Problems Facing the Development of Small and Medium-sized Manufacturing Firms in the Baltic States

Abstract

One of the issues facing Central and East European (C&EE) countries in the transformation from centrally planned into market-based economies is the need to develop a small and medium-sized enterprise (SME) sector. The potential role of SMEs includes generating employment and thus contributing to absorbing any labour surpluses which result from economic restructuring; using privatised property for production; contributing to the development of a diversified economic structure (including their role as suppliers to larger companies); and, in some cases, as a source of innovation (for a more detailed discussion see Smallbone, 1995). Moreover, it can be argued that the development of manufacturing SMEs is of particular significance in the transformation process because it is manufacturing (together with some parts of the service sector) that constitutes the economic base² thus emphasising the potential role of the sector in generating external income and thereby contributing to the growth of the economy (Gudgin, 1982). In addition, the multiplier benefits of a given expansion in the manufacturing sector is likely to be greater than a similar growth in service sector activity. In the Baltic States there are additional factors which justify paying particular attention to manufacturing SMEs in policy terms. This is because of the need to modernise and re-orientate the manufacturing sector of the economy as part of a wider process of restructuring that involves a closure of some activities on the one hand, and the development of new activities on the other.

This paper has been produced as part of a research project — ‘The Survival, Growth and Support Needs of Manufacturing SMEs in Poland and the Baltic States: Developing a Policy Agenda’ — funded under the Phare (ACE) Programme (ref. 94 743R). The authors gratefully acknowledge the constructive comments made by Professor Niels Mygind of the Copenhagen Business School who acted as discussant when the paper was presented at the conference ‘Micro-Level Studies of the Transition in the Baltic States’, Riga, August 1995.