LITUANUS LITHUANIAN QUARTERLY JOURNAL OF ARTS AND SCIENCES   Volume 46, No.3 - Fall 2000 Editor of this issue: Gundar J. King ISSN 0024-5089 Copyright © 2000 LITUANUS Foundation, Inc.

CHARACTERISTICS OF SMALL BUSINESSES IN LITHUANIA: 1993-1998

DOROTHY MINKUS-MCKENNA Pace University

In 1993, despite the limitations of doing empirical research in a transitional environment, the author felt it was appropriate to initiate quantitative documentation of small businesses to develop a basis for future comparison. The resulting benchmarks would be used to track the evolution and changes that would occur in small businesses in Lithuania over time. A survey was conducted in 1993 and the results published in two papers (Kirchhoff, Minkus-McKenna and Galkis, 1994; Minkus-McKenna, 1997).

Research Questions and Methodology

The research questions are simple and straight forward: What does a small business in Lithuania look like? What are the characteristics of its owner? In 1993, the authors sought to ascertain aspects of the recent development of small business that might escape official data and to expand upon the data available for this subset. To make a positive contribution to the economic transition, we sought information about the needs of entrepreneurs that could be used by the Lithuanian government to establish policy, by Lithuanian educational institutions to develop curricula, and by business people in domestic and international settings.

The same questions were asked in 1993 and 1998 to standardize the findings for comparison purposes and to monitor the progress of small business enterprises in Lithuania.

The use of survey methods in developing economies faces difficulties ranging from respondents' reluctance to express opinions (Ališauskienė et al. 1993) to concerns about interpreting results (Motivans, 1993). These concerns are valid, but should not preclude the use of surveys. Because survey methods in this environment may be deemed tentative and imperfect, they only begin to provide systematic information from the perspective of respondents. They should be employed with caveats and can be refined and improved as business conditions and attitudes evolve.

The thirty-seven item questionnaire was distributed to business owners in their places of business and/or to owners who were attending business seminars. A total of 139 questionnaires were deemed usable for the 1993 analysis. In 1998, the questionnaire was fielded by marketing students under the guidance of Professor G. Galkis of Vytautas Magnus University, Kaunas. A total of 131 useable surveys were completed and analyzed.

Survey Results

Information from the survey is grouped into three sections: the demographics of business owners, characteristics of businesses, and obstacles to establishing and operating a business.

Demographics of Owners: Respondents were asked to indicate their sex, age, and education. Sixty-seven percent of survey respondents were male and 33 percent were female. In the 1993 survey, the split was 64 percent male and 36 percent female. The general population of Lithuania, however, is 47 percent male and 53 percent female.

As Table 1 shows, 76. 6 percent of the business owners responding to the survey in 1998 were between the ages of 30 to 39 (36. 6 percent) and 40 to 49 (40. 3 percent), as opposed to 52. 6 percent in 1993. There is a sharp difference from the previous study in the 20 to 29 segment and the 40 to 49 segment. The 20 to 29 segment has decreased by 23. 5 percentage points while the 40 to 49 segment has increased by 23. 7 percentage points. It appears, if the sample is representative, that an older entrepreneur is evolving in Lithuania.

Table 1
Survey Respondents

As shown in Table 2, almost one-half (47. 7 percent) of the business owners have a university education, and approximately one-third (32. 6 percent) completed trade school. There was a substantial increase in college graduates (+7. 6 percentage points). Although Lithuanian business owners are highly educated, it should not be assumed that this education includes business courses.

Table 2
Education and Training

Small business enterprises in Lithuania are dominated by neighborhood services and skilled artisans. The success of such establishments was assured in practice by a talent for service and craftsmanship, but the need for some education was still important. Small business owners and managers would be helped most by a stronger orientation to increased sales, a knowledge of elementary accounting and a better understanding of cost control.

