Motivations and Obstacles for Small Business Entrepreneurship in Russia (2^nd Edition) Entrepreneurship Summary by Anand

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Motivations and Obstacles for Small Business Entrepreneurship in Russia

1. Introduction

   1. Main Idea of Research

      1. To examine entrepreneurial climate and developments in Russia’s small businesses with a focus on motivations and obstacles in starting up and operating businesses.

   2. Other Research Aim

      1. Aim at analysing entrepreneurs’ needs for training, consulting, and other types of assistance in a comparative context.

   3. Brief Results of Study

      1. Though the level of SME entrepreneurial activities in Russia is still lower than in major developed economies, the gap is diminishing.

      2. This study found no significant differences between 1994 and 2008 in terms of entrepreneurial motivations and obstacles. (However, improved in 2008)

2. BACKGROUND AND CURRENT DYNAMICS

   1. Background

      1. Entrepreneurship has not played an important role in Russia because of the following.

         1. Russia’s business environment and cultural tradition have not supportive of entrepreneurship.

         2. Russia has been governed under centralised control and strong government role in economic planning and development.

         3. Immense territory, remote geographic location, harsh climate, large distances, poor infrastructure, communal tradition of life and work, and numerous devastating wars

         4. Aftermaths of communism

      2. Russia was predominantly agrarian, so small business has never developed the way it has in the United States, Great Britain, Germany, and other developed countries.

      3. Such developments in Russian history, political economy, and administrative structure have cultivated generally restrained cultural attitudes toward entrepreneurship.

      4. Stayed among the lowest-ranked countries on future orientation, uncertainty avoidance, and performance orientation.

      5. Stayed among the highest-ranked on power distance.

      6. Entrepreneurial climate in Russia has markedly improved after the USSR demise.

   2. Current Developments

      1. Annual International Assessment of Entrepreneurial Activity and Business Owner Managers across Middle- and Low-Income Countries (by Global Entrepreneurship Monitor (GEM))

1. Focus on SMEs

2. Russia was among the world’s least entrepreneurial countries across its group of reference.

1. Report of the Observatory of European SMEs (with the purpose of improving the monitoring of SME performance and impacts in Europe)

   1. Contains the following data.

      1. A broad range of comprehensive data on entrepreneurship

      2. Registered SMEs and individual entrepreneurs

      3. Employment in the SME sector

      4. Taxation

      5. Access to finance for SMEs

      6. Issues such as the legal environment, innovations, enterprise policies, and business support services related to SMEs.

   2. Finding

      1. Private entrepreneurs and natural persons represent the major constituent of the small business sector in Russia.

2. Study of the Russian SME Resource Centre in Moscow

   1. Core findings generally corroborate the aforementioned Russian SME Observatory Report and dispute the alleged gap between Russia and developed economies in the level of SME development.

      1. SME sector in the Russian post-Soviet economy has emerged through privatization of formerly state-owned enterprises and through private venture initiation (private enterprises, including partly privatized companies).

      2. Government spending equalled 31.3% of gross domestic product (GDP), with the state maintaining a strong presence in such key sectors as energy and mining. --- Although the GDP looks so low, it is very high when compared to other Eastern European countries (in 2008). For example, 31.3% is equal to 75% in Albania.

3. Limitations by law/ government in Russia in pursuing entrepreneurship

   1. Examples of the limitations

      1. Define small enterprises and legal entities as having no more than 25% of state, municipal, public, and religious organizations or charitable funds’ ownership in their charter capital

      2. Define limit in annual number of employees: 100 persons in industry, construction, and transportation; 60 in agriculture and research and development.

   2. Despite more than a decade of the post-communist revival of small business, limited research data are available on Russia’s entrepreneurs, entrepreneurial behaviour, cultural propensity for entrepreneurship, and small business development.

      1. These data largely come from Russian government statistics, limited in scope and sometimes unreliable owing to the effects of informal economy.

      2. Russia’s home-based scholars and academics are poorly paid and concentrated mostly in a few major cities.

      3. Russian government provides inadequate attention, financial and organizational support for SME research, and development owing to budgetary constraints and SME’s low ranks in government priorities.

      4. Although having progressed in SME development in absolute terms compared with that in USSR era, Russia continues to hold cultural limitations toward entrepreneurship.

         1. A study of 250 Russian respondents on Hofstede’s five cultural dimensions in the late 1990s showed that on average Russian culture appeared to be moderate in individualism, masculinity, and power distance, and fairly high in paternalism and uncertainty avoidance—characteristics hardly compatible with dynamic entrepreneurship.

   3. Limited availability and unfavourable terms of financing (high cost base) has been another problem for SMEs.

   4. In comparison, the U.S. differently for different industries based on either the economic size of production or the number of employees for each industry. (Does not define some limitations like limit in annual number of employees: 100 persons in industry.)

4. Performance of SMEs in Russia

   1. Small enterprises show better financial results (profits) than other-sized enterprises.

   2. The share of unprofitable companies in the total volume of small enterprises is lower than among large and medium enterprises, although the level of small enterprise profitability varies by sector.

      1. This can be partially explained by inefficiencies of the Soviet heritage when large government-owned enterprises were set up and managed with disregard for cost efficiency.

   3. Labour productivity is high in SMEs.

      1. Each employee has had twice as much contribution to positive financial results compared with the average for employees of all enterprises.

      2. Also perform well in terms of return on invested capital; during the last five years, small enterprises were, as a rule, more effective than large and medium enterprises, in terms of the return on equity.

      3. External funding has greater significance for small enterprises than for medium and large enterprises. (Please read more in 2.2.6.)

5. Problems about Financial Resources for SMEs in Russia

   1. Long-term financial resources for small enterprises are loans granted by non-bank institutions.

      1. The largest part of accounts payable (AP) falls to liabilities to suppliers and contractors. (This implies slow repayment.)

         1. Liability typically occur in case of prepayment, as a form of settlement with clients.

         2. Small enterprises are reliable in repaying borrowed assets and tend to be solvent partners in business.

         3. Small enterprises also appear to be more reliable than large and medium-sized companies in terms of repayment of short-term loans.

         4. Non-bank institutions = Personal relationships and commitment/ Commercial credit of suppliers/ Absence of an efficient institutional contract enforcement and a court system in Russia/ Mafia-style remedies, including blackmail, intimidation, and contract killings

         5. The majority of funding was personal savings, whereas banks accounted for 10%.

         6. On the other hands, new business start-ups and the state raise money on financial markets (e.g. services of local banks) in many developed countries.

   2. Complicated Loan Procedures = Getting a loan from a bank in Russia has been primarily complicated by very high interest rates, unrealistic collateral requirements, guarantees, limitations on the duration of the loan, and lengthy application procedures.

   3. Doing Business in Russia (Easy or Difficult???)

      1. In 2008, World Bank’s survey ‘‘Doing Business’’ ranks Russia as No. 106 of 178 countries. Also, ranking results of 7 from 10 key subcategories were stagnant or worsened.

         1. Starting a business (Worsen)

         2. Dealing with licenses (Worsen)

         3. Employing workers (Better)

         4. Registering property (Worsen)

         5. Getting credit (Better)

         6. Protecting investors (Worsen)

         7. Paying taxes (Worsen)

         8. Trading across borders (Stagnant)

         9. Enforcing contracts (Stagnant)

         10. Closing a business (Better)