CONDITIONS OF NON-AGRICULTURAL ENTERPRISES IN RURAL AREAS IN A STRUCTURALLY DISPERSED AGRICULTURAL REGION

Teresa Miś¹, Ryszard Kata^2
1 Regional Policy and Agribusiness Unit, University of Rzeszow, Poland
² Unit of Finances, Faculty of Economy, University of Rzeszow, Poland

ABSTRACT

In this paper, the authors assess conditions for developing non-agricultural economic activity in rural areas with a dispersed agriculture. The research was conducted in the Podkarpacki region, and is based on opinions expressed by farmer - entrepreneurs as well as other rural entrepreneurs.

Key words: non-agricultural entrepreneurship, dispersed agriculture, rural areas, farmers - entrepreneurs.

INTRODUCTION

Entrepreneurship is an economic process involving the establishment of new enterprises, often small and medium-sized ones. It is also a feature of personality, characterizing human attitude and behaviour, based on the ability and willingness to take risks, susceptibility to innovations, as well as taking action in order to take advantage of potential future chances and opportunities [3]. A measurable effect of entrepreneurship is a functioning enterprise and an ability to adapt to dynamically changing surroundings. Entrepreneurship requires the ability to adapt and innovate.

Developing non-agricultural enterprises is particularly desirable in regions with overpopulated villages and a dispersed agricultural structure. The example of such a region is the Podkarpacie. The agrarian population amounts to 59.5% of the total population in the region (compared to a nationwide average of 38.3%). Agricultural employment makes up 45.6% of the total number of employed people in the region (versus 29.3% for Poland as a whole). The agricultural share of the GDP (gross domestic product) in the region amounts to less than 4%, while the employment expenditures in the agricultural sector per 100 hectare of agricultural land are 5 times as large as those in the western and north-western parts of the country [11]. The relatively high levels of employment in agriculture yield low levels of economic efficiency of labour in this sector. Value added per worker in agriculture in the Podkarpacki region is 4,663 PLN, whereas in Lubuskie - the region with the highest value added per worker in the agricultural sector – it amounts to 23.362 PLN.

The average farm size in the Podkarpacki region is 3.8 hectare. Further, farms with fewer than 5 hectares make up 83.9% of the total number of farms in the region. Incomes from agricultural production and farm work are very low. Consequently, agriculture is the main livelihood for people living on only 7.5% of farms, whereas as many as 45.4% of all the farms in the region make their living mainly from retirement payments and pensions, and non-paid sources [12]. The region’s overall registered unemployment in rural areas is 19.8%. While unemployment in the agricultural sector is 17.2% of the total agricultural labor force, unemployment among individuals not connected with agriculture is 31.7% [1].

Developing rural non-agricultural enterprises is one way to alleviate problems associated with high unemployment, and may also help avoid some of the pitfalls linked to making structural economic changes in rural areas. The development of rural entrepreneurial enterprises may further serve to increase the economic efficiency of agriculture itself by absorbing part the excess of agricultural labour and thus enabling a concentration of the remaining resources needed in agricultural production, i.e. land and capital.

The development of non-agricultural entrepreneurship endeavours is conditioned by a number of factors that can be divided into two broad categories. The first is internal, stemming from a company’s future potential. This includes owned financial resources, fixed and working assets and labour, position of a company in the market, attitude, motivation and knowledge of the owners. The second set of factors influencing the successful development of an entrepreneurial enterprise is external to the operation, and is a function of the immediate and general environment in which the enterprise is located. This external set of factors includes the system of macro-economic and local characteristics [6]. Among external factors of macro-economic character there are for example: conditions of general competition, inflation, interest and tax rates, exchange rates, economic growth and others. The factors are fundamentally shaped by economic policy of the country whose main task, as far as the sector of small and medium enterprises is concerned, should be to create opportunities to fully take advantage of the potential of enterprises and to raise their competitiveness.

External factors can strengthen or weaken the use of internal potential and possibilities of entrepreneurs. Hence, the influence of external factors on the development of non-agricultural economic activity is essential [5,13,14]. Internal factors are easier to identify than are external factors, and entrepreneurs may be able to influence at least some of these factors. While external factors may be considered as independent variables, entrepreneurs may be able to react to them. Entrepreneurs may be able to actively influence their environment to achieve intended effects. Specifically, entrepreneurs may, on the one hand, seek to strengthen the influence of factors favourable for the development of the enterprise, and, on the other hand, attempt to diminish the influence of unfavourable factors, and try to prevent negative external events from occurring.

To develop an effective reaction to and external factor, it is necessary to recognize its specific influence. This reaction may include quantitative or qualitative changes in the input supplies of enterprise, changes in structure or field of activity, technical and organizational innovations as well as team activity [7].

