in Georgia Midterm Results

Transcription

1 Emergence of Entrepreneurship in Georgia Midterm Results Tbilisi, May 2014

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3 Emergence of Entrepreneurship in Georgia Midterm Results Gerbet Rüf Stiftung 2014

4 CONTENTS Executive Summary...5 About the Study...7 Economic Background...8 Institutional and Legislative Background...9 General Information and History...9 Projects, Expectations, Intentions Block Motivationss E Legal Framework F Informal Institutions Attitude towards Entrepreneurship Non-Material and Material Resources and Opportunities... 18

5 Executive Summary The problem: Georgia s economy is made of two different components: the observed and the so-called unobserved parts. Little is known about the mode of activity of the self-employed except that they live mainly in rural areas and that some may de facto run micro-enterprises. Yet self-employment amounts to about 2/3 of the total employment and according to our estimates generate about 18% of GDP. The study: a longitudinal cohort research study. Interviews with the same cohorts of 350 self-employed, and 250 micro and small firms are conducted every 6 months in three different regions of Georgia (Adjara, Kakheti, Tbilisi) The first round of interviews took place in August 2013, the second in February Entrepreneurship is here understood as a dynamic process, as the discovery and exploitation of profitable opportunities (Shane and Venkataraman 2000). The policy environment shaped some of the divergence in answers in between the rounds. The year 2013 was distinguished by political uncertainty and no clear economic vision from the side of the government. The year 2013 saw economic slowdown, decrease in aggregate demand, high budgetary deficit and fluctuating national currency. Starting from 2014 economic recovery is present and there are a number of government initiatives declared for supporting SME development in the country (such as the creation of an Entrepreneurship Development Agency and a governmental program Produce in Georgia); however these initiatives are new and have not had any effects on the respondents yet. The results: General information: there has been a slight shift in the activities of self-employed in between the rounds: 35 more people named agriculture as their primary activity. These people might have either started to use the land resource that they had before, pushed by the governmental initiatives, or have placed more emphasis on the sector that was initially their secondary activity, due to opportunities that emerged. It might also be a seasonal effect. An outstanding 92% of self-employed do not hold accounting records, against 32% of micro and small firms. By the same token, an overwhelming majority of self-employed are operating with oral contracts, against roughly 40% of micro and small firms using written forms of agreements. These figures have not changed much since the first round, but the difference between self-employed and micro/small enterprises is quite significant. Are there psychological barriers preventing self-employed to formalize their situation? Is the law the only motivation for micro and small firms to keep accounting records and deal with written contracts? Why 99% of micro and small enterprises are not member of any association? Emergence of Entrepreneurship in Georgia 5

6 Motivations: entrepreneurship is mostly necessity driven in Georgia. No better choice to work is the main motivating factor to think entrepreneurial in absolute majority of cases among both categories. The second most popular answer is the desire to increase income. The entrepreneurship by default parameter should be mitigated, to the extent that there is willingness to be active and take risks to produce more and/or produce better. 40% of micro and small firms and 24% of self-employed would be ready to take more financial risks to develop their businesses. By the same token, 60% of micro and small firms would be ready to take courses or training to improve their businesses, although this figure is lower for the self-employed (40%). One could say that the small Georgian entrepreneur is ready to take certain risks to grow its business, but that these fails to translate into plans and actions, due to the external environment, their vulnerability to and perception of it. Project and expectations: fewer entrepreneurs plan ahead in Approximately 90% of the self-employed and 70% of micro and small firms do not plan to sell more of their services or products in the coming 3, 6 months or even 2 years. Only 4.5% of micro and small enterprises and 1% of the self-employed feel they did have some opportunities to grow their businesses during the past 6 months. As compared to the first round even less respondents are considering together with partners or alone to attempt a new business endeavor, sell more or new services. Among self-employed, less of them are considering the possibility to register officially as a business in the next 6 months. Legal framework: the absence of the state administration. Self-employed do not have any relations with the state authorities. Likewise micro and small businesses do not encounter problems with the state officials, or with their suppliers and clients. This has been consistent throughout two rounds. Approximately 45% of the micro and small business believe that property rights are well protected in Georgia; there has been a slight increase in the number of people who believe this way. 20% of micro and small firms in both rounds do not believe the state provides a fair ground for competition and that the state favors big businesses. Informal institutions: Georgian culture supports entrepreneurship. Approximately 65-70% of both self-employed and micro and small firms agree that the Georgian culture favors businessman. Likewise, more than half of the respondents, in both categories think that the Georgian culture approves of those who take risks. But network, outside of friends and family, cannot be really considered as a resource for self-employed, micro and small firms. They don t rely on their network for financial help or human resources. Perception of opportunities: micro and small enterprises are more confident than self-employed. More than half of the micro and small firms think they have the expertise and skills for doing what they do while less than 40 percent of the self-employed think the same. By the same token, whereas half of the self-employed admit that fear of failure would prevent them from starting something new or introducing new services, only 35% of micro and small firms do so. Material resources and opportunities: the structure of the market is what counts, and not the market per se. Value chains are underdeveloped, causing high concentration on the local markets, which is the main market for 6 Emergence of Entrepreneurship in Georgia

