Georgia leads the countries of the European Union’s Eastern Partnership (EaP), which also includes Armenia, Azerbaijan, Belarus, Moldova and Ukraine, when it comes to nurturing small and medium-sized enterprises (SMEs), a report published by the Organisation for Economic Cooperation and Development (OECD) has found.
According to the SME Policy Index for Eastern Partnership Countries 2020, Georgia received the highest scores in nine out of 12 subcategories within five so-called pillars – responsive government, entrepreneurial human capital, access to finance, access to markets, as well as innovation and business support.
Compared with the previous edition of the report, published in 2016, the South Caucasian country improved its scores in all 12 subcategories: institutional and regulatory framework, operational environment, bankruptcy and second chance, entrepreneurial learning/women’s entrepreneurship, SME skills, access to finance, public procurement, standards and regulations, internationalisation, business development services, innovation policy and green economy.
“From an already strong position, Georgia has made further progress since 2016 by adopting a more strategic approach to small and medium-sized entrepreneurship development through targeted initiatives. The adoption of the 2016-20 SME Development Strategy and respective action plans, the improvements made to entrepreneurial learning and women’s entrepreneurship, the continued simplification of business registration, and the increase in e-government services have drastically improved the operational environment for SMEs,” reads the OECD report, adding that the way forward should include strengthening support provided to exporting SMEs, expanding the links between foreign direct investment and domestic businesses, as well as increasing competitiveness.
Belarus leads the pack in two subcategories – bankruptcy and second chance and green economy – and scores above the EaP average in five of the 12 subcategories. Analysts at the OECD acknowledge that the Belarusian government has stepped up its efforts to strengthen the position of SMEs in recent years by adopting an SME development strategy for 2030 and the provisional establishment of an SME agency.
“However, SMEs’ contribution to value added and employment in the business sector remains limited and state-owned enterprises continue to play a disproportionate role in the economy,” the report points out, adding that the Belarusian authorities “could establish a healthy competition culture in the economy and support the development of entrepreneurial human capital” to increase SME competitiveness.
Moldova tops the EaP countries in terms of entrepreneurial learning and women’s entrepreneurship. The country, which scored above the EaP average in nine subcategories, achieved higher scores in all but three dimensions compared with the 2016 report – standards and regulations, internationalisation and business development services. Making “moderate progress,” Moldova’s notable reforms over the past four years include reducing regulation, a reinforced policy framework for entrepreneurial learning, start-up support for young people, broadening e-government services and formalising public-private dialogue.
Exceeding the EaP average in five subcategories, Azerbaijan was commended for making significant progress in improving the operational environment for SMEs and in expanding the provision of export support and promotion services after the country reformed its SME sector following a sharp recession in 2015-16. Going forward, Baku is advised to focus on promoting a more competitive business environment, strengthening the rule of law and improving business integrity, as well as building capacities in key institutions such as the country’s newly established SME development agency. However, limited access to finance continues to be a significant barrier for local businesses.
Analysts at the OECD found that the government of Armenia’s prime minister Nikol Pashinyan “has embarked on an ambitious reform agenda that includes SME development as a priority” for the country, although – due to political changes and persistent economic challenges – Yerevan achieved only limited progress compared with the 2016 OECD assessment. “Nevertheless, despite the lack of a comprehensive medium-term SME strategy, the institutional and regulatory framework for SME policy has further improved as the DNC [Armenia’s SME agency] has extended the scope of services provided to SMEs, and a revised e-procurement system was introduced in 2018.”
The report adds that “there has also been a growing focus at the policy level on the importance of entrepreneurial human capital for national competitiveness, and the government’s efforts in this area should be recognised and further supported.” Future attention should be paid to adopting the country’s SME development strategy for the 2020-24 period, enhancing e-government services, improving bankruptcy procedures, offering better services to exporters, and creating a competition-friendly business environment.
Despite scoring below the EaP average in 10 subcategories, as well as continuous political and economic challenges, Ukraine has made “significant progress” through a continuous implementation of reforms since 2016 in areas including deregulation, public procurement, improving the institutional framework and harmonisation with EU standards.
“Ukraine should ensure the sustainability of its institutional and regulatory framework for SME policy, step up deregulation efforts and ensure the creation of level-playing-field conditions for SMEs through consistent enforcement of the corruption and competition legislation,” the OECD’s analysts suggest, amongst much else.
“EaP countries have made significant progress in building a more SME-friendly business environment. All six countries have been proactive in setting up a strong institutional basis for SME policy making through the design of SME strategies and the set-up of operational agencies to deliver tangible support programmes,” the report states, adding that business-related legislation has been further simplified and regulatory barriers reduced, for instance, by streamlining registration procedures, extending the scope of e-government services and strengthening the legal framework for insolvency. “Moreover, EaP governments have increasingly developed targeted support mechanisms to enhance SMEs’ access to finance, skills and innovation through financial or non-financial instruments,” the report continues.
At the same time, the OECD highlights that SMEs across the EaP region struggle with a number of challenges that impact their growth and productivity.
“More attention should be given to establishing level-playing-field conditions for companies of all sizes and regardless of their ownership structure as a precondition for market-driven private sector growth. In addition, more tailored support programmes are needed to increase productivity and enable SMEs to be competitive in export markets,” the report stresses, noting that EaP governments need to strengthen monitoring and evaluation systems to allow for informed SME policy making and to ensure the optimal use of public resources.
Analysts at the OECD also found that the potential for SMEs within the EaP region remained untapped: while representing up to 99 per cent of all firms, they account for 57 per cent of private sector employment and 47 per cent of added value, with the vast majority of SMEs being subsistence micro-entrepreneurs that operate in low-value-added sectors with limited space for export.