ENTERPRISES IN BULGARIA A STUDY OF GOVERNMENTAL MEASURES AND TRUST
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
By Denitsa Gancheva
Student № 6274242
Social Policy and Social Work in Urban Areas
29/08/2011
MASTER THESIS
Supervisors:
Rineke van Daalen
Patrick Brown
UNIVERSITEIT VAN AMSTERDAM
OPINIONS OF ENTREPRENEURS ON THE
CURRENT SETTING FOR DEVELOPMENT
OF SMALL- AND MEDIUM-SIZED
ENTERPRISES IN BULGARIA
A STUDY OF GOVERNMENTAL
MEASURES AND TRUST
Denitsa Gancheva Entrepreneurs in Bulgaria
1
~ Table of Contents ~
INTRODUCTION ...………………………………………………………………………… 2
CHAPTER 1: BULGARIAN INSTITUTIONAL SETTING …...…………….……. 4 - 17
I. Country Overview ……………………………………………………...……….. 4
II. Entrepreneurship Pre- and Post-1989 …………………………………………. 5
III. Current Institutional Setting for Operation of SMEs in Bulgaria …….…….. 8
and economic development in general (Arrow, 1973; Granovetter, 1985) to name a few.
In the current chapter, the following section will focus on clarifying the general definitions
and distinctions of trust by relating to the different schools of thought. The subsequent section
will deal with the context of post-communist societies and will aim at explaining why trust
has been low during communism and is still low nowadays. Different features of the
communist regime that still remain today form the so called “communist legacy” which
nowadays negatively affects the process of transformation of these societies into market
economies and democratic regimes. Finally this framework will be transferred to the specific
country of the research – Bulgaria – and the effect of distrust and skepticism will be viewed
not only in the light of impeding the rebuilding of the civil structure and society in the
country, but also as negatively affecting the business environment for SMEs.
The flourishing of trust as a research topic in a relatively short time span has been triggered
by a widely acknowledged concern on its alarmingly lowered levels (cf. Putnam, 2000). The
broad focus on trust however resulted in no universal agreement on its definition. Another
factor contributing to this is that trust has turned into a word of everyday use and thus
everyone knows what it is but no one seems to be able to term just one, most important,
essence of it. In the words of Niklas Luhmann (as quoted by Hoehmann & Malieva, 2002,
p.11): “It is worth serious consideration whether one wants to advise sociology to use words
of everyday usage and concepts of the traditional ethic world of ideas”. Despite its many
meanings, most concepts of trust share some common elements. First, there is the assumption
of a degree of interdependence between trustee and trustor since the concept of
trustworthiness only becomes relevant if one actor depends to a certain extent on another.
Second is the assumption that trust is a coping mechanism against existing risk and
uncertainty arising from the chance of opportunistic behavior of the other party. Third is the
assumption that such opportunistic behavior will not be employed by the other party in a way
as to take advantage of the trusting actor (Lane, 2001). Therefore, most broadly, trust can be
defined as the positive expectation that a partnering actor will not behave opportunistically
Denitsa Gancheva Entrepreneurs in Bulgaria
19
and thus against the interest of the trustee (cf. Bradach & Eccles, 1989; Misztal, 1996; Nuissl,
2005).
The sources and types of trust are as numerous as its definitions. Distinguishing between them
is proven as a useful academic affair that helps to define different ideal types of trust but
nonetheless in reality trust is the outcome of a far more blurred process where the different
sources and types intermingle. Only the most relevant for the purpose of this study types will
be presented here. Even though they will be described as separate influences, their interplay
should not be neglected.
Among the first scholars to argue that trust cannot develop unless individuals share common
norms and values has been Talcott Parsons (1951), followed most prominently by Francis
Fukuyama (1995). In the words of the latter, all liberal and economic institutions depend on a
healthy civil society for their existence. The civil society, in its turn, depends on people’s
habits, customs, and ethics and it has been defined as the “[…] complex welter of
intermediate institutions, including businesses, voluntary associations, educational
institutions, clubs, unions, media, charities, and churches […]” (Fukuyama, 1995, p. 4). A key
element here is the fact that the civil society is formed through the constant and continuous
interactions between its elements, thus trust cannot form out of individual efforts alone but is
rather stemming from the overarching societal efforts and virtues. According to Fukuyama
(1995, p. 11) “[l]aw, contract, and economic rationality provide a necessary but not sufficient
basis for both the stability and prosperity of postindustrial societies; they must as well be
leavened with reciprocity, moral obligation, duty toward community, and trust, which are
based in habit rather than rational calculation”. This socially oriented type of trust creates
collective capital, which “contributes to the integration both of the local division of labour and
of contextual skills with new codified knowledge” (Dei Ottati, 2002, p. 29).
This type of trust can however be not effective enough when the concern is the creation of
new entities for further societal and economic innovation and development, like for example
small- and medium-sized enterprises. Collective trust does not automatically trigger personal
motivation since it mostly relies on established moral obligations to better the society. This
supports the existence of trust existence but does not result in further improvement. An
alternative is personal capital, which is the calculative or self-interested trust that enables the
actor to estimate the possible benefits of a trust relationship. The distinguishing feature here is
that behavior is motivated by the expectation that the future benefits of cooperating based on
Denitsa Gancheva Entrepreneurs in Bulgaria
20
trust will outweigh the immediate gain of an opportunistic behavior and distrust. This idea of
future gains is what is seen as detrimental for the further societal and economic improvement
since individuals will selfishly try to maximize these gains by trying their best to create a
better environment to enhance that (cf. Lyons & Mehta, 1997; Dei Ottati, 2002). The
mechanism that makes sure that society will not be torn apart by dominating but opposing
self-interests is not values and habits but rather control measures implemented by firms and
institutions to standardize the processes and determine the ways of ensuring that certain
obligations are followed (Brunetto & Farr-Wharton, 2007). Some authors (cf. Braun, 2002),
argue that as long as such controlling mechanisms are properly in place, alliances between
partners can well be established without the presence of trust. However, it is important to
balance trust and control since enforcing too many formal control mechanisms can dilute the
levels of trust and the clear expectations between actors, thus leaving all situations to be
handled by the certain formal entity imposing the control. It is essential for each actor to have
the possibility to act independently to a certain extent. Therefore, trust in this case is the
outcome of the combination of formal and social control mechanisms (Das & Teng, 1998).
And here, once again, the intertwining of individual self-interest that leads to formal ways of
controlling and social mechanisms that establish certain norms and obligations becomes
obvious.
Regarding the types of trust, the most broadly used ones are (inter)personal and institutional.
The former one is based on the perception that other agents will behave in a certain way that
can be predicted and is therefore dealing with calculation and risk assessment (Gambetta,
1988). It is also present when actors are unwilling to rely solely on institutional arrangements
(Granovetter, 1985; Smallbone & Lyon, 2002). Institutional trust, on the other hand is when
individuals have confidence in the economic, political and social institutions that they have to
deal with. It can be established only when there is “a critical mass of individuals trusting in
the system” (Smallbone & Lyon, 2002, p. 22). The two types of trust cannot be distinguished
in a clear-cut manner because institutional trust can also be viewed as a type of interpersonal
trust. The reason for that is that the former originates not only from the way of functioning of
institutions as a whole but also from the personal experience with the institutional
representatives on a day-to-day basis. Therefore we need to examine the individual and
institutional levels as interconnected and failure to properly establish the link between the
“micro and macro levels is inaccurate as it tends to anthropomorphize the organization”
(Zaheer, McEvily, & Perrone, 1998, p. 142). Norms and taken-for-granted routines from one
Denitsa Gancheva Entrepreneurs in Bulgaria
21
of the two types of trust can very well be translated into the second one. For example, if there
is a strong general trend for interpersonal trust, this can in turn positively affect the trust
orientation of the population towards its institutions. At the same time, if there is a long
history of successful institutional performance, the trust that this would have established
would be internalized by the people and transferred to their everyday interpersonal behavior.
However, interpersonal trust cannot be used as a proxy to institutional trust since many
additional factors also play a role during the formation of institutional trust. In line with the
aims of this study, a primary topic of interest will be institutional trust but it will not be
examined as occurring independently from interpersonal trust.
On another axis, according to Lane (2001) trust can be divided into calculative, value- or
norm-based and trust based on common cognitions. Calculative trusting involves expectations
about another actor, “based on calculations which weigh the cost and benefits of certain
courses of action to either the trustor or the trustee” (Lane, 2001, p. 5). This type goes in line
with the concept that examines trust as originating from the self-interested, rational actors that
try to maximize their gains by calculating the possible benefits of a trusting relationship.
Value-based trust goes in line with the theories of Parsons (1951) and Fukuyama (1995) and
is therefore based on the expectation that both parties will meet their social obligations and
will act responsibly, without violating the trusting relationship and taking advantage of
opportunistic behavior. Here, once again, the moral aspect of trust and its expected influence
are given prime emphasis. Lastly, there is the trust based on common cognitions. It sits as a
hybrid form between the main two concepts on the origins of trust. Common cognitions are
seen as the common expectations we hold “both about the social order in general and about
specific interactions with others” (Lane, 2001, p. 10). In this sense the basis of trust could be
found in the expectations in common societal structures but also in the certain predictable
ways of personal behavior. By looking into the empirical results of this study, the question of
which of these three types of trust is mostly present among the Bulgarian SME owners will be
investigated.
