Regional Transitions from Socialism to Entrepreneurship: Russia and Germany compared

We investigate the personal- and regional-level determinants of entrepreneurial activities in East Germany and Russia in the process of transition to a market-type economy. In this comparison entrepreneurship in West Germany is used as a benchmark. Whereas East Germany has experienced - after 40 years of socialism - a shock-like transformation towards a market economy, Russia was under socialistic regime for a period of about 70 years, and its economic development after the breakdown of the Soviet Union diverged from the development in East Germany. Hence, one can expect substantial differences in the level of entrepreneurship and determinants of the decision to be self-employed in these two countries and their regions. While a number of studies indicate that East Germany has now largely overcome its socialistic legacy with regard to entrepreneurial activities (Fritsch et al., 2013,2014), the developments in Russia are still largely unclear. There are some cross-country comparisons of the overall level of entrepreneurial activity that include Russia (Djankov,et al.,2005, 2006; Ageev,et al.,1995; Aidis,et al.,2008). There is, however,hardly evidence on the dynamics of entrepreneurship in detail and with comparison to other post-socialist countries. We conduct micro-data panel analyses for Germany and Russia that cover the time period from shortly after German reunification until recently. The analysis for Germany is based on the Socio-Economic Panel(SOEP), a national representative survey of German households containing detailed information about people's socio-economic and psychological characteristics. Data for Russia comes from the Russia Longitudinal Monitoring Survey(RLMS) which is comparable to Germany's SOEP. For detailed regional analysis in Russia, we additionally use the Overall Monitoring of Living Conditions(OMLC) data set. We find several differences with regard to entrepreneurial activities between East- and West Germany and Russia. While the level of entrepreneurship in East Germany has achieved the West German level of about 12 percent 15 years after the German reunification, the self-employment rate in Russia is still very low at about 4 percent. In all countries under inspection there is substantial variation of the level of self-employment across regions. With regard to the individual-level determinants of self-employment,we observe several differences between Germany and Russia. While age does not seem to play a significant role for the probability of being an entrepreneur in Russia,this relationship has a statistically significant reversed u-shape in Germany. Moreover, entrepreneurs in Germany are more likely to be low- and high-educated,in comparison to employees,whereas in Russia we observe a positive and linear relationship between formal education and the probability of entrepreneurship. Furthermore, Russian entrepreneurs tend to work in occupations that do not correspond with their field of education, thus, indicating necessity-driven nature of entrepreneurship in Russia. Nonetheless, Russian and German entrepreneurs are similar in that they are more likely to be married and men.