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THE CAUCASUS & GLOBALIZATION
Igor LIUTY
D.Sc. (Econ.), Professor, Vice Principal at the Taras Shevchenko National University of Kiev, Chair Head
(Kiev, Ukraine).
Rufat KULIEV
D.Sc. (Econ.), Professor at Azerbaijan Technical University and the Taras Shevchenko National University of Kiev, Member of the Milli Mejlis (Parliament) of the Azerbaijan Republic
(Baku, Azerbaijan).
SMALL AND MEDIUM BUSINESSES IN A GLOBALIZING WORLD
Abstract
This article looks at the specific features of small business development and its significance for the economy, as well as at the European, Asian, and American small
and medium business development models. It gives recommendations on how to use world experience in small business development in the post-Soviet countries.
Innovation is the key to success in this business, and creativity fuels innovation.
James Goodnight, American businessman, founder and CEO of SAS1
KEYWORDS: Small and medium business, globalizing economy, market economy.
Introduction. Small Business's Place in the Economy
The market economy today is characterized by a complex amalgamation of large, medium, and small production units. On the one hand, plant concentration is a stable trend of scientific-technical progress: large companies have the greatest material, financial, and labor resources, as well as quali-
1 [http://www.adme.ru/vdohnovenie-919705/slova-velikih-predprinimatelej-415305/].
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fied personnel. They are able to carry out large-scale R&D. On the other hand, there has been an unprecedented flux in medium and small entrepreneurship recently, particularly in areas where large amounts of capital, significant volumes of equipment, and widespread collaboration are not yet needed. Such enterprises are particularly abundant in scientific-intensive types of production, as well as in branches related to the manufacture of consumer goods.
Small forms of production have certain viable advantages over large production units: their proximity to the local markets and adaptation to customer requests; their ability to put out small batches of products, which is not advantageous to large companies; their ability to eliminate extraneous management links from the production cycle, and so on. Small business is also enhanced by the differentiation and individualization of demand in production and personal consumption.
The development of small business is creating favorable conditions for economic revival: a competitive environment is developing; additional jobs are being created; restructuring is going faster; and the consumer sector is expanding. The development of small enterprises is helping to saturate the market with goods and services, raise export potential, and make better use of local raw resources. Their ability to enlarge their area of operations and create new opportunities not only for finding jobs, but also for engaging in business activity, launching creative efforts, and making use of free production capacities is of immense importance.
The formation of small market structures in every branch and sphere of the economy without exception meets world economic trends: today an increasing number of small enterprises of the most diverse specializations is appearing in all branches of the economy throughout the world.
The optimal size of an enterprise depends on the branch specifics, its technological peculiarities, and the economies of scale. For example, some branches that are not distinguished by high capital-intensiveness and large production volumes have no need for large enterprises and it is precisely their small and medium companies that prove to be the most economically justified.
World Experience in Small and Medium Business Development
In recent years, the concentration and centralization of capital has accelerated in West European countries. However, although this has made many small and medium businesses bankrupt, this branch of the economy has not disappeared altogether. Small business has proven very hardy and able to make a comeback, while also attracting the interest of large concerns. Small and medium companies are looking for specialized niches where they can act as subcontractors for large corporations. In Western Europe, approximately half of the output of the manufacturing industry is produced by small and medium enterprises. Without being monopolists, they are exerting all their efforts to better adapt to internal conditions of production and sales. Transnational corporations are offering them the opportunity to be the first to try out new products in order to later launch their mass production. New companies are replacing bankrupt enterprises, so constant renovation is going on. It is worth noting that employment in small business did not drop during the economic crisis.
The table below presents indices that characterize the state of small and medium businesses in several European countries, America, and Asia.
Small enterprises enjoy state support in all developed countries; they are integrated into the national economy and are playing an ever increasing role in the manufacture of goods and services. When analyzing world experience regarding the functioning of small and medium business, three models of development of small business can provisionally be identified: European (the West European countries), Asian (South Korea, Japan, and so on), and American. Let us examine them based on several examples.
