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Human Capital in Romania

Small and medium sized enterprises (SMEs) dominate the business scenario around the world accounting for more than 95% of the total number of firms (OECD, 1997 and European Commission, 2003). Moreover, academic research highlights the importance of SMEs for employment creation and economic development. In addition, SMEs increase market competition and competitiveness, leading to price reductions, improvements in product quality, as well as favouring the implementation of new technologies at the firm level.

Given the resource constraints faced by small firms and their vulnerability with respect to environmental changes and uncertainty, a better understanding of the factors and mechanisms that explain small firms’ growth stands as a key issue for business owners and the economy. Hence, there is an increasing interest in identifying the main characteristics that differentiate firms that grow from those that do not grow or disappear. On the one hand, it is important to know more about the growing and development processes experienced by firms, and on the other hand, increasing our knowledge about those factors that make firms grow is a relevant issue to the appropriate design and application of more selective support policies.

Nevertheless, in spite of the increased attention devoted to the study of firm performance in transition economies, academic research that attempts to jointly examine the impact of human capital upon firm’s growth is still scarce. Furthermore, it is important to remark that the relationship between human capital and business growth is especially relevant in transition economies, since the human capital creation process under the communist system may have become less efficient in the market economy. This is because the political system in these countries constrained the accumulation of business experiences, and the education systems in the former communist countries was biased towards hard sciences and engineering, neglecting social sciences, law, business and public policy.

In the light of these arguments, and using a robust data set provided by the Centre for Entrepreneurship and Business Research (CEBR) for the year 2006 of 492 Romanian firms, the main objective of this paper is to evaluate the impact that human capital components have upon employment growth in Romania using a quantile regression framework. This approach enables the evaluation of the determinants of employment growth at different points of the growth distribution.

This paper increases the literature dealing with the determinants of small firms’ growth in transition economies. The main contribution emerging from our empirical results indicates that human capital matters when explaining employment growth in small firms, and these components affect differently employment growth. Also, our findings reveal that in our sample small new firm exhibit higher employment growth rates. Moreover, our results reflect that, when analysing data sets characterised by high degrees of heterogeneity, important informational gains may be achieved through the analysis of the conditional distribution, rather than relying on central tendency measures.

This brings about important implications of the findings of this paper for policy makers. The conclusions of the study lends to recommend that small firms’ support policies must encourage human capital formation. Thus, governments or local administrations could introduce specific policies to improve the individual’s skills through the entrepreneurial process. These policies should target the educational system, training as well as technical assistance programs. A more active involvement of universities is necessary to increase the knowledge related to entrepreneurship and business, as well as the skills and motivations of individuals. Training and technical assistance programs should stimulate the interaction between established enterprises and individuals in order to provide potential entrepreneurs with experience which can be critical for the development of more successful new ventures.

Furthermore, it is recommended to introduce policies that promote the formation of entrepreneurial teams. These actions should foster the communication between entrepreneurs and individuals either interested or involved in entrepreneurial activities, and they could include specific programs that require individuals to work in teams or meeting places where to make contacts or find partners.

Future research should not only attempt to further explore the observed differences in the impact of human capital components on small firms’ growth using longitudinal data in transition economies, but should also attempt to include a greater number of factors related to the entrepreneur, human capital and the organisation in order to enrich our analysis as well as its longitudinal perspective.