II. TRUST AND SMEs IN POST-COMMUNISM
According to Rose-Ackerman (2001), two conflicting stories are told about the impact of the
past on societies making a transition from socialism to a market economy. The first one
Denitsa Gancheva Entrepreneurs in Bulgaria
22
“recognizes the overall failures of the planned economies but points to cooperation between
family and friends as a means of coping with a dysfunctional system. This sense of
community has been broken up by the move to the market and to democracy leading to a loss
of trust and to an increase in opportunism” (Rose-Ackerman, 2001, p. 415). This story
recommends the establishment of policies that would reinforce interpersonal trust. The second
story “stresses the socialist governments’ lack of legitimacy – a fact that led citizens to
assume that official state actors were self-serving and that rules were irrational” (Rose-
Ackerman, 2001, p. 415). This story argues for policies that develop trust in the competence
of the state.
As was already pointed in the previous part, the best description of trust and its origins could
be provided after combining the different characteristics of opposing theories. In this section,
this is once again the case. It will be insisted that the topic of trust in post-socialist societies
sits exactly at the intersection of institutional and legal analysis, on the one hand, and the
study of interpersonal relations, on the other. Therefore, in order to best examine and
understand how trust occurs in such societies, both perspectives should be observed.
According to Mishler & Rose (1997, p. 418): “No government enjoys the absolute trust of its
citizens; arguably, none should”. Trust in leaders is integrally related to the capacity to predict
and affect their behavior. Leaders however have little motivation to be responsive or even
trustworthy toward those to whom they have no direct connection. Thus by reducing
drastically the number of paths from any leader to his potential followers, trust in such leaders
would be inhibited (Granovetter, 1973, p. 1374). Resulting from low trust, governments
cannot govern effectively, trust is further undermined and a vicious cycle is created (Mishler
& Rose, Trust, Distrust and Skepticism: Popular Evaluations of Civil and Political Institutions
in Post-Communist Societies, 1997, p. 419). This spiral of low trust, reinforcing the low-trust
attitude, has been termed as “low-trust dynamics” (Fox, 1973). Consequently, one of the
major problems of post-socialist societies is the mismatch between the trust potential of these
societies, on the one hand and the ever increasing need for trust, on the other (Nuissl, 2005).
Stemming from this, it becomes obvious that trust is not only in shortage in post-communist
societies but also that it is absolutely essential for their proper overall societal functioning.
This is especially so in democracies since only there is trust a rational gamble. In totalitarian
societies, it is irrational to trust anyone but your family and your closest friends. In
authoritarian societies, you might trust a somewhat larger circle. But only in democracies –
Denitsa Gancheva Entrepreneurs in Bulgaria
23
and not even all of them – will you give trust to strangers (Uslaner, 1994 as quoted by Letki &
Evans, 2005, p.517). Giving trust to strangers who are in the institutions intended to represent
the ordinary citizens, is supposed to ultimately result in enhancing both the legitimacy and the
effectiveness of democratic government.
But where does trust in institutions stem from? Like with general trust, there are two theories
on the matter. Cultural theories on the one hand hypothesize that trust in political institutions
is exogenous or originating outside of the political sphere in long-standing beliefs rooted in
the cultural norms of societies (Putnam, 1993; Inglehart, 1997; Mishler & Rose, 2001).
Connecting to that, communism is seen as having “created many habits – excessive
dependence on the state, leading to an absence of entrepreneurial energy, an inability to
compromise, and a disinclination to cooperate voluntarily in groups like companies or
political parties – that have greatly slowed the consolidation of either democracy or a market
economy” (Fukuyama, 1995, p. 40). According to Fukuyama (1995), people might have
successfully dedicated themselves to the replacement of communism with democracy and
capitalism but they will nonetheless lack the social habits necessary to make these work. The
lack of “firms, entrepreneurs, markets, and competition not only perpetuates poverty, it fails
to provide critical forms of social support for the proper functioning of democratic
institutions” (Fukuyama, 1995, p. 356). In this sense, the thorough destruction of civil society
that took place during communism could be seen as one of the most devastating consequences
of the regime.
Institutional theories, by contrast, see political trust as politically endogenous. Therefore
institutional trust is the expected consequence of the satisfactory performance of institutions
(Coleman, 1990; Mishler & Rose, 2001). As a result it can be argued that institutional
performance holds the key to developing trust and that “[g]overnments can generate public
trust the old-fashioned way: they can earn it […]” (Mishler & Rose, 2001, p.56). This
suggests that institutional trust should stem mainly from the visible control and performances,
rather than from the internal workings of the institution as such (Moellering, 2006). Therefore
the behavior of leaders could also be considered as a determinant of trust. After the fall of
communism, citizens became especially sensitive to institutions, which were then highly
pressured by expectations to provide all that people were deprived of during communism
(Mishler & Rose, 2001 as quoted by Kostadinova, 2007, p.823). In order to (re)build trust
leaders were expected to engage in different forms of fairness, support and participative
Denitsa Gancheva Entrepreneurs in Bulgaria
24
decision-making. In post-communist countries however the absence of such steps together
with the lack of reliable information and publicity over the deeds of public officials
contributed to the image of the institutions as corrupt, catering to selfish needs and not
deserving trust. And since earning trust is a relatively long and difficult process, distrust
continued to be inherited generation after generation with the expectation of a change towards
a more trusting state. These statements will later on be further reiterated through the opinions
of the interviewed entrepreneurs.
This is the reason why this research suggests that since communist rule in Bulgaria was
operating until the end of 1989, there is still the communist rule legacy present which leads to
skepticism and lack of trust. These phenomena are attributed to the communist period and are
not seen as being already present before its start. This is justified by the ample examples of
voluntarily organizations and the lively civil society that was present in Bulgaria prior to the
communist rule (Valkov, 2009). So despite some views that the Eastern European region is
generally more prone to low levels of trust, irrespective of the communist regime (Colton,
1995; Rose, Mishler, & Haerpfer, 1997), there is evidence that Bulgaria does not fall into this
category. Therefore with a degree of certainty the destruction of trust and civil society can
indeed be attributed to the regime. The communist legacy could be found in a number of
areas but it is most prominently visible in the weak civil society that remained after the
regime and in the ineffective institutions currently present that in their turn, result in a weekly
organized society. When focusing on entrepreneurship and SMEs, the consequences of the
abovementioned factors are also expressed by the negative feedback to the governmental
initiatives in the sphere, even if these are seen as successful by the Bulgarian ruling
institutions and the international organizations. The legacy of the past is nonetheless subject
to periodic revisions based on more recent experiences. Therefore the Bulgarian government
should strive for providing individual and collective good, in general and improving its
entrepreneurship policies, in particular if it is to successfully finish the transition process and
establish a stable democracy with high trust levels. Such efforts, if replicated in other Eastern
countries, could potentially close the gap between Western and Eastern European societies in
economic development and institutional quality. This still remains to be investigated but what
should be agreed upon is that the relationship between successfully operating official
institutions and trust is not a straightforward one, where one triggers the other but rather they
should be seen as complementing each other and each as being vital for the existence of the
other. In the words of Moellering (2006, p. 365) “institutions can be seen as bases, carriers
Denitsa Gancheva Entrepreneurs in Bulgaria
25
and objects of trust: trust between actors can be based on institutions, trust can be
institutionalized, and institutions themselves can only be effective if they are trusted”.
What should also be clear at this point is the argument that trust enhances the economic
performance of a society. Small- and medium-sized enterprises have also proven to be an
important factor to economic growth. Stemming from causality then, trust within SMEs is
also essential. Niklas Luhmann concentrated on its role in terms of the importance it plays in
modern societies for reducing the complexity of everyday life. He argues that trust acts as the
substitute for risks inherent in decisions and situations. For an entrepreneur, this would then
suggest that not all business relationships have to be regulated via contracts (Luhmann, 2000
as quoted by Welter & Smallbone, 2006). Consequently, a reduction of the transaction costs
of the relationship follows since the process of gathering information about the other party
can be minimized and the signing of contracts can be avoided where possible. Lowering
transaction costs through the ability to trust results in many other positive by-products. One of
the most important among them is the fact that SME owners and managers will be more likely
to seize opportunities which will help stepping up to their full potential and innovative
capabilities. The reason for that is that they would have maximized their efficiency by not
spending too much time on unnecessary safeguarding. Furthermore, the ability to trust will
highly affect the networking of the given small or medium enterprise and networking is an
essential skill for the survival of SMEs in general. According to Saxenian (1994), those SME
owners that have difficulties trusting new parties may turn into a liability for their enterprises.
This is because establishing the correct networks with others might present new opportunities
to add value to the enterprise and what is even more important – clustering for SMEs has so
far proven to be the most successful way for them to cope with competition from bigger
companies. It could therefore be claimed that “low levels of trust constrain market entry,
enterprise growth and competition whilst encouraging unproductive forms of
entrepreneurship. High levels of trust, on the other hand, encourage open and dynamic
competition structures and foster enterprise growth” (Hoehmann, Kautonen, Lageman, &
Welter, 2002, p. 4).