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Table 1
Indices Characterizing the State of Small and Medium Businesses (SMB) in Several Countries in 2011
Nv Indices Country N. Number of SMB, thou. units Number of SMB per 1,000 residents, units Number of employees in SMB, million people Percentage of employees in SMB of total number of workers, % Percentage of SMB in GDP, %
Great Britain 2,630 46.0 13.6 49 50-53
Germany 2,290 37.0 18.5 46 50-52
Italy 3,920 68.0 16.8 73 57-60
France 1 980 35.0 15.2 54 55-62
U.S. 19,300 74.2 70.2 54 50-52
Japan 6,450 49.6 39.5 78 52-55
Russia 844 5.65 8.3 13 10-11
S o u r c e: E.N. Lymar, "Effektivnost gosudarstvennoi podderzhki malogo i srednego biznesa kak uchastnikov rynkov s monopolisticheskoi konkurentsiey," Chelyabinsk State University Bulletin, No. 10 (264), 2012, Ekonomika, Iss. 38, pp. 95-101, available at [http://www.lib.csu.ru/vch/264/016.pdf].
Europe
For many years now, EU experts point to the exemplary nature of Spain's small and medium business structure, not only in terms of its organization, but also with respect to its operational results. This assessment is primarily based on the country's 72% of GDP, which is provided precisely by this sector of business.2
The share of Spanish small and medium businesses in some branches (for example, in agriculture) reaches 80%, while in the others (construction, industry, ship-building), it comprises an average of 25-30%. The main branches of small and medium businesses are the agroindustrial complex (agriculture, particularly grain production), ferrous and non-ferrous metallurgy, the food industry (manufacture of food products, confectionary, winemaking), construction, tourism, and so on.
Spain espouses a multitude of small and medium business support and development programs. For those planning to open their own business, various assistance programs have been developed and are being successfully applied. Businessmen do not have to pay taxes for the first five years, while they also have the right to perpetual loans for business development. The Spanish government focuses its main attention on those small businesses that have a high social value, create jobs for socially vulnerable groups of the population (students, women, immigrants, and so on), and promote
2 See: Dva kita ispanskoi ekonomiki. Opyt razvitiia malogo i srednego biznesa, ed. by V.L. Vernikov, Ves mir, Moscow,
2010.
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the upswing of underdeveloped regions. In Spain, the state encourages many organizations and funds to support small business.
Minimum red tape is the most important positive factor in the development of small and medium business in Spain. A business can be registered and receive a license in 24 hours without unnecessary bureaucratic delays. What is more, anyone can do this, even the citizen of another state. The controlling functions of state structures are also kept to a minimum.
The world financial crisis of 2008 greatly aggravated the situation: the drop in business activity and financial collapse of hundreds of large and medium and thousands of small companies caused inevitable cutbacks in employees in many branches, primarily in construction, furniture manufacture, services, and tourism. But even despite this, small and medium business is still rendered vigorous state assistance in Spain.
Not every country of the European Union enjoys the favorable conditions for developing small and medium businesses that Spain does, but small and medium business is developed and encouraged in other countries too. Each country has its special features, but this mainly relates to historical traditions, family crafts, and historical sights of interest.
The La Tour d'Argent restaurant in Paris is a graphic example of a specific small business in France. The restaurant boasts the largest private collection of wine in the world—25,000 bottles of vintage wine. Visitors can go on excursions to the restaurant's museum basement and, of course, many wines from this famous collection are included on the menu. Visitors can also try the house specialty, "pressed duck," which has been served here since 1890. Since the end of the 19th century, all visitors who order this dish have been presented with a numbered certificate and their name entered in a special register along with the names of Alexander II, Charlie Chaplin, Marilyn Munroe, Japanese Emperor Hirohito, and Mikhail Gorbachev.
In Great Britain, the ubiquitous family hotel business is a special feature of small businesses. And this is not simply a hotel business, but accommodation in family castles that have only 2-3 rooms and boast their own history and sights of unique interest.