7 most 80% of self-employed and micro and small enterprises. This fact has not changed in between rounds. Regarding access to finance, the Georgian case shows that the problem lies in the establishment of a proper financial market. Only half of the micro and small firms and 20% of the self-employed interviewed have a bank account. The figure has increased by 3 percent as of the second round for both subgroups. Bank-real sectors relationships are too weak and that the private lender sector is an important part of the financial sector, probably not the most efficient one. Indeed 11% of self-employed have a credit of up to 5000 GEL is a high figure if one considers that 77% of them do not have a bank account. It is highly probable that a lot of self-employed, micro and small firms have taken credits from private lenders, without having any bank account. About the Study As mentioned, the structure of the Georgian private sector is divided between the observed and non-observed part. The persons active in the unobserved part of Georgia s economy are defined as self-employed. Little is known about the mode of activity of the self-employed except that they live mainly in rural areas and that some may de facto run micro-enterprises. Barely anything can be found about this portion of the Georgian economy in statistics. Yet self -employment amounts to about 2/3 of the total employment and according to our estimates generates about 18% of GDP. In other terms, this part of the population has a very low level of income per head. The purpose of the study is to know if that portion of the Georgian economy can give rise to registered small and mid-sized firms. In other words, it is possible to express the research question in the form of a hypothesis: the unobserved part of the Georgian economy represents, for the country, a reservoir of entrepreneurship whose ways of materialization will be shaped by the socio-economic context, the resources and the opportunities of the Georgian economy and the visions and motivation of entrepreneurs. We can expect to identify hidden obstacles to enterprise creation such as sociological, cultural and psychological barriers that may hinder the passage from self-employment to micro firms and, within SMEs, from small enterprises to mid-sized firms. To capture the emergence and evolution of entrepreneurship in Georgia, a longitudinal research study with observations on self-employed, micro and small firms cohort over a particular period of time is here proposed. Indeed, it appears that the different studies of the observed Georgian economy do not allow for a proper understanding of entrepreneurship in an evolutionary perspective. entrepreneurship here was covering the grounds between intention to and the actual action of creating and managing an enterprise or a business in the perspective of it becoming a lasting source of one s subsistence. This use of the word entrepreneurship refers to the process related to the discovery and exploitation of profitable opportunities 1 (Shane and Venkataraman, 2000:217) Geostat s household statistic recognize self-employment as the ownership of personal enterprise during the accounting period, in order to generate profit or family income (cash or in kind) or a person working for free in family enterprise/holding. The Ministry of Finance of Georgia recognizes micro-businesses as those with an annual turnover 1 SHANE, S. & VENKATARAMAN, S The Promise of Entrepreneurship as a Field of Research. Academy of Management Review, 25, p Emergence of Entrepreneurship in Georgia 7