In terms of entrepreneurship and SMEs, in order to reach the trusting position, trust first needs
to be won and sustained through mutual effort. The literature agrees that “interpersonal trust
in business relations is rarely offered spontaneously but requires an extended period of
experience. During this time, knowledge about the exchange partner is accumulated through
Denitsa Gancheva Entrepreneurs in Bulgaria
26
direct contact or is acquired indirectly through reliable third parties. The search for
trustworthy partners is eased by the fact that it is in the interest of such potential partners to
make their trustworthiness known by sending out signals of trustworthiness” (Lane, 2001, p.
21). A basic prerequisite before trust can be established through mutual interaction is for both
actors to exhibit reciprocal interest; for both to be aware of the opportunities and benefits that
an existing trusting relationship could bring (Nuissl, 2005). These statements point to an
endogenous character of interpersonal trust as well, where the performance and
trustworthiness of the partner are what eventually results in trust.
As strong a motivator as self-interest could be, enterprise behavior results from a dynamic
inter-relationship between not only internal or endogenous but also external or exogenous
conditions. External ones “gain importance in transformation contexts where the institutional
reforms have not yet been thoroughly implemented and where the socialist legacy influences
the attitudes and behavior of individuals” (Hoehmann, Kautonen, Lageman, & Welter, 2002).
This emphasizes the importance of seeing entrepreneurship in the perspective of its social
context, despite the “tendency to underestimate the influence of external factors and
overestimate the influence of internal or personal factors when making judgments about the
behavior of other individuals” (Gartner, 1996). In linking the social context to
entrepreneurship, trust plays a complementing sanctioning role to the overall institutional
framework.
One of the main problems of post-socialist states is that there is an increased need for
entrepreneurial trust in order to restore the societal and economic order but the conditions are
such as to often discourage the creation of trust. Although barriers as such no longer exist and
entrepreneurs are free to run SMEs, connect with each other and engage in different forms of
cooperation, the process of trust development might prove to be more difficult than elsewhere.
The reasons for that can be attributed to the “legacies of socialism” (Nuissl, 2005) which still
affect people’s attitudes and behavior. The communist state “set about deliberately to destroy
all possible competitors to its power, from the “commanding heights” of the economy down
through the innumerable farms, small businesses, unions, churches, newspapers, voluntary
associations, and the like, to the family itself” (Fukuyama, 1995, p. 55). It can be argued that
“the state-managed neglect of elements of civil society on the one hand, and the necessity to
organize informal supply networks prompted by an economy of scarcity on the other hand
(both typical characteristics of “socialism as it existed in reality”), has a lasting influence on
Denitsa Gancheva Entrepreneurs in Bulgaria
27
attitudes and behavior patterns. Consequently, a pushy or opportunistic mentality is said to
have been released as soon as the ideology of equality and social welfare had vanished
together with the legally enforced norms which backed up this ideology, such as guaranteed
full employment” (Nuissl, 2005, p. 71). Therefore, the post-socialist societies have been
caught in the developmental trap of widespread distrust stemming from their communist
legacy. Increasing the effect of this legacy is the perception among entrepreneurs themselves
of the existence of such difficulties. Once it has been established, it discourages people from
engaging in trusting relationships with other actors. The low levels of trust do not however
only stem from past experiences. As it was suggested already, the past and the mind set
associated with it are subjects to reformulation based on the present situation. If people are
witnessing their official institutions working in their benefit, the citizens’ behavior will
change towards a more trusting state. Unfortunately, nowadays in the economies that are in
transition from centrally planned to market-based systems, the formal institutions which
should cater to the needs of entrepreneurs and stimulate their progress are either non-existent
or only minimally focused on that goal. This results in distrust, which is further amplified by
the still existent communist legacy and the slow pace of reformations that have followed the
fall of communism (cf. Raiser, 1999; Rose-Ackerman, 2001; Smallbone & Lyon, 2002).
III. TRUST AND SMEs IN BULGARIA
Post-communist Bulgaria has experienced decreasing trust levels following the fall of the
communist regime. This development could be explained by the dictatorship theory of Paldam
& Svendsen (2001) which has a lot in common with the suggested by Nuissl (2005) “legacies
of socialism” and which suggests that trust levels have deteriorated due to the oppressive
behavior of the communist dictatorship. During the communist rule, intelligence agencies
with internalized informers existed and thus it has been entirely rational to trust only one’s
family and closest circle of friends. It therefore seems safe to conclude that communism
destroyed generalized trust as conjectured in Paldam and Svendson’s theory (Bjornskov,
2007, p. 17) . As a result the most immediate problem in the Bulgarian post-communist
system was to overcome the distrust, remaining as a legacy of the communist rule. The
changes in the levels of trust of Bulgarians are indicated below (Table 1), using data from the
World Values Survey providing the most widely accepted measure of generalized trust by
asking the question: “In general, do you think that most people can be trusted, or can’t you be
Denitsa Gancheva Entrepreneurs in Bulgaria
28
too careful in dealing with people?”. The data available clearly indicates a drop in the levels
of trust despite the overruling of the communist regime and entering a period of transition
with a new democratic government.
Table 1. Levels of Trust among Bulgarians, WVS 1990 - 2006
WVS 1990 WVS 1997 WVS 1999 WVS 2006
Trust in
Bulgaria (%)
30.4% 28.6% 26.9% 22.2%
According to the New Democracies Barometer V (Mishler & Rose, 2001) the greatest lack of
trust among Bulgarians is almost exclusively found towards the political institutions in the
country and especially towards the parties (2.7%) and the parliament (3.1%).
These trends of development may present an additional perspective on why, in the opinion of
entrepreneurs, “over the past year there was no major improvement in the business
environment, and with respect to some of its elements there has been deterioration” (Ministry
of Economy, Energy and Tourism, 2010, p. 61). The majority of concerns are related to the
Bulgarian institutional framework, as exemplified by the figure below.
Source: WVS 1990-2006
Denitsa Gancheva Entrepreneurs in Bulgaria
29
Under the current transition economy, merit is supposed to be the determinant of success
(Koford, 2003). As a result the institutions responsible for allowing the start-up of private
enterprises are expected to act objectively. Nonetheless, “most Bulgarians expect decisions to
be made on the basis of “connections” (vruski)” (Koford, 2003). This perception is further
strengthened by the fact that even though 52% of Bulgarian entrepreneurs, according to the
OECD (2005, p. 22), are aware of the existence of a clearly identified organization,
responsible for the SME policy development, they are not familiar with its goals, functions, as
well as the results of its activities. This continues the culture of low trust towards official
institutions.
On the local level the situation is similar with a rather discouraging attitude towards SMEs
and favoritism towards bigger enterprises. This creates an important gap between the central
level, where the policy is developed and the local level – the closest to SMEs – where it
should be implemented. Entrepreneurs tend to believe that the government policies are only
pursued at the central level and negatively assess the involvement of regional governmental
representatives. This lack of proper communication with business, especially at the local
level, could be treated as one of the highly unsuccessful consequences of the governmental
efforts to transform its institutional setting and to lower its barriers to SMEs (Organization for
Economic Co-operation and Development, 2005, p. 24).
Figure 9. Average Ratings by SME Owners and Managers of the Seven Dimensions of
Good Practice, 2002 - 2004
Source: OECD, 2005
Denitsa Gancheva Entrepreneurs in Bulgaria
30
The absence of effective institutional setting that is adapted to the needs of entrepreneurs,
leads to a general skepticism and distrust and form doubts whether the institutions are in truth
working for the benefit of the private sector. However the way institutions function is not the
most important factor affecting the trust levels of entrepreneurs. Rather it is the factor that is
preventing the currently existing low levels of trust to transform into a more trusting state. As
was already mentioned, in order for entrepreneurs to put their trust into another entity, they
first need to be convinced in the capabilities and honesty of the party. Following they can shift
their trust levels accordingly. However in the current relationship between the government
and the entrepreneurs, the existing environment does not foster trust generation, which results
in stable or increased levels of distrust.
The factors that create the underlying low levels of trust remain in the broader societal
perceptions and norms. Following the communist fall, Bulgaria was left with a destroyed civil
society in which distrust could easily strive. This process was enhanced during communism
when the state created an excessive reliance of its control and the population had difficulties
trusting anyone outside of a small circle of family and relatives. After the collapse of the
regime not much effort was put into restoring the active civil society and voluntary activities
and thus increasing trust again.
This brings up again the endogenous and exogenous types of institutional trust and which of
the two is more important when building up trust in institutions. In the case of Bulgaria it
seems that the exogenous type of institutional trust, as suggested by Putnam (1993) and
Inglehart (1997) is the underlying reason for the current institutional distrust in the country.
The norms and attitudes that have been artificially imposed during the communist regime
have destroyed the previous lively civil society and have made it difficult to rebuild trust since
the process of values re-adjustment is slow and very much dependent on the endogenous type
of institutional trust. In order for people to start trusting their institutions again, the latter need
to perform accordingly and in the best interest of their people. Trust then can be earned, as
suggested by Mishler & Rose (2001) and values slowly can shape around the new
environment in the country. In conclusion it can be observed that while the exogenous
character of institutional performance provides the basic source of distrust, the endogenous
one holds the key to earning trust through successful performance and as a result to re-shaping
the previously existing norms and attitudes.