Asia
Small and medium enterprises have become an important component of South Korea's economy. The country places priority emphasis on the development of small and medium business since these sectors of the economy promote the creation of new jobs and ensure sustainable economic growth. State policy is aimed at comprehensively supporting small and medium businesses, since any weakness in the small and medium business sector could potentially be of serious detriment to the national economy.
The Korean Small and Medium Business Administration (SMBA) operates in the country.3 The strategic goal of the SMBA is to help small and medium businesses gain access to foreign markets. In 2011, the export volume of Korea's small and medium enterprises amounted to $114.6 billion—20.6% of the country's total export volume. Despite the global financial crisis, the annual export growth rates of the small and medium business segment are higher than similar indices for large business. In 2011, growth amounted to 16.2% compared to 15.6% the previous year.
Korea's small and medium businesses supply 227 countries of the world with products. These countries include China, Japan, the U.S., Hong Kong, Vietnam, Taiwan, Indonesia, India, Iran, and Russia. The number of small and medium businesses that send products abroad rose from 75,500 in 2008 to 83,000 in 2011. However, the export volume of more than 83% of companies in 2011 did not
[http://www.ruskorinfo.ru/articles/economy/3649/].
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exceed $ 1 million. In other words, most Korean companies belong to the small and medium business segment. The main export articles are car parts, ship hull structures, computers, and household appliances.
The state's small and medium business support policy has been characterized in recent years by low interest rates on borrowed funds and multifaceted and comprehensive bank lending programs.
The lending programs drawn up by the Small & Medium Business Corporation (SBC), which is the main regulating body, are being successfully implemented in different spheres of the economy and are primarily offered to those enterprises that possess the latest technology and enjoy business appeal. The most important programs are:
—the program for financing the development of an enterprise's technology by granting funds for the commercialization of scientific research;
—the program for financing enterprises of the newly developing industrial branch with the promotion of innovative enterprises that have advanced technology in order to raise an enterprise's competitiveness.
The competitiveness of small business enterprises generated by raising labor productivity and innovated development is strengthened and stimulated by production and technology consultation and support.
One of the most important factors for stimulating the development of small innovative business is the education system, which ensures high quality of personnel training. Programs are being developed for offering consulting support in training specialists in technology and management, as well as in instructing employees aimed at increasing the enterprises' competitiveness.
The support of R&D in the interests of small business enterprises is being carried out through technical support programs for implementing technological inventions at the initial stage. Enterprises specializing in the manufacture of spare parts and materials that have not previously received state assistance for carrying out scientific research enjoy special support.
Domestic exporters who are transferring to world quality standards also enjoy extensive financial support in the country. The plan for reforming the national standards system includes active participation of state structures, training specialists, and raising budget expenditure on carrying out research.
An effective way to support small and medium business in Korea is expanding state contracts with small and medium companies: they account for 56% of the total volume of state purchases.
Programs are also being drawn up for managing and raising product quality, developing marketing, and assisting in reinforcing international competitiveness and enhancing the international market by means of special marketing aimed at stepping up the export of small business products.
Throughout the world, Japan's economic and scientific-technical achievements are primarily associated with several dozen of the largest companies and enterprises. At the same time, Japan's small and medium businesses are also making a considerable contribution to the country's prosperity.
Small and medium companies in Japan, along with large powerful corporations, form an important element of the economy. There are around 6.5 million small and medium enterprises operating in the country, employing 40 million people (approximately 80% of the total number of employed). Small and medium enterprises account for around 55% of the country's GDP.4 These enterprises occupy a dominant position in such branches of the economy as garment manufacture, footwear, the haberdashery industry, the manufacture of spare parts and structures, construction, the service sphere
4 See: E.N. Lymar, "Effektivnost gosudarstvennoi podderzhki malogo i srednego biznesa kak uchastnikov rynkov s monopolisticheskoi konkurentsiey," Chelyabinsk State University Bulletin, No. 10 (264), 2012, Ekonomika, Iss. 38, pp. 95-101, available at [http://www.lib.csu.ru/vch/264/016.pdf].
