Presented to the2008 International Council for Small Business World

Conference Halifax, Nova Scotia, Canada

June 22-25, 20081

Motivations and Obstacles for Small Motivations and Obstacles for Small Business Entrepreneurship in Russia: Business Entrepreneurship in Russia:

15 Years in Transition15 Years in Transition

Anatoly ZHUPLEVLoyola Marymount University

Los Angeles, USA

Dmitry SHTYKHNOPlekhanov Russian Academy of Economics, Moscow, Russia

Environment for E/SME in Russia: background

• Historically, E/SME has not played important role in Russia. The business environment and cultural tradition less supportive of E, compared to the world’s most developed economies

• Tradition of centralized control and strong government role in economic planning and development does not bode well with E/SME.

• Historic tendency to pursue paths different from other nations. Vast territory and remote geographic location, harsh climate and large distances, challenging infrastructure, communal tradition of life & work, numerous devastating wars.

• Before the Bolshevik Revolution (1917) - predominantly agrarian, self-sufficiency, subsistence.

• 7 decades under communism continued this trend, restricted/halted E/SME development. Resulted in restrained cultural attitudes towards E.

• Since the demise of the USSR in the early 1990s E/SME climate in Russia has markedly improved, although remains a work in progress.

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Environment for E/SME in Russia: current dynamics (1)

The latest 2007 GEM survey of 42 countries placed Russia among the world’s least E countries across the group of middle-low income reference countries

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Prevalence Rates of E Activity Across Countries Ages 18-64 Middle- and Low-Income Countries – Europe and Asia

Country Nascent Eactivity

New business owner-

managers

Early stage E activity

Established business owner-

managers

Overall E activity

China 6.9% 10.0% 16.4% 8.4% 24.6%Croatia 5.3% 2.0% 7.3% 4.2% 11.1%Hungary 3.8% 3.1% 6.9% 4.8% 11.7%India 6.0% 2.6% 8.5% 5.5% 13.9%Kazakhstan 4.3% 5.3% 9.4% 5.8% 14.8%Latvia 2.2% 2.3% 4.5% 3.4% 7.7%Romania 2.9% 1.3% 4.0% 2.5% 6.5%Russia 1.3% 1.3% 2.7% 1.7% 4.3%Serbia 4.8% 4.0% 8.6% 5.3% 13.7%Thailand 9.4% 18.6% 26.9% 21.4% 47.4%Turkey 1.9% 3.7% 5.6% 5.5% 10.8%

Environment for E/SME in Russia: current dynamics (2)

• Other important comprehensive SME studies– Russian SME Observatory Report. 2002– Ukraine and Russia: SME Development Policy. USAID/Kiev. 2002– Analysis of the Role and Place of SME Enterprises in Russia. 2004.

• Russian law on small enterprises - legal entities– no more than 25% of the state, municipal, public and religious

organizations or charitable funds’ ownership in their charter capital and

– not exceeding the following limits in annual number of employees• 100 persons in industry, construction and transportation• 60 in agriculture and research and development (R&D) areas• 30 in retail trade and consumer services to the public• 50 persons – in other types of activity

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Environment for E/SME in Russia: current dynamics (3)

• Limited scope , reliability of research data (although there has been a progress)

• Limited role of domestic scholars in E research (busy in survival)• A mid 1990s study of 250 Russian respondents on Hofstede's five

cultural dimensions showed that on average Russian culture appeared to be moderate in individualism, masculinity, and power distance, and fairly high in paternalism and uncertainty avoidance – traits hardly compatible with dynamic E. Younger generation that came of age during the late 1980s and early 1990s had the highest scores in masculinity and the lowest scores in paternalism.

• In the beginning of the 2000s the number of enterprises with up to 250 employees per a thousand people of population in Russia was 37 enterprises – comparable to 45 enterprises for the EU (Russia SME Observatory Report, 2002).

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Environment for E/SME in Russia: current dynamics (4)

• Inadequate organizational and financial support from government • Constrains in access to funding; unfavorable terms of financing;

reliance on non-banking sources; limited role of institutional VC, business angels and other forms of external equity markets

• Lack of efficient institutional contract enforcement and court system in Russia delinquencies on private funding are often privately enforced via mafia-style remedies, including blackmail, intimidation, and contract killings

• Reflecting on problem with SME funding, the 2005 survey of investment climate by the World Bank: only 8.8% of small firms have loans; only 17% cite financing as a major constraint

• Almost 16% of Russian small business and individual entrepreneurs in 2005 financed the creation of their business with funding from relatives and acquaintances. The majority of funding was personal savings; banks accounted for 10% 6

Environment for SME/E in Russia: current dynamics (5)