Denitsa Gancheva Entrepreneurs in Bulgaria
31
The first section of this chapter was dedicated to the description of trust and its main
characteristics. Trust is a highly complicated to define but essential component not only of
everyday life but also of almost every other realm and scientific area. Based on some common
features of the existing definitions, the phenomenon was defined as the positive expectation
one party holds that another party would not act opportunistically but according to some
accepted line of behavior that will eventually benefit both actors.
Numerous theories also exist on the origins and types of trust. In terms of the origins, Parsons
(1951) and Fukuyama (1995) put forward the theory of collective norms and values through
which trust is nurtured and spread with the help of a lively civil society. Opposite of that is the
suggestion that trust is created by the self-interested efforts of individuals. Because people try
to maximize their benefits they will establish trusting relationships in order to achieve that
more effectively. In this case additional controls should be introduced in order to prevent the
society from falling apart due to strong but opposing interests. Existing norms and values in
this case cannot act as mitigating forces.
In terms of the types of trust, most commonly we have a distinction between interpersonal and
institutional. However, it has been argued that the latter could be examined as a form of
interpersonal trust since most often people develop their levels of trust towards their
institutions, based on the experiences they share with the official representatives on a day-to-
day basis. On another axis, trust can be calculative, value-based or based on common
cognitions. The first type goes in line with the theory suggesting that trust stems from self-
interest; the second is in line with the cultural theory on trust origin, while the third lies in
between.
Following the basic introduction of the trust concept, the attention was shifted towards trust in
post-communist societies. It was examined how the regime has destructed and even after its
collapse, its legacy has prevented the existence of high levels of trust. More broadly, the
extensive periods of communist regime have negatively affected and greatly slowed down the
consolidation of the society, the reconstruction of civil life and the move towards market
economy and democracy. It was presented that an essential feature for the rebuilding of post-
communist societies is the presence of trust.
Institutional trust has been presented as possessing exogenous and endogenous characteristics.
The former concerns the role of common values and attitudes and suggests that institutional
Denitsa Gancheva Entrepreneurs in Bulgaria
32
trust stems from them, while the latter insists that trust has to be earned through the successful
performance of the institutions. In the case of Bulgaria, it was argued that both play a role and
that exogenous trust or the persisting norms from communism form the framework for the
currently low levels of trust within the country. However the endogenous trust or the
institutional performance, which in the Bulgarian case can be considered poor over the past 20
years, is what is preventing the trust levels from going up again. Following from that it was
concluded that poor institutional performance is a minor factor contributing to the low levels
of trust. What matters in this case and for the example of Bulgaria are the deeply-rooted
attitudes and beliefs, remaining as the communist regime’s legacy. The institutional
performance however is essential if the levels of trust are to be increased since it has been
shown that trust has to be earned. This is a requirement that will later on be confirmed by the
interviewed entrepreneurs’ opinions.
For Bulgaria, the lack of trust has been attributed to the communist rule since there has been
evidence presented that prior to the regime, the country enjoyed ample voluntary life and civil
society. The regime destroyed these through establishing full state control with high levels of
citizens’ observation, which greatly lowered both interpersonal and institutional trust.
The lack of trust is not only negatively affecting the societal rebuilding but also preventing the
small businesses in Bulgaria from thriving. The presence of trust in this sector is highly
essential since it reduces the transaction costs for the actors involved. Trust substitutes the
risks involved in business relationships and also relieves actors from contracting on every
issue. If SMEs are assisted into a successful development, this would result into overall
economic growth, increased competitiveness of the country and greater innovative potential,
to name a few.
The following chapter will present the research’s case studies. First the participants’
background will be introduced, followed by their opinions on mainly two aspects – the
business environment in Bulgaria and their trust attitude towards the institutions and other
entities when running their enterprises. Conclusions will be drawn based on these opinions
and the effectiveness of the previously presented National Strategy will be assessed.
Denitsa Gancheva Entrepreneurs in Bulgaria
33
CHAPTER 3
TRUST OF BULGARIAN ENTREPRENEURS
I. INTERVIEWS’ BACKGROUND
In order to investigate the essence of the research, 17 interviews were conducted. These were
made possible with the help of owners and managers of different small- and medium-sized
enterprises, all on the territory of Bulgaria. Part of the interviews was conducted face-to-face,
part took place over Skype conversations and the last part of the data was received through
questionnaires filled in and sent back by e-mail by the participants. All interviews were
conducted in Bulgarian and correspondingly, all answers were in Bulgarian. The quotations
provided in this chapter are a translation of the original answers, which could be found in the
Appendix of the study.
The interviews were based on a questionnaire constructed so as to retrieve information in
three main categories: first, basic information about the participants and their enterprises;
second, information about the entrepreneurs’ opinions on the political and economic
environment for SMEs’ existence in the country; third, information on the importance of trust
in business relationships.
The choice of participants was randomized, initially counting on personal contacts in the
sphere and subsequently contacting SMEs representatives through the list of firms, approved
for gratuitous financial support under the Competitiveness Operational Programme (OP)2. 10
male and 7 female participants partook in the research. The age range of participants was
between 25 and 64 years and all of them had some type of university degree achieved, with
the exception of one participant with high school attainment and one participant that didn’t
specify his educational level out of confidentiality reasons. The number of employees divided
the represented SMEs into three categories: micro enterprises, which according to the
European Union (European Commission, 2011) are enterprises with up to 10 people
employed (in the study, the number (n) of these enterprises was 4); small enterprises with up
to 50 employees (n=5) and medium-sized ventures with a maximum of 250 employees (n=7).
One of the participants did not comment on the number of employees in his enterprise.
2 The list of approved SMEs can be seen here (in Bulgarian): http://www.eufunds.bg/bg/page/100
Denitsa Gancheva Entrepreneurs in Bulgaria
34
II. OPINIONS OF ENTREPRENEURS ON THE INSTITUTIONAL
SETTING IN BULGARIA
In the onset of this section the following main recommendations for governmental action in
respect to SMEs can be outlined (Министерство на Икономиката и Енергетиката: Ministry
of Economy and Energetics, 2007):
Simplification of the administrative and normative environment for SMEs through the
optimization of the regulatory conditions and encouraging market competitiveness
Increasing the administration’s qualifications for achieving more effective SME
assistance
Improving the quality of information services through the creation of unified database
about the conditions and needs of the SME sector; executing information campaigns
on the opportunities of the structural funds and the requirements of the European
market; trainings on project development and EU resources’ assimilation
Improving the financial environment for SMEs, including the possible creation of a
Development Bank and funds for stimulating SMEs at the local level
The significance of the abovementioned recommendations is that they point out practical
ways of improving the business environment for SMEs in Bulgaria and further stress the idea
that “in order to flourish and grow they [the small- and medium-sized enterprises] need an
environment that facilitates and enables business start-up, does not hamper them with
excessive and costly regulations and facilitates access to finance and business services”
(Organization for Economic Co-operation and Development, 2005, p. 3).
It will be the aim of this subsection to determine to what extent this environment currently
exists based on the opinions of the interviewed entrepreneurs. In order to fully assess the
situation, the general effectiveness of the National Strategy will also be presented and put in
the light of the personal standpoints.
The main problems coined by the participants can be divided into two main categories - the
first one is centered around the issue of administrative burden and constant change in
regulations, while the second one deals with, as one of the participants put it bluntly, the
Denitsa Gancheva Entrepreneurs in Bulgaria
35
complete indifference of the country in terms of improving the current business environment
and fixing whatever is malfunctioning. The following paragraphs will present these two issues
accordingly.
The reform in the Bulgarian regulatory framework is among the key EU recommendations for
the country. In order to improve it, the National Strategy has set the following main goals
(Ministry of Economy, Energy and Tourism, 2010; Republic of Bulgaria, 2010):
Increasing the functioning of the state administration (including through the
introduction of e-government and other electronic services)
Increasing the administrative efficiency
Reducing the existing administrative burden
Better, simpler and more transparent regulations
Indeed certain laws have been adopted with the aim of simplifying the regulatory burden.
Among the most significant of these is the Better Regulation Programme, which aims at
improving the functioning of the state administration, lowering the administrative barriers and
increasing the overall confidence in governmental institutions. Some of the more concrete
actions taken refer to the cost of starting a business and the number of procedures for that,
which have been significantly lowered as a result of the Strategy’s efforts. For 2010, the
number of procedures for starting a business was 4, the time was 18 days and the cost was
1.7% of per capita income (Ministry of Economy, Energy and Tourism, 2010; Republic of
Bulgaria, 2010). For a comparison, in 2004-2006 11 procedures were needed in order to start
a new business. In 2007 and 2008, the number was reduced to 9 before it became 4 in 2009
(European Commission: Enterprise and Industry, 2009).