8 below GEL (approx USD). Small firms are, for Geostat, those that employ less than 20 persons with an annual turnover of less than GEL (approx. USD ). Within the scope of the study the round of interviews was conducted in July 2013, altogether 600 self-employed (350), micro and small enterprises (250) were questioned, in three different regions of Georgia (including the capital Tbilisi). The second round of interviews took place in March 2014, 14 individuals from each group could no longer participate in the study due to various reasons. In 7 of the cases for self-employed, the interviewer was unable to contact the person, while in 6 of the cases for micro and small enterprises, business activity stopped. On average the amount of population in the sampled regions for the self-employed group is from 50 to 100 thousand people, while micro and small business representatives are from larger cities, on average with the population of more than 500 thousand. The gender balance is better in case of the self-employed with approximately 50/50 representation, while for micro and small business representatives, the interviewed are predominantly male with around 70 percent. Education levels vary in between the groups, majority of self-employed have general secondary education, while one third of the micro and small business representatives have a master s degree, only few from both samples have attended any type of training courses. Economic Background The first round of interviews was held towards the end of The period was characterized by a number of political and economic transitions. In October 2013 Presidential elections were held in Georgia, following the first democratic change of government after the independence of the country in 2012 Parliamentary elections. By July 2013, Georgian government and society had to confront a bleak economic reality. A mere of 1.7% real economic growth recorded in the first quarter, and 0% growth for the month of May represented alarming statistics, rendering the 6% real annual economic growth initially anticipated for 2013 highly improbable. Downward moving prices, persistent deflatory processes and a sizeable decrease in imports clearly indicated a weak aggregate demand negatively affecting budgetary revenues and ability of the state to act effectively if the economic situation deteriorated even further. Ultimately the year closed down with 3.2% GDP real growth. The state budget performance indicator in terms of collection of value added tax (VAT) equaled only 83,7 % of the planned figure. VAT inflow can be considered as a proxy to business and economic activity. On this background, the end of the year was characterized with fiercer credit activity from the side of financial institutions, moreover, major chunk of infrastructural projects and thus, budgetary expenditures took place in the fourth quarter of the year, 50 percent of the infrastructural expenses took place in the fourth quarter of The aforementioned caused depreciation of the national currency by around 6 percent. As a result by the end of 2013, inflation started to climb up, and equaled 2,4% in December started with better economic outlook, as compared to the previous year. Average economic growth for the 8 Emergence of Entrepreneurship in Georgia

9 first quarter equaled a high 6,7%. The national currency has more or less stabilized. It might be possible that due to the time lag, this is the spillover effect after the increased economic activities of the last quarter of The second round of interviews was held around that time, in spring Therefore, the change in opinions of the target micro, small enterprises and the self-employed will be quite interesting to monitor. Especially, if we take into account that the decreased demand in 2013 might have affected their sales and number of customers negatively. Institutional and Legislative Background No major legislative changes have taken place during the past six months in between the two rounds of interviews. However, on the institutional side, by the initiative of the Ministry of Economy and Sustainable Development of Georgia, an Entrepreneurship Development Agency has been created. The main target groups of the agency are the start-ups, small and medium businesses. The initiative aims at fostering innovation and entrepreneurship in the country through providing financial, consultancy, and technical assistance to the entrepreneurs, helping the already established ones to expand and increase their export potential. Furthermore, the field of agriculture has been declared as a priority for the newly elected government of Georgia. A number of state funded initiatives have been launched for fostering growth and development of the sector. These initiatives include small-scale farmer support programs, as well as rural credit for farms of different sizes. The most important eligibility criterion is the ownership of agricultural land. Since half of the population of Georgia is self-employed in the field of agriculture (mostly subsistence farming), the effect of this initiative should be interesting to monitor through the surveys conducted with the self-employed within the scope of this study. As a matter of fact absolute majority of self-employed interviewed for the purpose of this study are employed in agriculture. General Information and History This section of the questionnaire gives general overview of the respondents and history; therefore these kind of question has not changed much over the two rounds of interviews. However, in line with the above-mentioned there has been a slight shift in the activities of self-employed in between the rounds, that is to say additional 35 people name agriculture as their primary activity. These people have either started to utilize the land resource that they had before fostered by the governmental initiatives, or they have placed more emphasis on the sector that was initially their secondary activity, once again due to opportunities that emerged. Emergence of Entrepreneurship in Georgia 9

10 When it comes to micro and small businesses, even though one third of them are still primarily engaged in trade, repair of vehicles and personal and household goods, a small increase in engagement in the field of agriculture is observed. For the majority of the interviewed, in both of the subgroups, the activity that they are pursuing is their first and only business endeavor. However, small and micro firms have more experience in this respect; the reason for failure of previous initiatives was mostly insufficient sales. More than 70 percent of the self-employed have 5 years and above experience in doing their business. More than 55 percent of the micro and small firm representatives are pursuing their current activities for more than 5 years. In both subgroups agriculture is named as one of the secondary activity sectors by some individuals, probably due to its seasonality. 10 Emergence of Entrepreneurship in Georgia

