Higher School of Economics , Moscow, 2011

www.hse.ru

Barriers to small scale entrepreneurship in Russia and

Ukraine

Dr John RoundFaculty of Sociology

and Centre for Advanced studiesjround@hse.ru

Outline

• Research background• Theoretical frameworks• Middle aged men in the 1990s• Micro enterprises• Small and medium enterprises• Implications for economic development

Research Background

• Main research interest is in the coping tactics of everyday life

• Within this a great interest in the role of informal economic activity and the relationships between formal and informal work

• Much importance is placed on the role of social networks, the relationships to place, state/society relations and the nature of everyday life

• From this developed an interest in micro and small enterprise development

• PhD was based in Magadan city - looked at coping tactics amongst marginalised groups but expanded to look at the role of social networks amongst enterprises in the region.

• Based on favours and obligations - a great deal of informal activity

• Relationships with the state of great importanance

‘Dacha hill’

But they do not work…

Middle aged men in the 1990s

• This led to an interest in entrepreneurship in post-Soviet states

• Project on what middle aged men in St. Petersburg did after they left their Soviet workplace

• Mainly looked at men who were not successful in contemporary economies

• Perhaps the biggest problems was generational?

“We went to school in the Soviet Union, got our degree, did our military service and then went to work in the socialist system. All the time we were told that trade is a parasitic venture – then one day everything changes! How were we meant to forget everything we were told and believed in and just go out and become capitalists!”

Former ship builder, St. Petersburg

Barriers to small enterprise in the early 1990s

• They had little conception of what developing a business entailed and the state offered little support. For example, capital was not always available from the formal markets and hyperinflation wiped out the savings, or severance payments (if any were made), meaning the finance was not available through traditional means.

• The biggest problem, however, that interviewees who had tried their entrepreneurial skills discussed was their dealings with the state. In the early reform period little legislation concerning small enterprise development existed and the whole system became mired in bureaucracy and corruption. Interviewees discussed how the number of permits needed to operate ran into the dozens, all of them requiring a lengthy application procedure and in most cases additional ‘payments’.

• Even after start up this was an ongoing process with regular visits from state inspectors and the mafia, which again often required payment to ‘smooth the process’. The tax system provided further complications.

• Some of the interviewees described themselves as ‘consultants’, working irregularly for friends/contacts whose businesses have developed.

Theoretical frameworks

Lefebvre (2000:98), arguing that it is not possible to construct a singular theory of everyday life, stated;

Furthermore there is no system because there are so many sub-systems situated, as we have seen, not within a single system but at different levels of reality, the lacunae and gaps between them filled with floating mists… (emphasis in original)

10/08/10

“Eventually you know the shifts of the militia who will not ask you for too much money. So you go and sell your goods between 12 and 2 on a Thursday for example as you know the guy who is working that shift and he is ok. If you go and someone else is working it is easier just to walk away. Some of them will look after you after you give them some goods. Others just want to cause trouble.”

[s]trategies are able to produce, tabulate, and impose these spaces, when those operations take place, whereas tactics can only use, manipulate, and divert these spacesde Certeau, 1984:36

Coping tactics rely on;

• Knowledge• Social networks (social capital – but not in a Putnam form)• The use of place• Relations to formal institutions

Coping tactics or strategies?

Enterprise development

• To understand entrepreneurs’ motivations, a distinction often drawn is between “necessity” entrepreneurs who are pushed into entrepreneurship because all other options for work are absent or unsatisfactory, and “opportunity” entrepreneurs who are pulled into entrepreneurship more out of choice such as to exploit some business opportunity (Aidis et al, 2006; Harding et al, 2006; Maritz, 2004; Minniti et al, 2006; Perunović, 2005; Reynolds et al, 2001, 2002; Smallbone and Welter, 2004).

• Those entrepreneurs who operate wholly or partially in the informal economy have been widely assumed to be necessity-driven, pushed into this enterprise as a survival strategy in the absence of alternative options (e.g., Castells and Portes, 1989; Gallin, 2001; Lagos, 1995; Maldonado, 1995).