Two questions specifically addressed business education and training. In 1993, only 11 percent of respondents cited any business education. In 1998, there was no change. Although the questionnaire tried to distinguish between practical experience (i. e., apprenticeships, on the job training) versus education (course work), many respondents were not clear on the intended distinction. In tabulating what kind of business experience they had, 7 percent listed educational experience only, 7 percent listed training only and 5 percent listed both education and training for a total of 19 percent of the sample. Of those specifying an institution, 8 percent listed Kaunas Technical University and 2 percent listed other universities. The remaining respondents answering yes did not specify any institution.

Characteristics of Businesses: An important consideration when reviewing findings in a tracking study is the age of the businesses surveyed. Approximately 43 percent of the businesses have been in operation five years or more (Table 3). Overall, startups of new businesses in Lithuania appear to be fairly consistent for 1992 through 1996, with the percent ranging from 13. 0 to 20. 6. Approximately one in ten businesses were operational prior to 1991, the year the republic declared its freedom; and only 5. 3 percent, or seven (out of 131), new businesses were started that year. New business starts for 1997, however, were still only 3. 1 percent or four (out of 131). The number for 1997 bears watching, because it might indicate the beginning of a downswing. In 1998, 7 percent (nine out of 131) pf businesses were started; but since the survey was fielded in the first quarter of the year, the results are not indicative of a full year.

Table 3 Start
Date of Business

As shown in Table 4, the largest category (49 percent) of businesses were service businesses including, but not limited to, locksmiths, hair dressers, dentists, advertising, and hotels. These five subcategories comprised 18 percent. In the 1993 survey, services consisted of 22 percent of business.

Table 4
Type of Business

The second largest category was nonfood retail (21 percent). In the 1993 study, nonfood retail only comprised 10 percent of business. Food-related businesses, either food production or sales or restaurant businesses, were the third largest category and accounted for 13 percent of businesses in the current study; in the previous study, they accounted for 23 percent.

Other types of businesses in the current study were shoes/clothing (10 percent), manufacturing (6 percent) and repairs (4 percent). In the earlier study, shoes/clothing had the same share (10 percent). Manufacturing was not broken out separately in the earlier study, and repairs had a 10 percent share. In the previous study, art goods (4 percent) and funeral directors (3 percent) represented 7 percent of responses, but did not appear at all in the current study. Responses to the question regarding percentage profit (Table 5) varied considerably from 1993 to 1998. In 1998, approximately 47 percent of respondents were making between 3 and 10 percent profit. Over one in five (23. 7 percent) was making more than 10 percent. Only 8. 3 percent were not making any profit, and 2. 4 percent did not answer the question. In 1993, 85. 7 percent of respondents reported a profit or did not respond (18. 3 percent). It should be noted that "profit" in Lithuania is "operating margin" in the United States, thus no one reported zero profits.

Table 5
Percent Profit

The responses about profitability should be used with caution. In Lithuanian small businesses, the concept of profit was not perceived with consistency. In some cases, profit was the residual share of sales, but more frequently it was the whole gross profit margin. Seldom was profit defined as a return on invested assets or capital. Given the distrust expressed about the government, it was also likely that some respondents chose to underreport actual profits. Clearly, this is an area where a more concise definition of terms is necessary.

Table 6 summarizes sources of startup capital. Due to multiple responses, the total does not add to 100 percent. The overwhelming majority, 80 percent, used personal savings as startup capital. This number is unchanged from 1993 and was not unexpected, given the lack of development of the banking system. More than half (56. 7 percent) used family and friends to finance their business, an increase of 11. 4 percentage points; only 23. 4 percent used banks or investors. The largest difference between the two survey years was in the use of investors: in 1993, investors were utilized by 25. 2 percent of the respondents; and in 1998, this number had decreased to only 7. 0 percent, a decrease of 18. 2 percentage points.

Table 6
Sources of Startup Capital

It appears that the formalized capital sources, banks and investors, have decreased their funding. This could be attributed to tighter requirements by the banks or that the most promising businesses have already been financed.

Obstacles to Setting Up and Operating a Business: To determine the major problems experienced by entrepreneurs in the initial startup and operation of a business, respondents were asked to list the top three problems in each category. A total of 199 comments were elicited as obstacles to starting a business (Table 7) and 256 comments were cited as obstacles to operating a business (Table 8).