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(including the servicing of technical devices), and so on. Japan's small business is characterized by a widely developed subcontracting system where small and very small enterprises fulfill the orders of large companies—machine-building, airplane-building, car-building, and so on.
The Japanese model for assisting small business in carrying out promising scientific-technical developments and technically and technologically reequipping small businesses is considered exemplary, while the Japanese business support system is recognized as one of the most all-encompassing and mature in the world.
In addition to program financing, training, consulting, and development, Japan's state small and medium business support policy includes programs aimed at raising the competitiveness of small companies and enterprises in the most promising branches and encouraging the modernization of economic activity. Support is rendered by allotting subsidies and loans—issuing direct credits and offering guarantees. More than 80% of subsidies are designated exclusively to scientific-technical programs, including to raise the technical level of production, improve production technology in the light and food industry, and develop, along with universities and scientific research institutes, new scientific-intensive products.
South Korea and Japan are graphic examples of the Asian model of small and medium business that enjoy extensive state support, are vertically structured into modern high-tech industrial production, and cooperate closely with large monopolies, performing contractual work for them.
The U.S.
The small business sphere in the U.S. is a unique mechanism for activating socioeconomic life. More than 70 million people are employed in small and medium businesses, producing more than 50% of the country's GDP and manufacturing more than 30% of export products. Moreover, in the past 15 years, 64% of all new jobs have been created in the small business sector. State policy regarding small business is founded on understanding the high value of small and medium business in ensuring the country's sustainable development and set forth in the Small Business Act PL 85-536 with addenda PL 108-217 of 4/5/2004.5
In order to guarantee sustainable and harmonious development of small business in the continuously changing market situation, the state constantly renders comprehensive support to this sector of the economy. This function is performed by a federal agency called the U.S. Small Business Administration (SBA) and directly subordinate to the country's president. The SBA pursues a state policy regarding small business and implements different financial, technical, consulting, and legal assistance programs for small businesses at all stages of their development.
At present, in keeping with the current order in the country that envisages a medium-term strategic development and improvement plan for the operations of all government departments, the SBA is implementing the next five-year small business development plan for the 2008-2103 fiscal years. This document lists the main strategic goals for further developing small business and the most important vectors for improving state support measures to achieve these goals.
The SBA, the annual loan portfolio of which tops $88 billion, is one of the largest dispensers of state budget funds in the country. In the past five years, the agency's loan portfolio has burgeoned by 50%, which has made it possible to significantly expand the amount of assistance to small business and efficiently promote its development. In correspondence with the established practice, financial and technical support of small businesses is rendered in the form of a set of programs, including for guaranteeing loans and investment financing. The SBA is not rendering direct financial aid to small
[http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_strategic_plan _2006.pdf].
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businesses. This assistance is carried out through a network of partner and intermediate financial institutions that, thanks to the agency's guaranteed loans, engage in direct lending to small enterprises. A Loan and Lender Monitoring System (L/LMS) has been created for efficiently managing the multitude of loans at different stages of their realization.
Short-day mini kindergartens are a popular type of small business in the U.S. This enterprise is very much in demand. And, as research shows, a service related to the care and instruction of children will only gain in popularity. According to statistics, 85% of working Americans have a family, whereby 78% of married male employees have wives or partners who also work, while 46% have underage children. Approximately one fifth of working parents are single.
A mini kindergarten is usually located in a private apartment or home. The instructor, i.e. the landlady, takes care of a small group of children, between 2 and 5 people, while their parents are busy. Parents pay between $15 and $50 an hour for their child to attend such a kindergarten. For example, for $15 an hour, a nanny will take a child for a walk, play with him/her, and read to him/ her. For $50, a child is fed, put to bed, and taken to the movies, theater, or on an excursion (tickets and transportation are additional).
