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There is growing understanding that entrepreneurship is a fruitful strategic development option for local economic development, especially in the rural areas. This strategy being also known as homegrown development refers to a process of supporting and encouraging people to become entrepreneurs in order to enhance the economic prosperity of a community, by: first, creating the environment being favorable for creativity and innovativeness; second, encouraging entrepreneurship as an eligible career option through entrepreneurial education, facilitation and recognition, and third, developing institutional support system to entrepreneurs. The main aim of this paper is to discuss the economic strength of small and medium-sized enterprises (SMEs) in the economic development of the city of Osijek, and to explore the perception of the Osijek`s entrepreneurs about the role of institutions in entrepreneurship development. The analysis indicates the SMEs have had a weak economic power. Small and medium-sized enterprises, although numerically overwhelming, employ approximately half of the total employed in the City, operate continuously with financial losses, and are oriented mostly to doing business locally. According to the perception of Osijek`s entrepreneurs, the biggest business challenges are caused by problems connected to entrepreneurial environment conditions, i.e. institutional infrastructural conditions, and the least to inappropriate profiles and inefficiency of local work force. Drown from these findings, lessons considering the process of entrepreneurship development in the City of Osijek are discussed as well.

KEYWORDS: entrepreneurship development, the City of Osijek, entrepreneurial framework conditions, institutions

JEL classification: M13