These successful corrections of the small business’ environment are also reflected in the
opinions of the interviewed entrepreneurs. Nonetheless they also recognize that the removed
barriers are now replaced by new ones which is an occurrence that to a certain extent stultifies
the whole progress and reduces the positive effects from the improvements:
“Generally speaking, the administrative procedures are not complex or rather they have been
significantly simplified. For starting a limited liability company one now needs 2 leva instead
of 50003, which was a huge step ahead. The time consumed for registration is also typically
3 1 lev = 0,5 euro
Denitsa Gancheva Entrepreneurs in Bulgaria
36
very brief. As part of the registration, one doesn’t need to go to BULSTAT4 anymore because
there is now a unified registration agency. All documents are submitted there, which means
that one doesn’t have to hurry to and fro the court, BULSTAT and the tax administration
anymore. However, these few reliefs have been completely stultified by many other burdens
that are appearing, mostly due to the very dynamical changes in legislation. It is a fact that
many changes are still needed but I am against the lack of stability in their direction” [quote
15]
The remaining and newly emerging problems contribute to the effectiveness of the regulatory
framework being rated as modest at best. There are still a number of concerns, mostly
pertaining to the low functionality of the local and national administration or the insufficient
available information about the new services in the area. Furthermore the implementation of
some of the adopted measures has been postponed in time, which makes the National Strategy
in particular, less effective. The constant changes in the laws and regulations in the country as
a whole are a major source of concern with about 75% of all Bulgarian firms finding the issue
problematic (Figure 10).
Stemming by this brief overview it can be concluded that the current problems are not
resulting from the lack of correct rules and regulations. As it has been demonstrated,
entrepreneurs admit the applicability and usefulness of some laws. The problem rather stems
4 BULSTAT is officially the registration number under which every Bulgarian firm is registered. In this quote,
with BULSTAT the participant refers to the registration agency where this number was issued. 5 The original quotes, in Bulgarian, can be found in the Appendix of the study under the corresponding number
Source: The World Bank, 2009
Figure 10. Percentage of Firms Concerned with the Predictability and the Consistent
Interpretation of Laws and Regulations, 2009
Denitsa Gancheva Entrepreneurs in Bulgaria
37
from the poor execution and the lack of effectiveness of the administration which together
with the constant change in laws form a rather negative experience for most entrepreneurs:
“The problem is that the administration itself is uncertain of the way the changes are to be
interpreted. Even at the highest level of administration, it cannot be decided how to solve
different cases” [quote 2]
“The country encourages [the development of SMEs] but there should be people to carry all
those things out. At the moment the government aims at assimilating as much resources as
possible but somewhere along the way the ties break and problems begin” [quote 3]
This unstable interpretation of rules and laws results in an overall atmosphere of uncertainty,
lack of trust and a feeling that things are done randomly, without a direction of development:
“Lately I have been feeling completely uncertain, as if I am constantly making mistakes. All of
this is due to the constant changes in regulations which are impossible to follow” [quote 4]
It should however not be concluded that the administration is the only weak unit slowing
down the reform. The positive and negative effects alike are the outcome of a complex
interplay of factors. What is surprising nonetheless is what the entrepreneurs perceive as
complete lack of motivation from the administrative employees to be more responsive,
efficient and knowledgeable:
“There is a colossal unfamiliarity with the substance of things and undesirability for this to
change. I’m not claiming that there is only the administration to blame for the problems but
in reality it could alleviate itself to a maximum degree when dealing with the small businesses
and thus focus its’ efforts on another issue. The small business anyways always tries to be as
immaculate as possible since it doesn’t have the capacity and can’t afford to pay fines and to
waste its’ time in inspections, administrative procedures and so on” [quote 5]
In terms of certificates, licenses, and permits issuing the situation is again not lacking flaws.
Generally speaking, registering a firm is not a difficult task but once undertaken the process is
slow and often badly coordinated between the different institutions that provide the different
licenses. As already mentioned a unified registration agency is currently functioning but still
the problem of delayed and uncoordinated actions remains. The still present high levels of
bureaucracy and the lack of transparency of important, cornerstone institutions further add to
the problem:
Denitsa Gancheva Entrepreneurs in Bulgaria
38
“In our business certificates and work-related documents are international and not dependent
on the national way of operating but the ones that have to be issued by the official institutions
are received with difficulty due to the low levels of employees’ effectiveness. This is the main
reason for 90% of the problems in the governmental institutions and not the lack of correct
laws and regulations” [quote 6]
“In terms of licenses and permits one has to be very well aware of the procedures and if he
isn’t persistent enough it will be hard to get anything done. Very often one has to use
consulting firms which in exchange for a commission save the trip to the institutions. Not to
mention that usually the cart is set in front of the horse. Recently they started checking the
products’ certificates without Bulgaria in reality having an authorized laboratory to issue
such certificates. That is not an isolated case” [quote 7]
The presented brief overview of the regulatory framework, asserts that the overall reform in
the area is only moderate in its effectiveness and results. The reasons for that are multiple but
are mostly due to the constant changes in rules and regulations, which in their essence might
be necessary but the pace of change creates an overall atmosphere of uncertainty and lack of
transparency and direction. These, coupled with the poor execution and ineffective and
unhelpful administration, shift the attention away from all positive consequences and create
skepticism and distrust towards the institutions. An additional influential factor is that
Bulgaria is still a country in transition to a market economy, so the process of restructuring
after a long period of authoritarian rule, is bound to be challenging and slow. This should be
seen as a contributing component to the full description of the current societal state of
Bulgaria.
In terms of the second aspect of concern which according to one of the participating
entrepreneurs can be summarized by the overall indifference of the country, different factors
play a role. Among them is the financial environment in the country. In the latest National
Reform Programme (2011), the Bulgarian government acknowledged the progress achieved in
the overall financial stability of the country through the continuity in fiscal policy, limiting the
redistribution role of the state and maintaining low taxes. The financial system in Bulgaria is
dominated by a strong banking sector. The stable fundamentals, together with the
accumulated buffers in the form of capital and provisions, allowed the banking system to
retain its good financial position and to remain stable during the crisis. As a result, the
Bulgarian government does not consider its financial sector to be a bottleneck to economic
Denitsa Gancheva Entrepreneurs in Bulgaria
39
growth and thus does not recognize any immediate need for reforms (Republic of Bulgaria
2010; 2011). Furthermore, since the beginning of the National Strategy in 2007, an improved
access to financial resources for SMEs has been observed. However in terms of the other
objectives concerning the financial framework, only few visible improvements have been
achieved. The original plans for improving the access to finances were outlined as follows
(Ministry of Economy, Energy and Tourism, 2010, p. 72):
Establishment of a Bulgarian Development Bank, National Guarantee Fund and
support the development of existing guarantee funds
Support for the development of venture capital funds
Providing better conditions for foreign investment and encouraging domestic
investments
Encouraging the development of capital market and listing SMEs on the stock
exchange
Establishing a database of the credit history and credit rating of enterprises
Decreasing the tax and social security burden
Information campaign about funding opportunities for SMEs
A positive development in line of the objectives has been the launching of a programme that
granted financial assistance in the amount of BGN 20 million in order to support unemployed
people who want to put their business ideas into practice. There has also been a wider access
to institutional and project-based financing as an alternative to bank loans but their popularity
remains low, possibly due to insufficient information for likely users. As a result from the
95% of SMEs relying on external sources of funds, bank loans still play a leading role
(Ministry of Economy, Energy and Tourism, 2010). According to the opinions of the
interviewed entrepreneurs however, such external bank loans almost exclusively take place
once the business venture is already running and developing with a stable pace, i.e. in the later
stages of enterprise existence. When in need of financing for the start-up of a new SME,
entrepreneurs count largely on own savings and funds or financial help from family and
friends (Figure 11).
Denitsa Gancheva Entrepreneurs in Bulgaria
40
Furthermore the popularity of the banking sector is declining with the spreading of the
financial crisis which in turn leads to increased interest rates and requirements for potential
users (Ministry of Economy, Energy and Tourism, 2010). This has to a certain extent reversed
the positive effects witnessed prior to the crisis by making it ever more difficult for SMEs to
obtain access to financial support. As one of the interviewed participants commented:
“I don’t think that the government has to be strongly involved in the financial support of the
small business. Rather, I think that it has to involve itself into the formulation of a clear
framework for financial assimilation through the banks, through the financial instruments of
the EU and to a maximum degree to alleviate the burden from the procedures within this
framework. If the banks introduce a bit more flexible procedure regarding the requirements
for SMEs receiving financial support, which doesn’t mean lowering the standards, things
would look differently” [quote 8]
The reduced financial support for SMEs has made necessary the introduction, in cooperation
with the European partners, of new, innovative instruments for enterprise financing (Republic
of Bulgaria, 2011). The access to financial resources is planned to be enhanced through
various European programmes, like JEREMIE, EURECA and EUROSTARS, which will
operate under the established Operation Programme “Increasing the Competitiveness of the
Bulgarian Economy” (Republic of Bulgaria, 2010). Thanks to the implementation of this
initiative “guarantee funds, risk and joint venture capital funds, funds for capital increases
0 1 2 3 4 5 6 7
Other (e.g. help from partners; affiliation with a bigger company)
Bank loan
Help from family/friends
Foreign investment
Own resources
Figure 11. How did you finance the initial start of your enterprise?
How did you finance the initial start of your enterprise?
Number of participants (n=16)
Denitsa Gancheva Entrepreneurs in Bulgaria
41
targeted at developing and mixed instruments between share investments and loan finance,
will be established and capitalized” (Republic of Bulgaria, 2010, p. 19). The extent to which
these actions will have a positive outcome still remains to be seen.