The advantage of this type of business is that it requires minimal financial investments. Setting up such a kindergarten may require no more than $1,000. All that is needed is a set of toys and entertaining games, a good television and video recorder, as well as a few cots, bed linen, and sets of dishes and utensils.
On the whole, the American model of small business can primarily be described as innovative (venture companies, startups, business incubators, and so on), and secondarily as a platform of business opportunism.
Azerbaijan
In post-Soviet states, small and medium businesses have not become as widespread as in the developed countries of the world. For example, in Russia, the share of small and medium business in the country's GDP is no higher than 11%, while the share of employees is 13% of all those employed in the national economy.6 According to official statistics, as of the beginning of 2012, there were more than 170,000 enterprises operating in the small business sphere in Ukraine, which provided 15% of GDP.7
There are 14,200 small businesses functioning in Azerbaijan with 90,200 employees, which amounts to 2.1% of all those employed in the national economy. Small businesses produce 3.8% of the country's GDP, and along with private businessmen with certificates of legal status, this index amounts to 8.4%.8
At present, Azeri small businesses have essentially assimilated only one sphere of activity— mediation, while the development of such enterprises in the real sector and primarily in industry are of particular significance for the country's present-day economy. The development and functioning of small and medium businesses in the country are largely hindered by difficulties in acquiring funds. An important way to resolve this problem is to create a mutual lending mechanism. Mutual lending is implemented by means of loan cooperation, a specific variety of financial activities that calls for businessmen or consumers to voluntarily pool their resources in order to meet their needs for bor-
6 See: E.N. Lymar, op. cit.
7 See: The official website of the Ukrainian State Statistics Committee [http://ukrstat.gov.ua]; "Bolshie problemy malogo
buznesa v Ukraine," available at [http://ezarabotok.info/].
8 [www.azstat.org].
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rowed funds. The absence of a legal basis makes it difficult to create mutual lending societies in Azerbaijan. Adopting a law that regulates the activity of small business mutual lending societies will make it possible to create a new source for funding the activity of small and medium businesses in the country.
Large financial and industrial groups have been formed and are developing in recent years in Azerbaijan—the prototype of Western transnational corporations. They include SOCAR, the AKKORD Corporation, AZERSUN Holding, GILAN Holding, and several others. These companies are successfully doing business both in the country and in regions of Europe and Asia. Medium organizations are also developing: the BAKU STEEL COMPANY, AZPETROL, MATANAT-A, and others.9 It is hoped that small business will grow, become fortified, and find its niche concurrently with these companies—this is also being promoted by the investment and business climate in the country, which is improving with each passing year. Small business could perform a whole slew of functions that are not advantageous for large companies, and at the same time have its own specialization and development prospects.
At present, the Economic Policy Committee of the Milli Mejlis of the Azerbaijan Republic is reviewing the Law on Regulating Audits Carried Out in Business and the Protection of Businessmen's Interests." When discussing this law, several deputies emphasized the importance of further developing business in the country, while the coauthor of this article suggested paying more attention to protecting the interests of medium and small forms of production and carrying out several measures to stimulate small business, since these structures are called upon to play a growing role in the national economy.
Small business as an efficient way to organize socially vital labor meets the socioeconomic interests of Azerbaijan. Small business is a source of development that Azerbaijan cannot deny either now or in the future.
Conclusion
As we see, world experience is showing how important the small and medium business segment is for the economy of developed countries. The use of this experience in Azerbaijan will help to boost the participation of small business in the country's accelerated development. It is precisely in conditions of dynamic structural changes in the economy, modernization, and encouragement of long-term sustainable economic growth that the advantages of small business are largely manifested. The examples presented above show that small and medium businesses enjoy support in all the developed countries. This activity is equally beneficial both for the country's economy as a whole and for each citizen in particular, and so has deservedly acquired state recognition and support. Small businesses draw additional labor into public production, which creates new values and multiplies national wealth.
[www.sahibkhar.biz].