METHODOLOGY

Rural entrepreneurship mainly consists of two groups of entities. The first includes entities owned by farmers who are actively operating an agricultural enterprise as well as a non-agriculturally registered economic activity. The second group consists of entities owned or partly owned by rural inhabitants who are not connected with agricultural operations.

Operating an agricultural and a non-agricultural enterprise simultaneously is different from operating a farm only. These differences will likely be manifested in the motivation of taking up non-agricultural economic activities, as well as in its scale and dynamics of the enterprises. The differences between the entities may also concern the evaluation of development conditions of their economic activity according to entrepreneurs.

The main objective of this study is to find the answer to these questions. Our findings are based on opinions of entrepreneurs who operate registered non-agricultural economic activities. The opinions were expressed in questionnaires conducted in the Podkarpacki region in the second half of 2003. Such spatial range of research resulted from the necessity to demonstrate the problem of non-agricultural enterprise development on rural areas in a region with domination of dispersed agriculture in economic structure.

We investigated 493 rural enterprises. The analysed companies make a representative sample selected at random: first communes (administrative units) and then entities according to the kind of activity they deal with (production, trade, services) Within such groups the companies were drawn from the list. The necessary information, i.e. register of economic entities, was searched for in County Halls. A group chosen in this way corresponds with the structure of the whole community of non-agricultural enterprises as regards type of the activity as well as presents even spatial distribution of the entities in the rural areas of the Podkarpacie. In the research there was used a method of interview with a questionnaire conducted with the owner of enterprise. The questionnaire included for example questions about general characteristics of researched economic entities, their economic situation, sources of financing economic activities, reasons for undertaking non-agriculture activity and evaluation of factors stimulating and restricting the development of economic activity (according to a point scale: from –5 to +5).

Assessing the influence of external factors on the functioning and development of non-agricultural enterprise in rural areas is based on the force-field analysis method. This method – used with a point scale – makes possible to indicate a direction of influence of a given factor, i.e. whether this is a stimulating or restrictive factor, as well as strengths of its influence onto enterprises [4].

RESEARCH FINDINGS

The essential entities for economies in rural areas and small towns are small companies [8]. In the Podkarpacki region, such businesses constitute over 98% of a total number of entities.

In 2003, there were 142.682 registered entities in the REGON register of the Podkarpacki region, of which 58.482 functioned as rural enterprises. In the region as a whole, there were 112 companies for every 1000 productive-age inhabitants, compared to a national average of 130, and a rural average of 81 enterprises per 1000 residents in the age class from 18 to 59 – women, and from 18 to 64 – men. A total of 21.9 thousand owners of farms of 1 hectare of agricultural land or over were involved in non-agricultural activities, of whom 3.3 thousand farm owners were not involved in agricultural production.

Agricultural farms with non-agricultural economic activity constitute 11% of the total number of agricultural farms in the region (the national percentage equals to 12.9%). For 36% of such farms incomes from commercial activity make up the main source of family income [12].

Among 493 rural enterprises, which were investigated, 298 (60.4%) were owned by farmers who conducted non-agriculturally registered economic activity, and 195 operations (39.6%) were owned by individuals not connected with agriculture. Further, 41 companies (8.3% of the total sample) produced a physical output, 163 (33.1%) were involved with a trade activity, 207 (42%) were providing a service, and 82 (16.6%) were involved in more than one activities. The survey results do not indicate that there are essential differences regarding personal features between farm owners and non-farm business owners in the area. Entrepreneurs conducting non-agricultural economic activity in rural areas are often men between the ages 30 and 50, and with an average age of 42. Only 16.2% of the total number of entrepreneurs in the region are women, although female business owners constitute a higher share (20.6%) among those not owning farms. Almost 60% of entrepreneurs in both groups of enterprises were people with a secondary education (table 1). Whereas 14.9% of entrepreneurs not connected with agriculture had received a higher education (university education), only 9.4% of farmers had received a higher education.

The majority of enterprises functioning on rural areas of the Podkarpacie are owned by individuals (87.6% of farmer entrepreneurs, and 82.5% of other entities). Only 12.4% of the farmer-owned and 17% of the other rural enterprises had a more complex organizational and legal structure, such as civil companies and corporations. In the whole population of rural enterprises there are small and very small enterprises dominating and this can be confirmed by the level of employment. Over 1/3 of enterprises owned by individuals not connected with agriculture consists of one self-employed person, whereas 45.9% of the farmer entrepreneurs have businesses consisting of self-employed operations. Generally, the level of employment of farmer-owned enterprises is smaller than that of other rural enterprises. Specifically, one-sixth of enterprises run by people not connected with agriculture, but only one tenth of farmer-owned enterprises employed more than 5 workers (table 1).