11 Up to 80 percent of the micro and small firm representatives are sole owners and managers of the businesses, moreover, approximately 60 percent of them works alone, while the rest employee up to 3 people, on average around 20 percent gets help on occasional basis, both paid and unpaid. When it comes to the self-employed, around 75 percent of them do not get additional assistance from their family members and friends, the rest gets help on regular basis of up to 3 members of their families or friends. The growth in the number of employee or informal assistance for the self-employed is a good indicator of enterprise development. However, there is no change to notice in between both round of interview. An outstanding 92 percent of the interviewed self-employed do not hold accounting records, against 32 percent of micro and small firms. Around 42 percent of the micro and small firms employ a designated accountant to keep track of their finances, the rest do it themselves. This has not changed much since the first round, if we do not take into account a one percentage increase in the number of self-employed who holds these records. The number of entrepreneurs who prefer working with oral or written contracts has not change either. An overwhelming majority of self-employed operating based on oral contracts, against roughly 40 percent of micro and small firms using written forms of agreements. The latter is attributed to the fact that entrepreneurship and business activities are relatively new in Georgia due to its soviet past, therefore all the institutions (including financial) and corporate culture are still being developed. The difference between self-employed and micro/small enterprises is quite significant. It cannot be linked to enterprise size, since approximately 60 % of the micro and small firms in our panel operate with one person only, or, formalized self-employed entrepreneur. According to the tax code, micro firm are obliged to keep record of transactions and declare their revenue. It might seem cumbersome for some self-employed, but it comes with many tax advantages (exemption for revenue below GEL per year). Are there psychological barriers preventing some self-employed to formalize their situation? This fact explains much of the peculiarities of a business behavior in the country. 99% of micro and small enterprises are not member of any association and the general trend is that there is low trust in necessity of being part of any type of business association and let alone paying membership fees. Almost 47 percent of the micro and small firms use internet in their business activities mostly for internet banking and social media tools. If we take into account that 40 percent of the population of Georgia is internet-user, the indicator for micro and small firms is not that low. Due to high levels of unemployment in the country, unsurprisingly entrepreneurship by default is the major type of entrepreneurship spread in Georgia, 67 percent of self-employed state that they started their activities since there was nothing else to do to make ends meet. Interestingly, half of the interviewed self-employed call their activity a business. The reason might be the low level of revenues they receive from the activities. On a monthly basis Half of them 200 or below and one third of them earns approximately GEL. When it comes to revenues of the micro and small firms, approximately 70 percent of the interviewed claim that annual turnover is up to 30 thousand GEL (around 2500 GEL monthly). Half of the respondents describe the revenue Emergence of Entrepreneurship in Georgia 11

12 inflows as very unstable. It might be due to the small volume of revenues, which probably affect reinvestment in business. Up to 70 percent of the respondents do not reinvest their profits. Both target groups do not believe that there have been positive changes over the past 6 months, more than 70 percent of both subgroups say that the situation is not better as compared to summer More so, there has been a 13 percent increase among those self-employed who describe their business activity to be stagnating. Looking back Looking forward 12 Emergence of Entrepreneurship in Georgia

13 Projects, Expectations, Intentions Fewer entrepreneurs do plan ahead in 2014 Given the respondents perceptions for the near future, it is not surprising that very few of them plan to expand their current activity. Approximately 90 percent of self employed do not expect to pursue any new ventures, sale of new products or services, or sell more of the same product and services. About 65 percent of the micro and small firms have not expended their business since its creation, and more than 70 percent do not plan to sell more of their services or products in the coming 3, 6 months or even 2 years. Only 4.5% of micro and small enterprises and 1% of the self-employed feel they did have some opportunities to make their businesses grow during the past 6 months. As compared to the first round even less respondents are considering together with partners or alone to attempt a new business endeavor, sell more or new services. Among self-employed, less of them are considering the possibility to register officially as a business in the next 6 months. Another psychological barrier could be at play here, located at the intersection between feelings about a general situation and particular, practical actions allowing businesses to grow. Among those who do expect some type of expansion, self-employed believe that changing the way they conduct business, or additional investment in new equipment is the way to proceed, those who represent micro and small firms, on the other hand, name additional investment and finding new business partners/possible mergers, the way to expand. Subsequently, absolute majority of respondents do not plan to seek additional help in terms of hiring new employees or getting assistance from friends and family. Interestingly, respondents feel far more skeptical, and uncertain regarding the situation for small businesses in the upcoming next 6 months after the second round, than they did in summer Uncertainty regarding the future is very strong among those who are self-employed, more than 30 percent. According to the survey conducted by the National Democratic Institute (NDI) in March-April, 2014, more people consider that living conditions of their families have worsened, while 69 percent of the respondents think that nothing has changed in their living conditions. Of course general perception of the society is reflected in the views of the entrepreneurs as well. Emergence of Entrepreneurship in Georgia 13