Based on the entrepreneurs’ opinions and experience and the effectiveness assessment of the
National Strategy, a recommendation for the government and the policy makers is not only to
take advantage of the EU development instruments, but also to ensure the functionality of the
administrative system which will pass these to the SMEs. This is the only option if the EU
resources are to fully fit their purpose. In case this unit from the societal apparatus is
ineffective the overall impression among entrepreneurs will remain negative despite any effort
the government may invest itself into. SME owners will be bound to believe, even if not
completely true, that there is “political and economic instability and unpredictability” within a
country of “no business development strategy”, “no professionalism or competence”.
Another important factor building up to the overall opinion of entrepreneurs about the current
business environment for SMEs is connected to the unfair competition present in various
forms within the country. On the one hand, there is unfair competition coming from other
regions. In certain cases imported goods enter the market at a lower quality but also at a lower
price, which for obvious reasons does not function as a stimulus for local producers.
Unfortunately the government does little to protect local enterprises from such competition:
“In our field of production [production of shoes and shoe-lasts] in particular, the problems
stem from the competition coming from China. The state lacks the will to impose stricter
measures on Chinese imports. Bulgaria allegedly prioritizes the development of light industry
– the production of shoes, confections, etc. but at the same time does nothing to restrict
Chinese import and the import of a lot of fake products” [quote 9]
On the other hand, unfair competition is sometimes observed between the Bulgarian
enterprises themselves. Unfair competition and distrust are two factors that form a vicious
cycle where the presence of distrust nurtures unfair competition which subsequently justifies
and strengthens distrust. The matter of trust and the lack of it will be discussed more closely
in the following subsection but one of the interviewed entrepreneurs’ opinion exemplified
clearly how the two intertwine:
“I can very rarely trust. In Turkey for example, one door production is divided into 10
different cells – one makes one type of details, the next – another and so on until in the end
Denitsa Gancheva Entrepreneurs in Bulgaria
42
the finished product comes out. In Bulgaria there is no such enterprise which makes just one
type of detail because it won’t be loyal somewhere or it will start taking advantage of its
position and in the end you won’t be able to do your business. That is why everyone does a
finished cycle of production alone. Bulgarians are very distrustful, they always think that the
other is lying, deceiving or that he won’t be honest and in truth there are such [people] that
are not honest. That is why everyone does a finished cycle alone – so that there is control
from beginning to end and everything depends on you and the people in your team” [quote
10]
From another perspective, unfair competition to SMEs often comes from big enterprises. The
latter possess far more resources and are seen as “suppressive of the small enterprises”:
“The small enterprises are more honest, more precise in everything. At the same time a big
enterprise tries to lower your price; then tries to avoid paying you, etc. At the moment we
have many firms that still haven’t paid us. This is the so-called between-firm indebtedness”
[quote 11]
It is difficult for small enterprises to counter this status quo because, as previously presented,
big companies in Bulgaria are often perceived as being greatly supported by the national
government and the local officials. Allowing for such preferential support to bigger
companies when more than 90% of the Bulgarian working positions are created by SMEs,
(European Commission: Enterprise and Industry, 2009) strengthens the overall perception that
small enterprises are not prioritized and thus increases their skepticism and distrust towards
the official representatives of the country. This creates a negative atmosphere and working
environment for many of the interviewed entrepreneurs, which inhibit the belief that rules and
regulations are unsuitable for the current situation in the country. The result is a feeling
among entrepreneurs that Bulgaria is ruled by people who are highly non-acquaint with or
careless about the current institutional framework:
“As if we are ruled by people who don’t live in Bulgaria” [quote 12]
The following subsection will discuss the levels of trust entrepreneurs exhibit towards other
partners, colleagues, entrepreneurs and the government and country in general. It will
investigate into the cultural heritage of the country and the matter of how trust can be
cultivated after the long period of communism and the just as difficult period of transition.
Denitsa Gancheva Entrepreneurs in Bulgaria
43
III. INSTITUTIONAL AND INTERPERSONAL TRUST OF
BULGARIAN ENTREPRENEURS
As previously discussed trust is a complex phenomenon with different characteristics
predominating over the other depending on the context. However clearly distinguishing
between the different origins and types of trust is only possible in purely academic sphere and
not in a more realistic environment. Coining a specific type of trust has its positive effects
once one wants to put trust is a certain light of observation but the interplay between the
different factors should not be underestimated.
Two main types of trust have been outlined in a previous chapter of this research, namely
(inter)personal and institutional. The latter would be the focus in this subsection even though
it has sometimes been viewed as a type of (inter)personal trust because most people form their
levels of trust towards the institutions based on their encounters with the official
representatives. For the purpose of this study, institutional trust will be viewed as the levels of
trust that entrepreneurs exhibit towards the governing entities in Bulgaria. It will also be a
point of interest to see where such levels of trust or the lack of them find their grounding and
in this sense between-personal trust and experiences also play a determining role.
On another axis, there are three other forms of trust. Calculative trust which connects to the
already presented theory of trust originating in personal self-interest and value- or norm-based
trust which is in line with the theory suggested by Parsons (1951) and Fukuyama (1995) that
sees trust as rooted in the common culture and norms of every society. In between these two
stands the trust based on cognitions. In this subsection it will be determined which of these
three is most prominent among the opinions of the interviewed entrepreneurs.
Examining the received answers, suggests that Bulgarian entrepreneurs explain their levels of
trust with the presence of self-interests. According to the theory of calculative trust, self-
interest is breeds trust because each actor would assume that the others will act in reciprocity
in order to maximize their benefits in the long run, which will be more beneficial than
opportunistic behavior in the short run. Furthermore, the theory suggests that where trust
cannot be established because of opposing self-interests, existing rules and regulations will act
as to keep the relationship intact. Unexpectedly however, from all interviewed participants,
only one fit the framework of calculative trust, as theoretically presented. This entrepreneur
Denitsa Gancheva Entrepreneurs in Bulgaria
44
expected reciprocity from his partners based on the idea that they all share common goals,
which are only to be materialized if trust is established:
“I try to approach with maximum level of good intentions. I stem from the rule that they [the
other actors] should also be well-intentioned towards me and that every problem could be
solved when there is enough desire for communication. I would rather say I approach with
trust but I try to be alert enough and when there are problems, to detect them fast. Generally
speaking, what I can say is that Bulgarians possess far less of the culture needed to make
joined business with their partners” [quote 13]
More than 90% of all other participants that commented on the matter comment in a different
manner, thus revealing a previously unpredicted side of self-interest. In the theoretical
description of calculative trust, self-interest is supposed to influence a relationship as
described in the quote above – nurture trust due to the presence of common goals among the
calculative actors. Nonetheless in the specific case of Bulgaria self-interest is perceived as
exactly the reason why one should not trust. In the entrepreneurs’ opinion, self-interest breeds
distrust:
“For 20 years I’ve come to the conclusion that you should trust nobody, not even yourself.
Everyone is after their own self-interest. There are no loyalties. You can’t expect loyalty from
the people you’ve helped. The situation between firms is the same” [quote 14]
Similar to the quote about the door production cycle which in Bulgaria every entrepreneur
finishes alone, instead of dividing into production cells that maximize competitiveness and
reduce costs, in this case the certain oddity of the Bulgarian business environment again
becomes clear. Why is it that profit-oriented people, who strive for good reputation and
enterprise development, fail to cooperate? Why is it that even when the line of production is
the same, entrepreneurs actively distrust each other instead of joining forces for mutual
benefit? The answers to these paradoxes remain for future research but this study suggests
two possible explanations. First is the cultural heritage and destroyed civil society left after
communism, which lead to widely-spread opportunistic behavior. Second is the lack of
properly implemented laws and regulations in the current events. These two assumptions will
be subsequently discussed.
As already pointed out, communism in Bulgaria left immense marks in almost every societal
aspect in the country. Its fall destructed factories and lead to a loss of jobs, torn down the
Denitsa Gancheva Entrepreneurs in Bulgaria
45
social support system and made any type of move towards a more democratic and
economically-mature society difficult to reach due to the excessive and long-supported
authoritarianism and governmental control. Many jobless people of working age started their
own businesses because there were no other options available to them. However in reality the
transition process was still in such an early stage that at that time, not much in the country was
structured to meet their needs. This lead to, as one of the participants has pointed out, the
horse standing in front of the cart. More serious efforts for restructuring the private business
environment began only in 1999 with the introduction of the Law on SMEs and the
introduction of the National Strategies together with the EU accession preparations. Therefore
for more than 10 years Bulgarian entrepreneurs were struggling to stay above the surface and
keep their enterprises alive, while some Western European countries were actively developing
their SME sector and thus enabling their states’ economic development, innovation and
competitiveness and societal stability in general. The lagging development of the
entrepreneurial sector in Bulgaria together with the still deeply-rooted distrust attitudes that
have remained as part of the communist legacy, help to explain to a certain degree why
Bulgarian entrepreneurs currently behave with abundant distrust and negativism. Since there
were and still are other priorities set by the country’s officials, not much gets invested into
rebuilding something as abstract as trust. The social activities and capital that can successfully
restore trust are similarly not prioritized.