The research shows that credits as a source of financing commercial activity are more often used by entities run by people not connected with agriculture (46.2%). However, among farmer-owned enterprises, only one-fourth of them (25.8%) take advantage of this type of instruments. Almost 17% of farmers took investment credits for launching non-agriculture economic activity, in this way financing on average 48% costs of their undertaking. In the non-agricultural group, however, investment credits were made use of by 23.1% of entrepreneurs. They indicated in interview, that they financing in this way on average 42% of expenditures connected with the initial stage of starting a business activity.

Because rural entrepreneurship predominantly consists of small and very small entities, revenue per enterprises was also small in 2002 (graph 1). The figure shows that 54.4% of farmer entities received no more than 25 thousand PLN in revenues annually, and only 7% of enterprises received revenues exceeding 100 thousand PLN annually. For the non-agricultural companies 62.1% obtained revenues exceeding 25 thousand PLN annually, and 17.4% received revenues of 100 thousand PLN or more per year.

The analysis of the markets of rural enterprises indicates that most of researched entities sell products and services only in the local market (graph 2). In particular, 3/4 of the farmer-owned, and 2/3 of the other enterprises, sold their products and services locally. Only one fourth of farmer enterprise has managed to go out of local market but only 10% sell their articles in the national market, of which 3,3% in the national and foreign market. This situation looks a little more profitably in a group of other rural enterprises, from among which 12.3% sell their articles in the national market as well as foreign market.

The results indicated that by far the most important reason for the respondents to start a non-agricultural economic activity was a desire to obtain a higher income. The second most important reason was loss of employment (table 2). The first factor determined farmers stronger, who by launching a non-agricultural economic activity wanted to supplement low incomes from agricultural farms. Among the group of other rural entrepreneurs, loss of employment was a strong motivation. Unemployment touched also many farmers because the Podkarpacki region has been of a distinctly double occupational character and farmer-workers first of all lost their work in the period of transformation of economy. Possibilities to use free assets in farm (e.g.: multifunctional buildings, land and agricultural machines) were also essential motivation indicated by farmers.

Among factors which favourably influence a decision about launching a business activity has been participation in training organized by various institutions. A total of 82.6% of farmers and 59% of other entrepreneurs took part in such an educational form. In the case of farmers, the training sessions were free of charge and organized by the Centres of Agricultural Advice. Many other businessmen not connected with production agriculture also participated in such events. The latter group also took part in training sessions organized by private firms (e.g. by accountancy offices), the Agency of Regional Development and Employment Offices.

There is little difference between the two groups in terms of the number of years the economic activity has been in existence (graph 3). Almost one out of two enterprises has been functioning in the market for 8 to 15 years. Thus, they were created in the first years of transformation of Polish economy, in the period of the most dynamic development of enterprise in the country. Relatively few new companies have been in existence for up to three years only.

Entrepreneurship in rural areas manifests itself in the same organizational and legal structure and the same kind of activity as in other spheres of economy. However, conditions of its development are different. They result from great importance of agriculture in an economic structure of rural areas together with its structural difficulties such as: agrarian dispersion of farms, low incomes of agricultural population, registered and hidden unemployment in agricultural farms. This situation makes the development of enterprises on rural areas more difficult than in different areas of economy [10].

According to entrepreneurs the most important factors restricting development of economic activity conducted by them are high tax and quasi-tax burdens. The latter include social insurance payments, which add to the costs of work (tab. 3). Businessmen, having the possibility to assess each factor in a scale from 5 (positive) to –5 (negative), assigned the lowest grade to the above mentioned factors, i.e. respectively: farmers –4.1 and –3.3, other rural businessmen –4.2 and –3.2.

In the view of entrepreneurs running relatively large companies and employing a relatively large number of workers, high tax and quasi-tax burdens, i.e. social insurance payments, are more negative. According to respondents such a strong negative influence of these burdens results not only from their high level but also from the issue of stability and transparency of fiscal system and connected with it reporting requirements. It is also confirmed by a very negative opinion on the influence of administrative and legal regulations of enterprises, which, to a great extent, are elements of fiscal and social- insurance systems.

