Growing levels of education, the increasing availability of capital, the diversification and specialization of economic activities and the numerous soft and hard supports available to start new businesses have led to the creation of more and more micro and small businesses across Europe. But while the process of setting up a business is increasingly straightforward, keeping it going is much tougher. In normal times, business entry and business exit are natural processes, inherent to economic life. In fact, 50 percent of enterprises do not survive the first five years and, of all business closures, bankruptcies account in average for 15 percent (A Second Chance for Entrepreneurs, Expert Group Report 2011). Yet, the number of bankruptcies peaked during the recent financial crisis and even before that, the Lisbon Partnership had identified the key role of “overcoming the stigma of business failure” as a strategy for growth and jobs.

There are clear economic and social rationales to promoting a second chance for failed entrepreneurs and deriving positive experience from negative situations. First and foremost, businesses set up by restarters grow faster than first- timers in terms of turnover and jobs created (Stam, Audretsch, Meijaard 2006), and approximately one- fifth of all successful business people failed the first time around. The case studies of Ford, Hershey and Disney are instructive for young entrepreneurs in this matter.

Second, most of the time, business failure is not due to the incompetence of the entrepreneurs but due to external circumstances, such as a slump in demand, a financial crisis or the rise of a new competitor. However, this professional failure is often confused with personal failure, and low self- esteem causes individuals to withdraw and retreat to safer employment options.

Third, it is accepted that a society does not generate innovation and productivity by steadfastly avoiding mistakes but, rather, by learning from them. Yet our culture and incentive system does not reflect this. There is much evidence to show that Europeans as a whole are relatively risk- averse, especially compared to countries such as the United States. In Germany, for example, only 1– 2 percent of new companies annually are founded by second- chance entrepreneurs (see KfW- Gründungsmonitor 2013), and the World Bank recently critiqued Poland for its failure to understand the value of secondchance entrepreneurs as manifested in its particularly onerous liquidation procedures (Devictor 2013).

Abstract

This chapter discusses economic failure in the process of small business growth, using the example of Polish companies operating in the shadow economy. The discussion covers internal and external barriers contributing to economic failure in the process of company growth. The presence of companies in the shadow economy influences their operation and consequently the process of their growth. On the one hand, it stimulates the efficiency of businesses and, on the other, it boosts the risk of failure due to possible overestimated investment profitability, the confidential nature of internal activity in a company and problems in contacts with the surroundings. Such a risk is increasing with the increase of the shadow economy's financing of the company's growth.

Introduction

Small businesses have specific market, finance, location, organization and technology features that define their operational and strategic behavior, which are different than in large companies. Due to those features a small business is not merely a downscaled large company (Storey 1994). Differences in companies of various scale can be seen when it comes to development as well. Contrary to large companies, the majority of small businesses are in the early stages of their operations and only some of them succeed and grow to become a larger, stable and expandable company. With the growth of the scale of business, a company faces new problems and challenges in terms of management, finance and technology, and they contribute to various barriers and risk factors. According to the literature, we observe concentration of attention interchangeably on internal and external barriers and factors causing economic failure in the process of company growth (Ropęga and Stawasz 2014; Blackburn et al. 2013; Wiklund et al. 2009; Garnsey et al. 2006). One of the less examined factors is the share of companies in the shadow economy and the impact of the latter on the growth of small businesses (Stawasz and Głodek 2009; Caca 2010).

Shadow economy activity complements the legal sphere of business limited to certain areas only. In 2010– 15, the scale of the shadow economy was about 19.7– 18.5 percent of businesses in EU member states, whereas in Poland it was 23– 24 percent (Schneider 2015). Retail, construction and property and business services have the largest influence on the scale of the shadow economy.