There is a widely spread suggestion that associational life in Eastern Europe in general has
been lacking, both during communism and before it. Nonetheless recent evidence shows that
Bulgaria possessed an active civil society pre-communism (Valkov, 2009). In his study
Valkov (2009) examines the formal presence of more than 100 organizations and also draws
his conclusions from narratives of the most popular organizations since the 19th
century.
Therefore the distrust and destroyed civil society that were left after communism could be
attributed to its presence and not examined as phenomena already existing prior to the regime.
Communism destroyed both the trust between people and their government and between
people themselves (Lovell, 2001). As a result the only way to trust someone was for that
entity to prove its trustworthiness over an extended period of time. And here once again the
intertwining between the exogenous and endogenous character of institutional trust becomes
visible. The Bulgarian entrepreneurs are distrustful due to historical events that have changed
their cultural heritage and reshaped their attitudes and values. Nowadays however it is in the
hands of the institutions to shift these opinions towards more trusting levels by earning
Denitsa Gancheva Entrepreneurs in Bulgaria
46
people’s trust through successful and well-targeted performance. Until then the initial state of
mind will remain distrustful and cautious:
“When they [the governing institutions] don’t trust me, I distrust them too. It is a closed
cycle. If the government supports the SMEs then I will trust it. […] Trust is the product of the
actions of the government. It now reduced the tax by 10% but actually this just benefits
specific actors. It doesn’t concern the small business; it helps the big companies with the big
money. But in truth, it is the small firms that create working places, since the big companies
are just a few” [quote 15]
The expressed opinions of entrepreneurs that trust needs to be earned, both at the personal and
at the institutional levels point to two conclusions. First is the more general assumption that in
the Bulgarian case it is not people’s institutional trust that initially leads to well-functioning
social arrangements but rather that such need to be at least to a certain degree established by
the institutions before trust is rebuilt. A well-intended government will earn its subjects’ trust
which once granted will help reinforce the social and economic development of the country as
a whole. Second is the further reaffirmation that trust stems from self-interest. Entrepreneurs
would grant their trust in institutions once their self-interests are properly safeguarded by a
successfully working business environment. Here it should also be noted that both of the
abovementioned conclusions have formed following the specific cultural and societal historic
development of Bulgaria. This once again stresses that even if trust originates in
calculativeness it is still inseparable from the historic path of a society and the cultural norms
and values it produces.
So how can trust in a self-interested society be earned? As previously explained, in the case of
personal calculativeness what keeps the society from falling apart due to numerous conflicting
but strong interests, are pre-established regulations. Stemming from that it could be assumed
that precisely these rules are what entrepreneurs will fall back on when in doubt of
opportunism and free-riding. Metaphorically speaking, the rules will fit the wholes once trust
is incapable of securing every aspect of a given relationship. Furthermore if entrepreneurs can
rely on the rules being maximally objective and rightly implemented, then this will result in
higher levels of trust as well. Such reciprocal interaction however seems to be almost
completely missing from the Bulgarian business environment. Even though the interviewed
entrepreneurs did not opt for governmental intervention in all aspects of the SMEs’
development, they nonetheless considered it essential for the institutions to regulate
Denitsa Gancheva Entrepreneurs in Bulgaria
47
successfully by creating the proper framework for their SMEs’ existence and development.
This could, not exclusively, but nonetheless primarily, be achieved through different forms of
well-targeted regulations. These do not necessarily have to be only officially recognized but
could also be expressed in navigating the overall structural formation as to cater to the needs
of small enterprises as much as it does the same for the bigger companies. The government is
thus responsible for creating fairness in the working conditions but its failure to do so until the
present moment has led to the overall perception that all institutions are corrupt and
disinterested:
“There haven’t been real politicians for these 20 years. In order for them to become
politicians they have estimated that all that they’ve invested will return to them in double,
triple or quintuple quantities. There [in the official institutions] it is massively stolen from
what is common” [quote 16]
“I am disgusted by the behavior of the officials who act as our mentors and not as a serving
unit, whose salaries come from our taxes” [quote 17]
All of these factors contribute greatly to the overall distrust that has by now firmly settled
within the minds of the Bulgarian entrepreneurs. The distrust attitudes are furthermore
strengthened by the overall late onset of the entrepreneurial sector in the country. As
previously pointed, notable active measures to improve the situation for SMEs have only
started around a decade ago. Thus even the existing improvements are not yet stable and well-
established enough to shake the deeply-rooted opinions formed through experience during the
hardest period of reform and before that, during communism. The following answers to two
of the questionnaire items could in this light be perceived as a natural consequence of these
developmental trends (Figure 12; Figure 13).
Denitsa Gancheva Entrepreneurs in Bulgaria
48
These graphs show the alarming rates of institutional distrust. The data clearly indicates that
entrepreneurs believe that Bulgarian politicians are only after their own self-interests and
barely if ever are concerned with something different than getting into office. The interests of
the politicians are paradoxically seen as essentially different from these of the entrepreneurs.
Not only that – both are clashing and since the political representatives possess more power,
their interests predominate at the expense of the entrepreneurs. This logically hinders the
0
2
4
6
8
10
12
14
Fully agree Agree Disagree Fully disagree
DN/NA
Figure 12. To what extent do you agree: Political representatives are more interested in getting
into power than representingtheir electorates
To what extent do you agree: Political representatives are more interested in getting into power than representingtheir electorates
0
2
4
6
8
10
12
Fully agree Agree Disagree Fully disagree
DN/NA
Figure 13. To what extent do you agree: It could be trusted that most of the elected political
representatives try to raise the standard of living of the population
To what extent do you agree: It could be trusted that most of the elected political representatives try to raise the standard of living of the population
Number of participants (n=17)
Number of participants (n=17)
Denitsa Gancheva Entrepreneurs in Bulgaria
49
successful completion of the transition process and consequently also creates and adverse
business environment where trust cannot thrive. These are some of the reasons behind the
opinions of the entrepreneurs, who perceive trust in institutions as absolutely essential for the
proper development of their enterprises:
“I need trust in the government so that I can predict the environment in which I do business”
[quote 18]
“Trust in the government gives greater freedom of action and safety when making important
decisions” [quote 19]
“The distrust I have towards the government stays on the way of my business. I can’t count on
it [the government]” [quote 20]
Naturally entrepreneurs would simply like to be able to count on their government for
support. They expect nothing more than a well-targeted and properly executed framework for
business development. In fact trust towards other entities has often been pointed as more
important than institutional trust during the day-to-day business encounters. Most often
trusting one’s clients and employees is what is considered enough to run a successful
business:
“Trust in clients, employees, suppliers is an integral part of the success of a firm. We have
survived because even after 16 years we have permanent clients, hold high level of quality
and the brand is well known and accepted in the country” [quote 21]
However the current analysis makes the preliminary statement that institutional distrust has
translated into distrust towards the other actors participating in the entrepreneurial business
cycle. For example, previously distrust and doubt in fellow entrepreneurs with the same line
of development has been presented. Furthermore lack of trust in clients has been an issue of
concern for some of the participants:
“I work in their [the clients’] interest but I doubt them. On a daily basis small decisions are
made verbally but then it is always possible for their opinions to change. I’m not 100%
certain of their intentions” [quote 22]
The justification for the assumption that institutional distrust has affected trust in other entities
lies in the more than 20 years of unstable institutional performance. This unreliable
framework has initially resulted in distrust towards the institutions. This has made people
Denitsa Gancheva Entrepreneurs in Bulgaria
50
generally more prone to distrust and has settled a more or less distrustful atmosphere.
Therefore the opportunistic behavior of some individuals, triggered after the collapse of the
communist state, has easily extended distrust into the interpersonal relations as well. Certainly
there could not be such a strong causal relationship drawn before more research on the topic is
present. However it is not without certain reason to suggest that when there is no proper
legislative framework in practice and no strong government to stay behind the interests of the
small sector and increase its competitive advantage, SMEs are almost completely left to fight
for survival alone. It its turn this creates an environment in which trust cannot be adopted
despite it being the most successful way to a stable, fully-grown enterprise. All of these layers
of different types of distrust add up to high generalized distrust which altogether is one of the
most significant factors hindering the transition progress in Bulgaria and not allowing for a
stable economic and societal development.
In this chapter the main purpose has been to examine the opinions of the interviewed
Bulgarian entrepreneurs. 17 participants took part in this research and their answers helped
draw conclusions on two important aspects. The first concerns the overall institutional setting
in Bulgaria in terms of SME framework and operation enhancement. The second focuses on
the levels of trust that entrepreneurs exhibit towards the institutions and other actors.
In terms of the institutional setting, two important remarks have been made by the
entrepreneurs. The first one concerns the regulatory framework of the country, which is seen
as only moderately effective at best. Despite the evidence for some positive improvements in
the legislation framework, as shown through the institutional evaluation of the country and
confirmed by the opinions of the interviewed entrepreneurs, new barriers are currently
emerging and these stultify the progress already achieved. The current main problems,
according to the entrepreneurs, are the constant changes in rules and regulations and the
indifferent and ineffective official administration. The ineffective financial framework and the
unfair competition have been noted as contributing factors. The access to financial resources
for SMEs is now hindered by the increased number of requirements due to the economic
downturn. Furthermore, a strong dominance of the banking sector and not many sources of
alternative finances are seen as significant challenges.