• What are the motivations, tactics and barriers behind entrepreneurial activity in ‘transition’ economies?

Small scale entrepreneurship in Russia and Ukraine

• Undertook a survey of approximately 300 people who undertake some sort of entrepreneurial activity in Moscow, Kiev or Kharkov.

• Main focus was motivation for setting up a firm, the problems they had, relationships with the state and the level of informality

• The activities included micro scale operations, self employment linked to formal work and small scale enterprises

Key questions

• What were the reasons for undertaking entrepreneurial activity?

• Did the enterprises grow? Why did people want to keep them small?

• How did they fit into wider informal networks?

• What are the broader implications of the form that small enterprises are taking?

• Micro-enterprises – selling of food/flowers/property development/renting rooms

The importance of place in everyday economies

• Many enterprises take place through networks which operate across spaces;

– Apartment buildings

– From the household to another location

– Across communities

– At/through the workplace

– Between locations

• Almost all rely on informal social networks built on trust and reciprocity - only 21 percent rely solely on formal income

Motivations behind entrepreneurial behaviour

Motive %(n=298)

To generate sufficient income to live/survive 55To generate additional income 34Desire to have own business 4To fill a gap in the market 2

3Other 2Total 100

Initial reason given for starting up a business, Ukraine off-the-books entrepreneurs 2005/06Source: Ukraine off-the-books entrepreneurs survey, 2005/06

%

Motives unchanged 43

From necessity-orientated to opportunity-orientated 47

From opportunity-orientated to necessity-orientated 10

Do off-the-books entrepreneurs’ motives change over time?

Household by gross income

LowestQuartile

Lower quartile

Upper quartile

Highest quartile

% of sample 25 25 25 25

% of all entrepreneurs (n=331) 34 13 10 43

% of off-the-books entrepreneurs (n=298) 35 14 10 41

% of wholly off-the-books (n=169) 46 14 8 32

% working partly off-the-books (n=129) 21 14 12 53

Distribution of off-the-books entrepreneurs: by gross household incomeSource: Ukraine off-the-books entrepreneurs survey, 2005/06

Reasons behind informality

• Gerxhani (2004, p.274) asserts entrepreneurs often;

“choose to participate in the informal economy because they find more autonomy, flexibility and freedom in this sector than in the formal one. In other words, participants have the freedom of operating their own business; they have flexibility in determining hours or days of operation; they can use and develop their creativity.”

• This is also the finding of Snyder (2004) in her study of off-the-books entrepreneurs in New York City’s East Village neighbourhood. She argues that although most literature assumes that external pressures (such as discrimination, economic restructuring and unemployment) force people into the off-the-books economy, most of the 50 off-the-books entrepreneurs she studied did so out of choice.

10/08/10

“Katrina”

In her mid-40s, “Katrina” has over the past three years established a thriving and rapidly growing catering business. Although she initially asserted that she had established this business because she needed to generate sufficient income to enable her family to survive, following probes, it quickly became apparent that she is not solely a necessity-driven entrepreneur and that her motives have shifted over time. Previously a housewife, her business had started when in conversation with a school teacher friend, he had pointed out that there was nowhere in the vicinity of his school to purchase a cheap hot meal at lunchtime and told her that “there was a gap in the market”. With no school canteen and no cheap cafes nearby, she had volunteered to fill that gap and prepare meals for the 15 staff. Today, she continues to provide this service, but has also branched out into more “serious” and lucrative catering. A friend of one of the teachers at the school had invited her to prepare a banquet for him and his friends for his birthday. This had then led her to identify a significant opportunity for her business. Identifying that people often hire a restaurant for special events such as a wedding or anniversary and that for forty people this would cost about US$2,000, she had decided that if she offered banquets for under US$1,000 in people’s homes, offices or hired halls, she might receive offers. By word of mouth at each event and personal recommendation, she had received many contracts. Katrina now works full-time in her catering business, employs three people on a permanent basis as well as numerous casual staff. This enterprise, however, remains wholly informal. What initially was delineated by this entrepreneur as a case of necessity entrepreneurship, therefore, has become over time more an example of opportunity entrepreneurship as she has pro-actively identified gaps in the market that she could fill.