There are no fundamental differences between the groups of farmers and the other rural businessmen in terms of their perception of barriers of enterprise development in rural areas. The hierarchy of assessment of individual factors in these two groups is almost identical, and small differences concern only dispersal of opinions and average results. The farmers were somewhat less negative about their assessment of the access to credits barriers and costs of credits than were the rural entrepreneurs. It can result from the fact that they have wider access to preferential credits; they also don’t use commercial credits so frequently. Generally, by majority of rural businessmen, high costs of credit and limited access to external sources of capital are perceived as essential restrictive factors of development of economic activity. Particularly, such barriers are encountered by small companies with low level of own capital and little possibilities to accumulate own financial resources and as a result not being creditworthy [2, 9]. Their weak position in the market makes it also difficult to use different forms of external fund such as merchant credits. For the importance of capital barrier in creating and developing enterprises, it is a very big problem. It could be moderated by larger financial support (budget and other) for development of economic activity of rural inhabitants and also by creating such institution as funds of credit guarantees.

In comparison to other entrepreneurs, farmers feel stronger the negative influence of competition in the market and lack of sufficiently developed infrastructure of the market, e.g. commodity markets or wholesale structure. They also assessed more negatively access to market information.

In a group of factors of positive influence on development of rural enterprise, both groups, farmers and other businessmen, pointed to stable demand for articles and services of a company as well as to development of technical and financial infrastructure. They also positively assessed institutional support of entrepreneurship, manifesting itself mainly in legal and financial advice. Dispersal of opinions in this range was very high; it results from different experience of entrepreneurs in this matter (tab. 3). Businessmen who used institutional assistance (e.g. advice, trainings) or cooperated with financial institutions, in general, assessed this sphere of conditions favourably.

The largest differences in the assessment of influence of individual factors on development of non-agricultural enterprises concern results of the integration process of Poland with the European Union. In a group of farmers, near 2/3 respondents considered the process of integration as a positive factor. The other ones thought that it would bring more disadvantages, such as increase of competitiveness, need of expensive adaptation activity, increase of qualitative and technological requirements as well as intensification of bureaucracy. In a group of businessmen not connected with agriculture almost 3/4 respondents assessed the process of integration as a factor stimulating development of enterprise in the country.

Entrepreneurs declare different strategies as a reaction to pressure of external limitations in development of economic activity. Among them they mentioned processes of consolidations and integrations. However, mostly they are postulated activities, because the forms of team work have been very rare in both groups of entities. They often consist in activities on a level of branch or association organizations, in a range of representing common interest in the face of public administration, in the area of market information, trainings and consultancy as well as establishing contacts with contracting parties.

Both farmers – entrepreneurs and other country entrepreneurs sought to increase the competitiveness of their companies by striving towards cost reduction, as well as quality and technological innovation. Both types of entrepreneurs see the need to enlarge the role of market information and marketing and also to widen their activity onto new markets. They are also convinced about the need to use financial resources from European Union funds, what is also declared by people sceptically or negatively oriented towards integration.

The research shows that most entrepreneurs want to expand their economic activity. Company development by increasing the scale of production by means of investment was considered by over 40% of entrepreneurs (graph 4). Nearly 3/4 of the entrepreneurs who were not connected with agriculture and 2/3 of the farmers planned to broaden the market. In both groups, 65% sought to improve the quality of production. Entrepreneurs also declare simultaneous introduction of different kind of activities as well as changes of technology and modernization of production (graph 4).

CONCLUSIONS

1. In a region of dispersed agriculture such as the Podkarpacie, non-agricultural entrepreneurship in rural areas has been created mainly by small companies run by people who are looking for additional or new sources of incomes for their families. Entities owned by farmers constitute 37.5% of general number of non-agricultural enterprises functioning in rural areas.

2. Most rural enterprises operate on a small-scale basis, as is evident from both revenue and employment levels associated with their economic activity. Most of entrepreneurial operations sell their products and services in local and regional markets.

3. Among factors which positively influence the development of non-agricultural economic activity on rural areas in the view of the sample of entrepreneurs are a growing demand for articles and services provided by companies and also the further development of a technical infrastructure. They also positively assessed institutional influence in the range of financial activity, trainings and advisory as well as market information.

4. According to owners of companies, tax and quasi-tax burdens are the main barriers to rural enterprise development. This concerns especially high tax levels and social insurance payments determining costs of work. Of unfavourable influence there are also factors in the scope of administrative and legal regulations of enterprises and also limited access to credits, high costs of external capital as well as underdevelopment of infrastructure of the market.

5. The research showed that there are no significant differences in the assessment of factors influencing development of entrepreneurship between farmers conducting non-agricultural economic activity and other rural entrepreneurs. Differentiation of opinions resulted from individual experience of entrepreneurs.

6. Entrepreneurs’ attitude is to actively react to unfavourable factors that influence the functioning of their firms. They see possibility to change their position by common representation of their interests and cooperation in the area of marketing, market information, as well as finances (e.g. creation of fund of credit guarantees). They also see the necessity to improve competitiveness of their companies by reduction of costs, improvement of quality of products and services, and also the need to expand economic activity onto new markets.

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