The FINANCIAL — The top reasons cited for establishing a business in Georgia are sensing an opportunity to make more money and wanting to be one’s own boss, according to the latest Entrepreneurship Survey, conducted by The World Bank, which surveyed 300 enterprises established between the years of 2002-2010.
In 2012 a total of 269,861 individual entrepreneurs registered themselves in Georgia. The majority of them – 67,084 firms – registered in the construction sector, 17,045 – in the mining and quarrying sector, 16,840 – in the social activities sector, 10,684 – in the real estate sector, 5,790 – in hotels and restaurants, and 4,294 – in the agriculture sector.
The majority (62 percent) of the surveyed firms in Georgia have only one founder. About 18 percent of founders are women; 44 percent of founders have a Bachelor’s degree and 32 percent – technical education; 80 percent of founders are 40 and older and worked in the sector before, according to the report.
63 percent of the respondents in Georgia said that the reason for starting a business was that they could not find another suitable job (the highest in Eastern and Central Asia (ECA)); 70 percent – want to be “your own boss” and saw an opportunity to make money; 58 percent – had a great idea for a business.
Business ownership is low, the report shows – 4 percent own business in Georgia as compared to 6 percent in ECA and 15 percent in developing countries. Firm entry density is high (number of firms registered) but micro and SMEs do not scale up; many firms exit the market during the first year from their inception. And finally, low survival rate – entrepreneurs enter the markets with high competition, similar products and low skills, according to the report.
The average size of the firms surveyed in Georgia had 12 employees (as compared to 24 in Armenia and 44 in Azerbaijan). The largest firm had 220 employees. More than 90 percent of surveyed firms had no research and development (R&D) expenditures in the previous five years and did not envision spending on R&D in the next two years. This is in sharp contrast to the firms surveyed in Armenia, where nearly 50 percent of surveyed firms had conducted some form of R&D in the previous five years. Almost 90 percent of firms drew funding from their founders’ own savings, according to the report.
The top three cited obstacles in setting up or operating a firm were market risk, technological risk and difficulty recruiting highly skilled employees.
Only 7 percent of surveyed firms indicated that they had introduced a new or substantially improved product or service in the previous three years. This was in sharp contrast with the respondents in Armenia, where 67 percent of surveyed firms indicated that they had. No products or services were new to the world in the Georgian sample, compared with 3 percent in the Armenian survey. Around 50 percent of Georgian respondents who claimed they had introduced a new product or service said they were new to the market, compared with 80 percent of Armenian respondents.
Angela Prigozhina, Private and Financial Sector Country Sector Coordinator in the South Caucasus of the World Bank, believes that entrepreneurship is a critical element of economic growth strategy, because it creates new jobs. “9 out of 10 jobs all over the world are created in the private sector which starts with entrepreneurship. 90 percent of all the firms are small and medium business. These companies generate up to 60 percent of GDP and are a major source of export earnings. SME boosts innovation and competition and is the most important instrument for reducing poverty. Georgia needs to increase innovation and competition, for sure,” Prigozhina said.
Q. Why is the World Bank paying attention to the development of entrepreneurship in Georgia?
A. By request of the Ministry of Economy the World Bank started to study Georgia’s export potential. We found where the problems are and what the reforms should be for solving these problems. Since Georgia has already made reforms in the public sector and hard infrastructure there are some issues still remaining in agriculture and trading infrastructures, quality infrastructure and certification standards, which is necessary to increase the competitiveness of products. We are working on how to create jobs in the non agriculture sectors as Georgia has a 55 percent workforce in agriculture. And these are not real jobs, but self-employment. It is important for the economy to grow in other sectors as well and offer more job opportunities. One of the major instruments to create jobs is developing entrepreneurship. When we discuss the new sectors we first of all mean developing entrepreneurship there. This is the main reason we pay attention to entrepreneurship.
Q. What are the challenges for Georgia in developing entrepreneurship?
A. The financial systems in Georgia are not conducive to business development. Companies cite high interest rates and risk-averse lending policies as major hindrances to expansion. In addition risk capital is lacking. As a result of lack of borrowing opportunities, small and medium enterprises must rely on owners’ capital or on retained earnings for investments, which greatly impedes their growth.
Excess on finance is one of the issues that is challengeable in Georgia, a problem which hampers the development of entrepreneurship. Cost of excess on finances in Georgia is 10 times higher than in china and is 30 percent higher than in Armenia, which means that if a company produces a bottle of water it will be more expensive in Georgia. One way to reduce the costs is innovative approach, but innovation is driven by entrepreneurship. I think it is the right time for Georgia to discuss entrepreneurship development. One of the biggest reasons for this is that Georgia is a unique opportunity today because you see slowing down in the economy, growing poverty and unemployment in the country and this requires the Government and public civil society to rethink the strategy and make reforms accordingly. We see that Georgia has changed many things in the right way and the current economic situation allows you to make these very important decisions. We are all optimists. We know that Georgia has the best future ahead of it.
The Government can establish favourable financing programmes for SMEs by developing early-stage risk capital.
Q. Georgia reformed very well in the doing business environment, according to The World Bank. But the report shows that many companies closed just several months after their initial establishment. What is the reason for their failure, in your opinion?
A. Georgia reached a very high indicator in the doing business ranking, which means that this country lets people enter the market easily. But it is not enough as Georgia is actually below certain levels in other criteria.
At ninth place, Georgia was listed among the top ten countries rated on the ease of doing business. But Georgia lags behind in key growth and competitiveness booster rankings (out of 144 ranked economies). The difficulties are in the following areas: University-industry collaboration in R&D (134); Local supplier quality (131); Company spending on R&D (125); Quality of scientific research institutions (125); Availability of scientists and engineers (124); Firm level technology absorption (123); Effectiveness of anti-monopoly policy (141); Local supplier quantity (137); Intensity of local competition (127); Willingness to delegate authority (127); Prevalence of foreign ownership (121); Property rights (131); Agricultural policy costs (128); Financing through local equity markets (126); Intellectual property protection (126); Gross national savings, % GDP (122).
Furthermore, companies enter mainly in the same segments and do not see other opportunities and innovations in the market. The competition is very high and many companies cannot survive. I have seen how many shops have opened on Chavchavadze Street and closed up 6 months later. This indicates that people might enter business with good products but they do not have good skills in financial management.
We are seeing a slowdown in GDP growth and increase in unemployment rate, which is an obstacle for Georgia. The country should think of how to create sustainable jobs in new sectors and how to create opportunities for young people looking for jobs.
96 percent of companies in Georgia are SMEs, creating only 43.6 percent of jobs and 19.3 percent of total valued GDP of which 9 percent is agriculture, according to data of the role of SMEs in selected economies. These results are poor if we look at the number of companies in Georgia. If we look at the Czech Republic results, we will see that 99.9 percent of registered companies create 69.9 percent of job places and 55.9 percent GDP which means that the potential is huge. If we look at Armenia or Belarus the number of employed people is more or less equal to contribution to GDP which means that in these two countries firm level productivity efficiency is high and people can make a certain amount of money.
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