Informal Investments in Transition: The Motivations, Characteristics and Classification of Informal Investors in Croatia, Hungary and Slovenia

Abstract

It is not a surprise that informal investment is a widespread phenomenon in the developed countries with long experience in market economy practices. But what about is informal investment in countries that started economic transition just a decade ago? Present study investigates the influential factors of informal investment decision by the use of GEM individual data of three transition countries of Croatia, Hungary and Slovenia. Compared to previous results of Finish informal investors, similar factors of previous business ownership, startup skills and personally knowing an entrepreneur are found to be the driving forces of informal investment decision. Moreover, transition country individuals put more emphasis on good business opportunities and higher household income than Finish ones when they have become informal investors. A comparison of close-family versus not close-family related informal investors revealed that despite significant differences close family related investors cannot be characterized by economically irrational decision making called "providing love money", i.e. good opportunity recognition, business and startup skills increased the probability to become informal investor even in the case of family related businesses. The seven clusters of the 160 transition informal investors showed a variety of groups of different informal investors according to their age, level of education, amount of investment, start-up skills, existing ownership status, and country of residence. Since the three examined transition countries have a problem not only with the low prevalence rate of the informal investors but also with the short of the amount of investment, the group of the individuals with the highest invested amount was analyzed. We found that the most important reasons of the limited informal investment activity and low level of investment had been associated with the limited entrepreneurial activity, the unfamiliarity with start-up and business leadership skills, the limited ability of opportunity recognition, and more generally, with inexperience in market economy and entrepreneurial practices. The study closes with policy recommendations of supporting business education, entrepreneurial culture and providing better business opportunities.