The Re-allocation of Entrepreneurial Talent During Transition from Socialism to Market Economy: Some Conceptual Thoughts

Abstract

AbstractOne of the stylized facts in the literature is that the level and quality of entrepreneurship is determined by institutional framework conditions—the so-called rules of the game. In this conceptual contribution, we show that this insight is also key to understand the massive surge in start-up activity after the collapse of communism in Central and Eastern Europe. Our contribution draws on recent work analyzing who decided to start a venture in East Germany after the fall of the Berlin Wall. In this previous work, it was found that many individuals who demonstrated commitment to the anti-entrepreneurial communist regime in the socialist German Democratic Republic (GDR) launched their own new ventures soon after German re-unification. We argue that the previous commitment to communism of post-socialist entrepreneurs reflects a tendency toward rent-seeking, which is a form of unproductive entrepreneurship. Once institutions changed radically, their entrepreneurial efforts were directed toward start-up activity. In the current contribution, we reflect on this evidence and discuss to which extent it can be generalized beyond the East German context.