Abstract
We investigate how institutional change, specifically, the transition from a socialist system to a western-type market economy, relates to the re-emergence of entrepreneurship in East Germany. This region is particularly well suited for such a study because of the rapid change of the institutional framework and the possibility of using West Germany as a benchmark. It took about 15 years for self-employment levels in East Germany to reach those of West Germany. Despite this catch up, we find a number of peculiarities in East German self-employment and new business formation that appear to be a continuing legacy of the socialist period. There is also a considerable correspondence of the regional levels of entrepreneurship before, during and after the socialist period, suggesting the existence of a long lasting regional entrepreneurship culture that can be regarded as an informal institution. This is in line with the hypothesis that informal institutions change much more slowly than formal institutions.
This chapter builds on Fritsch et al. (2014).
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Notes
- 1.
- 2.
Baumol (1990) seems to recognize the role of informal institutions by mentioning the low social prestige of entrepreneurship in ancient Rome.
- 3.
The German Micro-Census, conducted by the Federal Statistical Office, has a general sampling fraction of 1% of the total population living in Germany, providing information for 820,000 individuals in each wave (Statistisches Bundesamt 2009).
- 4.
This rise in the self-employment rate is slightly overestimated because of the decreasing employment rate, which is the denominator of the self-employment rate.
- 5.
The sample is restricted to employed individuals between 18 and 65 years of age. Civil and military servants as well as helping family members are excluded from the analysis.
- 6.
Respondents are assigned to East and West Germany if they lived in the respective part of the country at the time of the survey and before German unification in 1990. Hence, we exclude respondents who moved from the East to the West and vice versa.
- 7.
Findings of a related study (Wyrwich 2013) show that the negative origin effects among East Germans are more pronounced for self-employed people with dependent employees than for solo self-employment. This result is remarkable because such differences in the probability of self-employment cannot be solely explained with an effect of East German origin. Additionally, there must be other reasons.
- 8.
For the definition of the historical self-employment rates see Sect. 3.2.1.
- 9.
It should be also noted that the employment share in manufacturing in 1989 correlates positively with the self-employment rate. A high manufacturing share in 1989 mirrors a high pre-socialist specialization in manufacturing. The share of highly skilled employees relates negatively to the self-employment rate in 1989. One main reason may be the strong anti-entrepreneurial indoctrination at universities. As previously mentioned, the ideological conditioning of university graduates was supported by a pronounced tendency to admit only those persons to higher education that declared conformity with socialist values (see Connelley 2000; Fritsch and Rusakova 2012).
- 10.
The high start-up rates in the north (e.g. in the Rostock area) are presumably due to the privatization of the formerly state-owned tourism industry.
- 11.
Additionally we include dummy variables for the type of region based on the settlement structure (urbanization and centrality) as classified by the Federal Institute for Research on Building, Urban Affairs and Spatial Planning (BBSR).
- 12.
There is a similar pattern when employing the year 1925.
- 13.
At the same time, the decrease in the coefficient estimate for the self-employment rate found in 1989 indicates that there are components other than culture that are measured by this variable.
- 14.
The coefficient estimate becomes insignificant when employing the self-employment rate found in 1925 as the indicator for historical entrepreneurship culture.
- 15.
Another aspect of a socialist legacy in East Germany is the performance of the economy. Despite massive policy support and subsidization, most East German firms still have enormous problems when competing on international markets. More than 20 years after the beginning of the transformation process the average level of labor productivity amounts to only about 80% of the West German level.
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Fritsch, M., Wyrwich, M. (2019). The Case of East Germany. In: Regional Trajectories of Entrepreneurship, Knowledge, and Growth. International Studies in Entrepreneurship, vol 40. Springer, Cham. https://doi.org/10.1007/978-3-319-97782-9_5
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