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Entrepreneurship and small business: development and success factors in societies under systemic transition

Priority areas of development: economics, sociology
Department: Laboratory of Entrepreneurship Research
The project has been carried out as part of the HSE Program of Fundamental Studies.

Goal: Analysis of statistical and sociological data on the structure and factors of entrepreneurial activity in the context of transitional economies, informal practices and their causes, as well as on the development of production sector SMES in Russia.

Methodology: The combination of quantitative and qualitative data cross-sectional analysis and longitudinal surveys.

Empirical base of research: Global Entrepreneurship Monitor dataset (2006-2012), FOM ‘Georating 2011’ dataset, own longitudinal panel of start-ups and entrepreneurs (2013-2015), RUFIGE 2014

Results ofresearch:

On the materials obtained in the course of realization of the project "Georating-2011", by grouping regions by the level of entrepreneurial activity, the stages of the business and socio-economic contexts, taking into account the 3-component presentation of motives of entrepreneurship.

  1. The backbone of the regional typology of entrepreneurial activity is based on clustering regions on socio-economic context and selection of homogeneous clusters in an external context; in each selected socio-economic cluster groups forming regions sufficiently homogeneous for the level of activity of entrepreneurs at every stage of the business. The basis for the grouping of the internal context of the accepted median value index of entrepreneurial activity by stage business. In each cluster regions allocated group "stability"-with stable high and stable low level of entrepreneurial activity at all stages of the business.
  2.  Regions with persistently low entrepreneurial activity at all stages marked only in clusters of problematic regions: distressed investment (InvP) and socially weakened ones (SocP). Regions with persistently low entrepreneurial activity at all stages should be priority subjects when designing targeted measures to support entrepreneurship.
  3. For nascent entrepreneurs in clusters of problematic regions revealed the only common factor that determines the hopeful quality assessment of the prospects for business development of the individual is to help relatives as a result of similar problems in these clusters for start-up (informal financing). In wealthy regions the optimism of nascent entrepreneurs is determined by the type of activity which, in their view, generates income and enables them to grow the business.
  4. Non-entrepreneurial segments of the population significantly more dependent in their assessments of the business environment from external factors than entrepreneurs, and factors determining the assessment of these conditions by non-entrepreneurial segments of population in different clusters operate in different directions.
  5. The vast majority of identified correlations can be used to influence the assessment of the people of the entrepreneurship framework conditions by measures of public policy. In particular, the promotion of success ("the best examples"), development of the system of entrepreneurship courses aimed at the formation of skills needed to start and conduct business, mentoring support, creating platforms for communication of start-ups with business angels, representatives of venture business etc. can significantly increase the level of involvement of the active part of the population in the enterprise with the same economic and infrastructure conditions.

Comparative analysis of the early entrepreneurial activity in Russia and 6 CEE economies, based on the GEM data, allows to show the following:

  1. Early entrepreneurial activity level in all these countries is rather low, because of unfavorable framework conditions for enterprise development in transition economies, and especially, weak availability of debt capital and the lack of entrepreneurial skills and experience among the population.
  2. To determine the factors that characterize the attitude of early entrepreneurs to loan and equity capital, a modeling of the discriminant functions was conducted for selecting early entrepreneur mode of financing business within the given economic context. The results on the basis of the Fisher’s LDA model let determine that clusters of entrepreneurs (intending to finance business at the expense of own savings or through the attraction of external financing) differ significantly. Besides, the discriminant functions built for Russia and for each of the 6 CEE countries (Hungary, Romania, Latvia, Croatia, Slovenia, Bosnia and Herzegovina), vary in composition and the number of independent variables-classification factors.
  3. In Romania, Croatia, and Bosnia and Herzegovina one of the determining variables when choosing the mode of financing is the fear of failure or low self-efficacy. In the meantime, the awareness of the risks has a positive effect on the propensity of the entrepreneur to access external financing. Entrepreneurs in Latvia, Croatia and Bosnia and Herzegovina are aware that they have more opportunities to attract borrowed funds if they offer products or services, new for the market. For Russia it is characteristic that the more optimistic are early entrepreneurs regarding the possibility to start their own business, the more likely are they to finance their business by attracting external funds.