Table 7
Main Obstacles in Setting Up The Business

Table 8
Major Obstacles in Operating a Business

In 1998, the major obstacles to setting up a business were money (37 percent), qualified employees (15 percent), laws/bureaucracy (12 percent), and space/renting/premises (9 percent). In 1993, the biggest obstacles to setting up a business were space/renting/premises (25 percent), money (20 percent) and equipment/supplies (13 percent). Money and space/renting/premises remain obstacles to establishing a business. A shift, however, has occurred from the physical components, space and equipment/materials (38 percent) to operating factors, such as qualified employees and laws/bureaucracy (27 percent).

The major obstacles to operating a business in 1998 were high taxes (27 percent), funding/money (11 percent), laws/bureaucracy (8 percent) and competitors (7 percent). In 1993, the major obstacles were laws/ bureaucracy (13 percent) and equipment and supplies. Inflation, which accounted for 6 percent of obstacles listed in 1993 does not appear at all in 1998. Conversely, competitors, which were not significant in 1993, were now cited by 7 percent of respondents. Racketeering and stealing dropped from 8 percent in 1993 to 3 percent in 1998.

Conclusions

The major differences between the findings in the 1993 and 1998 studies are: an increase in the age of the respondents; a shift in the obstacles to starting a business from space/renting/premise, money and equipment/supplies to money, qualified employees and laws/bureaucracy; and a shift in the obstacles to operating a business from laws/bureaucracy and supplies and equipment to high taxes and finding money, with inflation no longer being cited. The situation is undesirable in that there were no increases in the percentage of entrepreneurs with business education and sources of funding, but overall, the findings are encouraging for small business development in Lithuania.

The typical entrepreneur in Lithuania is an educated male between 30 and 49 years of age. The types of businesses being started are diversifying, but are generally in the service/retail sector. Although only 11 percent of the respondents claim to have any business education, 70 percent of the businesses are making a profit. The major obstacles to setting up (lack of money and qualified employees) and operating (taxes and funding) a business are consistent with obstacles in other economies in transition.

Threats to doing business in Lithuania

Three areas of concern are the lack of business education (only 11 percent in each study), no changes in sources of funding, and the lack of new entrepreneurs. In the five-year span between studies, the percentage of entrepreneurs with business education and/or training did not increase, which raises the question of the quantity and content of educational programs. It is assumed that many graduates are going to work for foreign companies, where the salaries and conditions are better. This situation provides an opportunity for more entrepreneurial business programs to be established in Lithuania. If more new businesses are being started by older entrepreneurs, because the younger ones are leaving, this may have a negative long-term effect on economic development.

Recommendations for further research take two forms: explore relationships between the various other factors studied and compare findings with a more sophisticated sampling method. A total of thirty-seven questions were asked on the survey. Within the scope of this article, only ten have been explored, leaving twenty-seven other factors to analyze.

Because this is a tracking study, it should be repeated in 2003 using the same sampling method. Concurrently, statistical sampling should be done, using the same questionnaire, to compare the results of the two methods.

In summary, it is important to continue monitoring entrepreneurial development in Eastern Europe since it enhances the economies and lives of individual citizens by providing needed services and an opportunity for personal achievement.

REFERENCES

Ališauskienė, R., R. Bajarūnienė and B. Sersniova. 1993. "Policy Mood and Socio-Political Attitudes in Lithuania." Journal of Baltic Studies 24. 2.
Kirchhoff, J. J., D. Minkus-McKenna and G. Galkis. 1994. "Demographics of Indigenous Lithuanian Small Businesses: Market Opportunities and New Venture Niches." Proceedings of Marketing and Entrepreneurship Symposium, INSEAD, France.
--------------, Inzenierinie Ekonomika. Nr. 1 (10) (1998).
Minkus-McKenna, D. 1997. "Attitudes Toward Key Business Indicators: An Empirical Study." Journal of Baltic Studies. 28. 1.
Motivans, A. 1993. "Social and Political Opinion Research in the Baltic Countries." Journal of Baltic Studies, 24. 2.