SMEs and the business reality of criminality (the case of Estonia)

Author:Paul Gordon Dickinson
Position:Department of Business and Management, Laurea University of Applied Sciences, Hyvinkää, Finland

Purpose – The aim of the paper is to identify key areas of criminality that affects SMEs and assess and link academic literature on criminality in relation to those areas with the empirical research. In effect to explore the business reality of the criminality environment and its significant aspects that have an impact on SME organisations and their managers and assist their decision making. Additionally, to consider the impact of Estonia's Soviet historical background and her EU membership criminal law obligations within such an... (see full summary)


Estonia is a small but strategically located country in the North East corner of the Baltic Sea area. She is the most northerly and the smallest of the Baltic States, in area, 45,226 km2 a population of approximately 1.6 million having borders with Russia to the east and Latvia to the south. Transport and communication systems are good and due to its favourable geographic location Estonia has good transport connections with other countries. Strategically, from a business development perspective, Estonia is well located, next to the vast market of Russia (150 million population and large mineral resources).

Estonia's significance has also been enhanced in recent years by the accession of Finland and Sweden to the European Union (EU) in 1995 together with the enlargement process and the strengthening of EU co-operation. The changes taking place within the Baltic region politically, economically and legally after the fall of the Soviet Union have been both rapid and profound. Estonia has been part of this change including becoming a new member of the EU. Although small in area size and population, its process of transition from a planned to a market economy is significant as it also located next to the established EU economies of Sweden and Finland as well as the EU's largest newest member Poland.

Consequently, there are good reasons for SME entrepreneurial activity in the Baltic Sea region and particularly, Estonia. However, taking into account in particular the speed of the changes, it is important that any decision to invest or engage in business activity within Estonia is carefully assessed and strategically right. Any manager making such a decision must look closely at the business reality in order to reap the most rewards. Criminality is an important part of that business reality. This paper examines the reality of the criminality environment for SMEs in Estonia, which includes how regulations are worded, relevant EU legislation and applicable exemptions.

The objective of the paper is to give information beneficial for the enhancement of the business environment for SMEs and to assist SME's decision making related to criminality issues, within Estonia. It acknowledges the significance of SMEs and their activity, in particular, economic growth and the correlation with the business regulation and links the significance of criminality and its “key” identified aspects for SME activity. Added to which, recent World and European together with Estonian domestic surveys are evaluated in relation to criminality, which are used as base for assessment of the main issues for SMEs. Within the identified “key” aspects of criminality the crime rate and transaction costs are significant.

The specific applicable crime regulation in Estonia is reviewed and evaluated as well as being related to relevant survey conclusions. It covers crime regulation in terms of how the regulation reads and operates, as well as assessing any unofficial costs through corruption. An interview with an SME owner within Estonia and a former Estonian police officer adds to the empirical evidence. It fills some gaps from the surveys, as to the criminality reality and its “key” aspects for SMEs. This enables a fuller picture to be given helping any SME managerial decision connected to crime issues.

The importance of SME development and the correlation with business regulation

It could be suggested that it is nearly 20 years since the collapse of the Soviet Union and therefore the need for SME development in Estonia is not as great now. However, the development of SME activity needs to be ongoing even if the country is at an advanced stage of transition. Additionally, because of the history of countries like Estonia and the “Socialist black hole”, it is more important to maintain SME development. This is because they have no historical SME background to fall back on.

The “Socialist black hole” appeared when comparing the size distribution of enterprises in a mature market economy close to equilibrium, with the size distribution of enterprises for a socialist economy in a sector. It showed a significant absence from the socialist industrial structure of small firms of up to 200 employees. This vacuum was a communist legacy of pre-form state planning which led to large firms and artificially high concentration and which allowed micro-enterprises little scope to expand ( Tyson et al., 1994 ).

Additionally, academics such as Kirkby and Watson (2003, p. 193) reaffirm the need for SMEs in both developed and transition economies as the engines of growth.

For countries that approach an advanced stage of transition to a market economy (such as Estonia), there is also the need for internationalisation. They comment on the importance of European SMEs becoming more efficient and providing further economic growth. Furthermore, Winieki et al. (2004, pp. 94-95) comment on the fact that the size structure in the EU is dominated by small firms, yet there still remain a gap to be filled by future expansion in SMEs. The jump start of SMEs in East-Central Europe was one of the most important developments in post-communist transition. However, the development of SMEs has not yet reached other high growth countries.

The legal environment is a crucial factor in sustaining and developing the SME sector. This was a point mentioned (early in the post-communist transition process to a market economy) by Koves (1992) . The same issue was acknowledged at the 31st International Small Business Conference (September 2004) in Warsaw, Poland, by Miroslaw Marek (Chief Executive Officer of the Polish Agency for Enterprise Development):

A series of factors influence the competitiveness of small- and medium-sized enterprises, amongst which one of the most important is the legal environment of business operations, and not only in the sense of creating favourable conditions for economic activity but also of ensuring the stability of valid regulations.

The criminal law of a country comes within that legal environment of business operations and as such, has an impact on SME activity.

Criminality has been identified as having a significant impact on SME activity

Criminality is illegal activity in breach of the criminal law ( Sakwa, 2002 ; Goorha, 2000 ), indicating that it raises transaction costs for SMEs through bribes and protection money. The higher the level of criminal activity the greater the discouraging effect on SME activity.

The World Development Report (2005, p. 89) assessed the effect of criminality on SMEs and entrepreneurial activity:

Robbery, fraud and other crimes against property and against the person undermine the investment climate. Rampant crime discourages firms from investing and increases the costs of business, whether through the direct loss of goods or the costs of taking precautions such as hiring security guards, building fences, or installing alarm systems. In the extreme, foreign firms will decline to invest, and domestic ones will flee the country for a more peaceful locale.

First the crime rate for robbery, fraud, crimes against property and the person, and second the transaction costs (bribes, protection money) are consequently the key aspects for SMEs.

The deterrent effect of the criminal justice system is something which the government of a country has influence over. The penalties for theft, robbery and other property crimes can influence and alter a thief's cost-benefit decision making. Connected to this are the penalties that are applied consistently, and how effective the overall system is at preventing and deterring crime. Criminal law is only as effective as those that enforce it and the police play an important role. The government can also help with organised crime and its effect on the SME criminality circumstance, by taking some of the profits out of organised crime by reducing the regulation for firms. As the regulation increases firms are less able to comply with the rules, and less likely to ask state agencies to protect them from criminality. As a consequence organised criminals then meet that demand. This is indicated by the World Bank (2005, pp. 90-92) .

In order to assess the total reality of criminality impacting SMEs, first the written criminal law in Estonia has to be assessed, and that includes EU criminal law. It also provides an opportunity to consider if Estonia, as a relatively new EU member, has complied with such laws.

EU crime regulation and Estonia

First, the main EU laws are connected to mutual co-operation by the EU member states, in the area of crime and organised crime. The crime directive relating to victim compensation allows a crime victim from another member state of the EU, to claim if the crime took place in Estonia. For example, if a German resident is injured in Tallinn, Estonia has the responsibility of paying the crime victim, and it has to establish an authority or body to be responsible for such payments, under the directive. However, on reading the directive, it only relates to “intentional violent crimes”, so it may be interpreted narrowly. However, it is a useful example of EU criminal regulation, which is widening responsibility to the government of each member state.

There are two acts mentioned within the Estonian legislation to cover this directive.

The State Compensation Act is wider than the coverage of the directive because it covers...

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