The analysis of factors of competitiveness of Russian manufacturing SMEs carried out by using the RUFIGE 2014 project database, showed that the level of competition varies significantly among SMEs, depending on the size (medium-small business), the type of location (large-medium-small towns, etc.) and economic activity. In particular:

  1. A strong influence of Russian competitors on manufacturing small firms increasingly felt in small settlements with a population of less than 50 thousand pers. Mid-sized enterprises in most types of settlements are faced with approximately the same level of competitive pressure-with the exception of cities with a population of 250 000 to 499 000 pers., where competition between Russian manufacturers are comparatively lower. In relation to the pressure of foreign competition market environment appears to be the most competitive in the billion-cities and in small towns with a population of 50 000 to 249 000 pers.
  2. There are industrial SMEs in cities with a population of 250 000 to 499 000 pers. who export in the largest scale, in such cities, the share of exports in the total revenue makes from 28% for medium to 20% to small industrial enterprises. In these cities, also the largest investment activity of industrial SMEs is observed, but the proportion of enterprises who invested in fixed assets differ considerably between small firms (approximately 40%) and medium-sized enterprises (about 80%).
  3. Regardless of the type of settlement, medium-sized enterprises are investing in fixed assets much more frequently than smaller ones. But the share of investments in fixed assets for all types of settlements, except very small with less than 50 000 pers., is higher in small firms than in medium-sized enterprises.
  4. Industrial small firms regardless of the type of settlement mention more often than medium-sized enterprises that the already achieved scale of business limits the possibility of successful competition. This limitation is most acutely expressed in the smallest settlements with less than 50 000 people, where more than half of the small firms and a third of medium-sized enterprises stressed this fact.
  5. The main limitation that prevents the growth of industrial small firms is the lack of financial resources (45% of enterprises regardless of the type of settlement). Demand level as a restriction for business development was recorded also almost equally in most types of settlements, relatively rarely in the smallest settlements with less than 50 thousand pers. There, also lack of skilled workers was pointed out as the obstacle more often.
  6. The quality of the products, according to estimates by the owners of manufacturing SMEs, does practically not differ by type of settlement, varying from 84% to 93% of the maximum.
  7. For small and medium-sized manufacturing enterprises, there are rather product than technological innovation more typical as a means of competition. There are SMes in billion-cities who bring more often new products and technologies on the markets. It is more typical for medium-sized manufacturers than for small firms regardless of the type of settlements.
  8. A high level of competition with Russian manufacturers is not connected with a R&D activity, improvement of the technological quality of production remains within the bounds of domestic accomplishments (from the middle tier to the highest). The level of competition from the side of domestic enterprises increases with the size of the population at the location of manufacturing SMEs.
  9. Possession of certificates of quality is not significantly correlating with the self-esteem of competitive pressures, while the possession of international ISO 18000 increases the self-assessment of the firm’s competitiveness.
  10. The share of the basic product in the turnover is significantly combined with the level of competitiveness only in the production of motor vehicles and equipment. This kind of concentration of resources in the production on a single product is perceived to be more effective by owners of firms competing with foreign manufacturers.
  11. The positive influence of the involvement into strategic partnerships on their competitiveness is identified by enterprises that have concluded a strategic partnership with Russian companies from other regions, as well as for companies cooperating with foreign partners; they have a revenue rate significantly higher than that of businesses without such strategic partnerships.
  12. When entering new markets, enterprises usually stress a growing competitive pressure, but some activities (in particular, the production of motor vehicles) show an inverted trend: when entering CIS markets, the perceived level of competition seems to be lower.

The 3-years long study of informal business activity based on e in-depth interviews with 13 start-ups and entrepreneurs revealed that:

  1. The real basis of informality in the sphere of individual and small business is a very informally defined structure of relationship between stakeholders within the business, which not exactly corresponds with the legal organizational form of the firm and the formal status of each concrete stakeholder. Therefore, many decisions on the formation of the business team, its structure and development, outsourcing, etc. cannot be formalized by definition.
  2. Some activities (e.g., construction and repair), are by definition more fit to do business using informal methods. Moreover, the activity on markets where small and micro business depend heavily on orders from larger businesses or State can also become a factor pushing to informal entrepreneurship due to regular delays of payment of underpayment of really fulfilled contracts, or unfair price jacking attempts; here, suppliers are forced to employ some staff on an informal basis and conduct operations off-the-cash to have tools for bribing decision makers.
  3. Business motivation is related with the fact whether the informal practices are used. Those who seek self-realization and aim to sale the business when it becomes prospering, are not as likely to use informal relations in their business practices, contrary to those engaged in enterprise by the push of circumstances.
  4. Partial payment of taxes or the absence of registration of employment contracts with workers according to the law, is usually legitimized in the own eyes of respondents as the only way to preserve the existence of the business and the fulfillment of social obligations to the employees.
  5. Informal relations with employees do not affect the ‘core’ of employees. With regard to the ‘periphery’ (non-skilled construction workers, etc.), employment relationships are built purely on an informal basis, and is not perceived by respondents as a problem.
  6. Informal relations with customers are practiced only at the initiative of the clients and mainly-when interacting with individuals. On the other hand, participation in public procurement pushes to search for costs’ ‘optimization’, including informal practices (primarily in part to payroll savings), and the ability to dodge major contractors from performing the obligations under the contracts, particularly in the context of the unfolding crisis. The latter is am additional factor forcing to build trusting relationships with contractors CEOs as a form of protection against the commercial risks.

Practical conclusions: If the Government wants to reduce informal business activity, we need to radically revise the possibilities and conditions for participation in public procurement (corruption mechanisms here are the main reason to have unrecorded cash, etc.), but under the conditions of a "limited order" it is hardly possible. In the context of the long-lasting economic crisis for large segments of individual entrepreneurs and micro businesses informal activity is an induced means to ensure a minimal profitability; the alternative is a growth of prices for goods and services to the population. Given the very doubtful prospects for pension insurance system in Russia, there are no serious incentives for employees to support the State authorities in their fight against the informal practices of entrepreneurship.

A desk review of public policies to promote SME development (2008-2015) allows to make the following conclusions and recommendations:

  1. With few exceptions (the growth of medium-sized enterprises in 2010), the real growth of SMEs in Russia during this period of time is not observed. Adjusted for inflation, real growth in their activities during a specified period is negative. Thus, the effect of government SME policies has proven to be extremely low.
  2. State support was particularly conducive to start-ups. However, the limited amount of demand for SMEs both on the home as well as on foreign markets diminishes their competitiveness.
  3. The Federal law “On the development of small and medium-sized enterprises in the Russian Federation”, as well as similar laws of Russian regions, seem to be outdated. The ideology of State SME support formulated there should be reviewed: only the system of targeted measures is an adequate policy under the pressure of increasing fiscal problems and negative growth in the economy. It is necessary to mandatory formulate in the law the use of the typology of SMEs by levels of economic maturity and branch of economic activities in order to enhance the targeted public policy for SME development. It is necessary to substantiate the criteria to select groups of SMEs which actually require direct government support (subsidies), as well as to establish the conditions excluding any possibility of misuse of those or forms of support.
  4. The priority of State support for SMEs is the manufacturing sector and innovation. In this sense, the SME sector should be segmented not on quantitative parameters (number of persons employed, the amount of economic activity, etc.) but by qualitative characteristics. The key point is the shift from direct support and/or different privileges to broad groups of SMEs toward the formation of a specialized infrastructure of institutions promoting the SMEs, as well as actively interacting with the innovation development institutions of the economy as a whole. 
  5. It is to clearly position and implement policies to promote medium sized entrepreneurship; this cohort was until now excluded from any forms of the SME policy. This was largely due to the lack of interaction of measures supporting SMEs State industrial and innovation policies.
  6. The system of public policies for SMEs in general is in a very insufficient way  connected to such directions of the economic policy of the State as industrial, innovation and scientific and technical policy, etc. This problem can be solved in the framework of the strategic planning system, linking the main areas of economic policy of the State both horizontally (i.e. the main areas of economic activities) and vertical (Federal, regional and municipal economic policy).
  7. It is necessary to establish economic and legal mechanisms for active inclusion of SMEs in the development of territorial institutions supporting production and innovation (special economic zones at the Federal and regional level, industrial innovation clusters, industrial districts).
  8. The respective groups of interests (business community, civil society, experts) are very insufficiently involved in shaping priorities and mechanisms of SME policies. The term “public-public support for SMEs” got no real content. 
  9. The decentralization in SME support policies is a prerequisite for enhancing the benefits from it; but without a real shift of resources and the establishment of a system of incentives at the level of the territories from the Federal level, this principle will remain the watchword. This, however, is a real problem and requires painful steps under crisis times to transmit a significant part of the fiscal authority to relatively easily collected and managed taxes (VAT, etc.) to the level of regions and municipalities.


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