Subsequently it was shown that trust among Bulgarian entrepreneurs originates from self-
interests. However, the unexpected conclusion here has been that self-interest in the Bulgarian
case rather breeds distrust. Out of all interviewed participants only one presented self-interest
Denitsa Gancheva Entrepreneurs in Bulgaria
51
as a positive force that generates trust due to the common goals of the calculative actors. The
other participants however perceived self-interests as diminishing all loyalties and honesty
both between the entrepreneurs themselves and between the entrepreneurs and the official
institutions. The suggested explanations have been found in the cultural heritage left after the
communist regime and in the lack of stable direction of legislative reform. Entrepreneurs
perceive their interests to be generally different from those of the political powers and since
the latter are quite ineffective but in possession of more power, there is the widespread
perception that the interests of the entrepreneurs are not prioritized. The distrust in the
country’s institutions has been observed to have also entered the interpersonal relationships of
the entrepreneurs – distrust has been exhibited towards clients, partners and fellow
entrepreneurs.
The entrepreneurs’ have suggested that the successful institutional performance is the only
way through which trust can be nurtured again in the Bulgarian society. Entrepreneurs do not
opt for daily government intervention but for a well-targeted framework for SME growth.
With the successful execution of this, trust can slowly begin restoring and thus the communist
legacy and the norms associated with it can begin to vanish. In this chapter, it has once again
been visible that the exogenous character of institutional trust presents the roots to distrust but
the endogenous one holds the key to transforming these.
CONCLUSION
The main focus of this study has been the description of the Bulgarian institutional framework
for SME development and the factors that affect the sector’s performance. To achieve that
assessment the current level of institutional reformation in the country has been presented but
the main assessment source has been a number of interviews conducted with Bulgarian
entrepreneurs. The latter revealed interesting and unexpected discoveries concerning the
entrepreneurs’ opinions on the reform process and the role of trust.
Bulgaria is a former communist country in which the reformation from centrally-planned to a
market economy has been an ongoing process since 1989. The virtually full control of the
communist party over every aspect of social and economic life in the country accounts for the
followed difficult transition after the fall of the regime. This currently results in Bulgaria
Denitsa Gancheva Entrepreneurs in Bulgaria
52
lagging behind in its economic development and presence of civil society when compared to
the market economies of the West. The same lagging development is found in the
entrepreneurial sector, which is mostly the result of its late legislative start. In Bulgaria, the
importance of entrepreneurship has already been realized during the communist period but
then there was no existing autonomous entrepreneurial sector. Rather, there were small units
created within the already existing big governmental companies with the main purpose of
alleviating the constant shortage of resources, food and clothes. This was termed
“intrapreneurship” (Punchev, 1989) and even though entrepreneurship, as perceived today,
emerged right after the fall of the regime, only in 1997 the Bulgarian officials started
supporting the sector more actively.
This initial indifference of the country’s representatives together with the slow progress in
terms of unemployment alleviation, social benefits restoration and civil society rebuilding, all
account to a great extent to the high levels of distrust among the population. Lack of
interpersonal and institutional trust was a major characteristic of the communist regime but
the subsequent governments did not strive for rebuilding the levels of trust, which were
present before the communist rule and this resulted in current thriving distrust.
This culturally-embedded attitude nowadays has negative consequences on the way Bulgarian
entrepreneurs conduct their businesses. The levels of distrust towards the institutions are to a
certain extent justified by the administrative burden and constant change of rules and
regulations in the business environment of the country. This, coupled with the perceived by
the interviewed entrepreneurs, indifference of the officials to improve the situation, result to
general expression of skepticism and distrust, which could be observed in the entrepreneurs’
opinions.
Bulgarian entrepreneurs explain their levels of trust with their self-interest. In the theoretical
description of calculative trust, self-interests of different actors with common goals are
supposed to breed trust between them. When the interests are opposing, previously
established rules and regulations are supposed to keep the relationships intact. However, in
the Bulgarian case study, the interviewed entrepreneurs, point to self-interest as the root cause
of distrust. The explanation why this is the case remains for further research but in this study,
two possible reasons are suggested. First is the communist legacy, which nowadays exhibits
itself in the destroyed civil society and the unintended stimulation of opportunistic behavior.
Second, is the lack of proper rules and regulations to protect against free-riding. Many of the
Denitsa Gancheva Entrepreneurs in Bulgaria
53
interviewed entrepreneurs have negative experience from opportunistic behavior of partners,
clients, other SMEs and the country’s officials. These result in active distrust not only in the
institutions but in other individuals as well.
These assumptions point to two main conclusions. First is the suggestion that in the Bulgarian
society trust nowadays has to be earned through successful institutional performance before
the culturally-embedded norms and distrust attitudes can be reshaped. Therefore, it is not the
population’s institutional trust that will lead to a successful social arrangement but rather such
successful institutional performance should take place before trust in institutions can appear.
Similarly, interpersonal trust should also be earned through a period of information gathering
about the trustworthiness and accountability of the other actors, based on their actions and
behavior. Second is the further reaffirmation that Bulgarian entrepreneurs invest trust when
their self-interests are properly safeguarded and when they can be sure that the other actors
and the institutions will not act opportunistically.
Denitsa Gancheva Entrepreneurs in Bulgaria
54
~Bibliography~ Arrow, K. (1973). Information and Economic Behavior. Stockholm: Federation of Swedish Industries.
Arts, W., & Gelissen, J. (2002). Three Worlds of Welfare Capitalism or More? A State-of-the-Art
Report. Journal of European Social Policy , 137-158.
Asenova, D., & McKinnon, R. (2007). The Bulgarian Pension Reform: Post-accession Issues and
Challenges. Journal of European Social Policy 17 , 389-396.
Barr, N. (1992). Economic Theory and the Welfare State: A Survey and Interpretation. Journal of
Economic Literature, XXX , 741-803.
Bjornskov, C. (2007). Determinants of Generalized Trust: A Cross-Country Comparison. Public Choice
130(1/2) , 1-21.
Bradach, J., & Eccles, R. (1989). Price, Authority, and Trust: from Ideal Types to Plural Forms. Annual
Review of Sociology 15 , 97-118.
Braun, P. (2002). Networking Tourism SMEs: e-Commerce and e-Marketing Issues in Regional
Australia. Information Technology and Tourism 5 , 13-23.
Brunetto, Y., & Farr-Wharton, R. (2007). The Moderating Role of Trust in SME Owner/Managers'
Decision-Making about Collaboration. Journal of Small Business Management 45(3) , 362-387.
CIA: The World Factbook. (16 March 2011 r.). Bulgaria. Изтеглено на 27 March 2011 r. от CIA: The
World Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/bu.html
Coleman, J. (1990). Foundations of Social Theory. Cambridge, MA: Harvard University Press.
Colton, T. (1995). Moscow: Governing the Socialist Metropolis. Cambridge, MA: Belknap Press of
Harvard University Press.
Das, T., & Teng, B.-S. (1998). Between Trust and Control: Developing Confidence in Partner
Cooperation in Alliances. The Academy of Management Review 23(3) , 491-513.
Davis, J., Schoorman, D., Mayer, R., & Tan, H. (2000). The Trusted General Manager and Business Unit
Performance: Empirical Evidence of a Competitive Advantage. Strategic Management Journal, 21 ,
563-576.
de Beer, P., & Vrooman, C. (2001). Measuring Welfare State Performance: Three or Two Worlds of
Welfare Capitalism? The Hague.
Deacon, B. (2000). Eastern European Welfare States: the Impact of the Politics of Globalization.
Journal of European Social Policy; 10; 146 , 146-161.
Dei Ottati, G. (2002). Some Thoughts on Entrepreneurial Strategies and Trust. От H.-H. Hoehmann, &
F. Welter, Entrepreneurial Strategies and Trust. Structure and Evolution of Entrepreneurial
Behavioural Patterns in East and West European Environments - Concepts and Considerations (стр.
27-30). Bremen.
Denitsa Gancheva Entrepreneurs in Bulgaria
55
Dirks, K. (2006). Three Fundamental Questions Regarding Trust in Leaders. От R. Bachmann, & A.
Zaheer, Handbook of Trust Research (стр. 15-28). Cheltenham: Edward Elgar Publishing.
Dirks, K., & Ferrin, D. (2001). The Role of Trust in Oeganizational Settings. Organization Science, 12 ,
450-467.
Esping-Andersen, G. (1990). Three Worlds of Welfare Capitalism. Princeton: Princeton University
Press.
Esping-Andersen, G. (2006). Three Worlds of Welfare Capitalism. От C. Pierson, & F. Castles, The
Welfare State Reader (стр. 160-174). Cambridge: Polity Press.
European Commission. (2010). Employment in Europe 2010. Luxembourg: Publications Office of the
European Union.
European Commission. (22 February 2011 r.). Enterprise and Industry. Изтеглено на 31 July 2011 r.
от European Commission: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-
definition/index_en.htm
European Commission. (4 February 2011(A) r.). Europe 2020. Изтеглено на 29 March 2011 r. от