The use of tactics

• Respondents developed tactics through which to develop opportunities and to maintain their enterprises

• They can ‘see through the mists’ as they understand how the processes they interact with work and the networks and locations that they take place in

• Contacts and social networks of vital importance

• Many people became frustrated with the formal labour market and thus moved into informal entrepreneurship

“I left university with a degree in accounting and economics. I found a job in a bank, which looked interesting. I had to work for three months on a trial basis, without pay, and then my wage would start at quite a good level. I decided to give it a go and was ‘lucky’ enough to get the job. However, almost at the end of the three month trial period, my boss one day simply told me that I was not good enough at my job and there was no future at the bank for me. I was annoyed, I felt used and I felt that I had wasted my time. At no time before was my performance discussed. I thought about complaining to someone, but to whom and what would be the point? It’s always the same in our country, the rich and powerful act as they please, enrich themselves and don’t care about normal people.”

• In many instances income from the first job is not enough for the household which pushes people to develop their own business

“I work as a hairdresser at a salon in the centre of the Moscow. The work involves long hours and the pay is not great but it is a real job. In order to earn some more money so as to clothe myself etc, I often do work ‘off the record’ at my home. You know, a client comes in, likes what I do and we have a coffee, get talking and soon we have exchanged telephone numbers. After that, the client rings me up when they need a hair cut and comes round to my home and pays me in cash. It works like that, it is good for me to get some extra money and of course, I charge a lower price to the client than that in the salon.”

Hairdresser, Moscow, 2008

“I’m an engineer and I have done this job for a long time. I wish that the wage could correspond more to the cost of living. Because 600-700 UAH [about £80 per month at the time] is simply not enough to live on. This is not money. It is just about enough to feed my family but I need more to clothe it. My wage does not correspond to the work we do, I wish it could be bigger but it is not so I have to spend most of my free time doing work for myself but using my employees time and equipment.”

State employee, Kyiv, March 2008

Moving from the informal to formal

• The majority of interviewees would like to become more ‘formal’

• It is very hard to obtain credit to expand your business if it is operating informally

• There is the stress of not paying tax when operating informally

• Worry that there will be penalties for operating informally in the past

• Most believe that becoming formal will damage the business as they will need to pay bribes

• All of those interviewed who operated at least partially formally discussed difficulties with institutions – whether it be excessive bureaucracy or the requirement to make informal payments

• The perception is that the situation is not getting better and that ‘anti-corruption’ drives makes the situation worse

• Some work suggests that informal payments can grease the wheels but the situation is extreme in post-Socialist countries (Dreher and Gassebner, 2001)

“We tried to make our construction company formal as we wanted to expand – it was only a small company but there were so many forms we needed to fill out and most needed some form of extra payment. In the end we gave up and started another off the books firm. We are saving all our money so we can go and live elsewhere as it is impossible to do business here”Kyiv, 2009

Outcomes

• Informality has a massive impact on economic development as enterprises find it very difficult to grow;

– It is hard to obtain credit– Expanding outside of the original location means

that new social networks have to be developed– How to trust new employees– Relationships with institutions have to be built

• Thus many of the respondents had little ambition to develop their enterprises outside of the locations they were already taking place in

• This has significant impacts on regional economic development as expansion will not take place nationally let alone internationally

• The enterprise has little security as there is no one to turn to if there is a problem

• It is easy for entrepreneurs to exploit employees

Furthermore

• Talent is lost from the formal market• Unless a better understanding is gained of the

motives of entrepreneurs operating within this hidden enterprise culture, then little progress is likely to be made in nurturing an enterprise culture

• Can regional development centers such as Skolkovo help solve these problems

• Can attempts to end informal payments succeed?

Areas for future research

• To research within medium sized firms who have expanded to explore how they have done so

• To examine the spaces of Russia’s new ‘creative economies’ – such as Winzavod and Red October Factory and Strelka – to explore the role of the state in supporting such economies

• To expand the research to look at regional differences within Russia