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Ease of Doing Business in Russia: World Rankings Doing Business. Russia (World Bank, 2008)

Ease of...Doing

Business 2008 rank

Doing Business 2007 rank

Change in rank

Doing Business (overall) 106 112 +6Starting a business 50 45 -5Dealing with licenses 177 172 -5Employing workers 101 102 +1Registering property 45 44 -1Getting credit 84 156 +72Protecting investors 83 81 -2Paying taxes 130 126 -4Trading across borders 155 155 0Enforcing contracts 19 19 0Closing a Business 80 81 +1

Questionnaire• The original 1994 survey questionnaire was designed for a purpose of

international comparative longitudinal survey. English version was translated into Russian, pre-tested and translated back into English for authenticity.

• Following the first survey in the post-Soviet Russia, the second identical survey was conducted in spring 2008. The 2008 survey in Russian was pre-tested and administered to respondents in Moscow by a business professor, a native Russian speaker.

• The 2008 survey was based on the same 130-item questionnaire and administered through attendees at several business training programs at the Plekhanov Russian Academy of Economics (a full-scale higher education institution) in Moscow, Russia. The questionnaire, based on the 7-point Likert scale, included five sections: motivations for small business ventures; problems and obstacles that small business owners and managers face in starting and running their businesses; entrepreneurs’ training and assistance needs; traits of successful entrepreneurs; and data reflecting respondents’ personal and business profiles.

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Sample: demographics

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Age, years <21 21-30 31-40 41-50 51-60 > 60

1994 (n=100)2008 ( n=151)

223

2356

4414

307

10

00

Gender Male Female

1994 (n=100)2008 (n=151)

7051

3049

Ethnic affiliation

Belong to ethnic majority

Belong to ethnic minority

1994 (n=100)2008 (n=151)

7089

3011

Sample: business profile

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# of additional businesses

owned

None 1 2-3 >3

1994 (n=48)2008 (n=151)

6385

3312

41.5

01.5

# of employees working in

business

None 1 2-5 6-10 11-25 26-50 51-100 101-500 > 500

1994 (n=93)2008 (n=151)

29

292

3018

2517

423

815

111

13

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1994/2008 Findings: motivations towards E

Motivations1994 2008

Mean Rank Mean RankMake money to become wealthy and ensure security 6.52 2 6.27 1Control own time and work 6.59 1 5.91 2Gain a personal sense of accomplishment and grow business 6.13 4 5.68 3Better use of abilities, training, knowledge, and skills 6.16 3 5.55 4Want to be own boss n/a n/a 5.48 5Desire to lead rather than be led by others 5.88 5 5.34 6Need for money to survive 5.37 8 5.19 7Try new product and business ideas 4.71 10 4.59 8Working with people preferred 5.75 6 4.58 9Variety and adventure in work 3.53 15 4.41 10Live and work in desirable location 5.58 7 4.32 11Desire to have fun 5.24 9 4.29 12Increasing recognition and social status 4.70 11 4.05 13Contribution to community welfare 4.46 12 3.56 14Innovating in the tech forefront 3.88 13 3.53 15Need for personal freedom n/a n/a 3.50 16Frustration with previous job 2.19 18 3.30 17Contributing to welfare of ethnic group 3.59 14 2.95 18Follow example of person I admire n/a n/a 2.87 19Continuation of family tradition 2.36 17 2.51 20The bad boss on old job 2.94 16 2.46 21Layoff 1.47 19 1.38 22

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1994/2008 Findings: obstacles/problems in E (1)

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Obstacles/Problems1994 2008

Mean Rank Mean RankObtaining the money to start the business 5.91 4 5,74 1Obtaining the money necessary to keep business operating

5.79 5 tied 5,32 2

Finding good and reliable employees 5.79 5 tied 5,29 3Governmental regulations and red tape 6.30 3 5,27 4High interest rates 6.47 2 4,89 5Acquiring knowledge and skills needed to start and operate business

4.91 17 4,79 6

Bribery, ethnic and influence peddling 5.09 15 4,75 7High taxes 6.84 1 4,56 8Reliability of business partners 5.64 6 4,51 9Achieving successful sales and marketing efforts 5.34 12 4,42 10Reliability of business suppliers 5.56 7 4,40 11Understanding how to manage my business 5.24 13 4,34 12New product development 4.84 18 4,25 13Production and operations management 4.71 19 3,91 14

1994/2008 Findings: obstacles/problems in E (2)

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Obstacles/Problems1994 2008

Mean Rank Mean RankUnfair competition 3.69 25 3,86 15Finding the necessary office and operating space 4.14 23 3,80 16Accounting and bookkeeping 5.10 14 3,77 17Managing employees 3.40 26 3,72 18Finding info on registration, legal and startup requirements

4.15 22 3,65 19

Crime against business and community 5.42 11 3,59 20Advertising 4.56 20 3,56 21Ease of currency transactions and safety of money

5.50 9 3,54 22

Finding info on markets, products, prices 5.44 10 3,46 23Conducting banking and financial operations 5.55 8 3,24 24Transportation 4.95 16 2,97 25Discrimination and harassment (ethnic, religious, sexual)

3.05 27 2,54 26

Environmental issues 4.16 21 2,51 27Setting up communications (phone, fax, etc.) 3.91 24 2,13 28

Major changes in the E/SME climate over the last 15 years (1)

1. Windfalls from exports of oil, gas and other energy and mineral resources facilitate E/SME expansion in Russia and beyond to the “near” and “far” abroad.

2. 46% was found to operate in wholesale, retail trade and food service, ~11% —in construction service, ~14% — in manufacturing industries.

3. Economic stability and growth lead to increase in the number of small businesses with medium level of sales and decrease in those with low sales in 2008. That also caused shift toward higher number of employees in a business along with reduction in the number of additional businesses owned.

4. Economic stability instilled confidence in private investors elevating importance of private investment from own country as a source of financing business.

5. Shift in motivations in operating small business: “starting own business,” "working with people one prefers,” "living and working in a desirable location," "desire to have fun" lost their relative importance; creativity-related motivations - "gaining a personal sense of accomplishment and grow business," "trying new product and business ideas" or "variety and adventure in work" - increased in rank. As share of minorities dropped, "contributing to welfare of one’s ethnic group“ lost its rank as a business motive.

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Major changes in the E/SME climate over the last 15 years (2)

6. Drop in general unemployment and a growing need for a well-skilled labor => downgrade in such motivators as "bad boss on old job" and "layoff”

7. Improvements in access to business information, transportation, advertising and other business functions, as well as setting up communications (phone, fax, etc.).

8. Shortage of real estate in capital cities due to increased demand. Difficulties in finding office and operating space

9. Improvements in business infrastructure did not make easier acquiring E/SME knowledge and skills. It is still an obstacle for a number of young entrepreneurs

10. Improvements in the banking service, stricter governmental requirements in banking transparency, introduction of the Deposit Insurance System in 2004

11. More stable monetary system, simplification in banking and financial operations => slight decline in perceiving high interest rate as an E/SME obstacle.

12. Simplification in the accounting system for small business => decrease in rating the accounting /bookkeeping as a problem.

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Major changes in the E/SME climate over the last 15 years (3)

13. Rampant crime against private businesses common in the 1990s no longer a hot button, while bribery, influence peddling and unfair competition are perceived as more important obstacles. That may be the resulting dynamics for these processes and entrepreneurs’ increased knowledge and awareness

14. Increased number of young small business entrepreneurs => raise in demand for business education, consultancy and services

15. Reduction in unemployment, labor shortages in capital cities and lack of experience in HRM cause concerns about finding and managing employees

16. Trend toward growth in the number of companies, number of employees, volume of sales and the number and share of female entrepreneurs (the later is particularly evident in the service sector)

17. Growth is facilitated by positive changes in taxation and licensing procedures but at the same time hampered by worsening situation with red tape and bribery

18. Russian government should continue reforms and efforts in support of small business, focus on developing effective infrastructure (technology parks, incubators), centers that offer specialized services, and financial support for small firms and start-ups

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Limitations of research• Limited sample size (93 in 1994, 151 in 2008) does not allow

for comprehensive generalization and wide policy implications

• Variation in the sample composition between 1994 and 2008 causes incongruence in analysis and comparisons

• Survey administration through a training program may have skewed outcomes

• Lack of data from the 1994 survey constrains comparison in interrelations between variables (cross-tabulations and further bi-variance analysis)

• Russia’s immense size, economic and cultural diversity may require adding the industry and regional components to survey; current survey was conducted in the capital city of Moscow that is different from the rest of Russia thus limiting broad policy implications nationwide 17

Future research

• Systematic longitudinal surveys to allow for better monitoring of changes and trends in E/SME environment

• Surveys specifically focused on selected target regions, industries and industry clusters in contrast

• International comparative surveys for Russian SMEs contrasting and comparing with regional peer countries

• Theme-based E/SME surveys (trade, demographics, entrepreneurial traits, competitiveness, female entrepreneurs, human side of entrepreneurship, etc.)

• Qualitative E/SME studies 18

Thank youThank you

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Motivations and Obstacles for Small Business Motivations and Obstacles for Small Business Entrepreneurship in Russia: Entrepreneurship in Russia:

15 Years in Transition15 Years in Transition