14 This block regarding perceptions of entrepreneurs could be a good signal for the government. What business lacks strongly is lack of the sense of stability. The newly elected government has not yet presented a long-term economic development plan for the society and especially the business circles; therefore business environment is quite vague, business lacks clarity on the governmental strategy regarding the taxation and other policies. Block Motivations Necessity driven entrepreneurship As mentioned in the previous sections, self-employed in Georgia pursue their activities due to the external triggering factors, mainly high levels of unemployment. Therefore, no better choice to work is the main motivating factor to think entrepreneurial in absolute majority of cases. The second popular answer is the desire to increase income. In case of micro and small business representatives, the desire to increase their income is named as a major motivating factor more frequently than no better choice to work. In case of both sub-groups necessity driven entrepreneurship outweighs the number of opportunity driven entrepreneurial ventures. The least popular answer was job provision for family members. Likewise, majority of the interviewed in both subgroups think that the most important reason for starting a business is to increase personal income. In between the rounds slightly more people think that the reason might be maintenance of the existing income, in other words feeling more financial stability. However, up to 60 percent of self-employed and up to 75 percent of the micro and small entrepreneurs said they will not stop doing their business in return for a fixed salary as an employee. This fact makes us believe that being one s own boss and feeling independent is valued highly, and money is no the single motivating factor for entrepreneurship. On the other hand, considering the very flexible labor market of Georgia, entrepreneurs might not value much the value of certainty of a fixed salary. But taking advantage of opportunities is not the only parameters indicating a more western approach to entrepreneurship. From this point of view, two variables connected to risk are worth mentioning: A certain willingness to risk time and money 40 % of micro and small firms and 24% of self-employed would be ready to take more financial risks to develop their businesses. It is however less than in the first round, which showed higher figures. 44% for micro and small firms and 37% for self-employed. By the same token, 60% micro and small firms would be ready to take courses or training to improve their businesses This figure is lower for the self-employed (40%) especially if compared to the first round (50%). 14 Emergence of Entrepreneurship in Georgia

15 These indicate nonetheless a willingness to spend time and money to develop a business. This mitigates the assumption of passivity attached to entrepreneurship by default hypothesis, to the extent that it points to a willingness to be active and take risks to produce more and/or produce better. However, interest in receiving consultancy services to access new technology is quite low among micro and small business representatives, the interest is even lower if getting such a service will require additional costs. This last point confirms recent studies showing the low level of innovation among Georgian enterprises, in comparison to Armenia, for example Risk aversion is partially connected with the perception among the respondents, that nothing really depends on them, and outside, exogenous factors are determinants of the final outcomes % of respondents believe that the future success rather depends on other factors than to their professional skills. Thus, only 23.6 % of surveyed respondents believe that it s up to them to ensure future success and growth of their companies. The perception of external instability seems to a key determinant of business behavior. Approximately half of the micro and small entrepreneurs, asked if they would be ready to risk more time and money into their businesses, answered yes. But confronted with reality, very few of them actually did so during the past 6 months. Only 10 percent of the respondents have taken any financial risks for improving their businesses. Perception of economic reality and possible opportunities is influenced by the legal framework that the state establishes. The relationship between the state administration and firms determines also the emergence and development of entrepreneurship. Emergence of Entrepreneurship in Georgia 15

16 E Legal Framework Interviewed self-employed do not hold any type of official registration documents, and consequently do not have any relations with the state authorities. In those rare cases when they do encounter a problem with state officials, respondents choose to talk with their friends and colleagues to solve these issues. Likewise micro and small businesses do not encounter problems with the state officials, or with their suppliers and clients, and this fact has been consistent throughout two rounds. In those rare occasions when they do have some problems, they choose to share with their friends and colleagues regarding the possible ways out, or find a peaceful solution with the person concerned. The interviewed self-employed have a positive view of the state administration in general, however one third of them does not know if they are fair, impartial and uncorrupt due to the little connection they have with them. Overall perception regarding the state administration can be assessed as positive and has not diverged much since the first round. It seems that intervention from the side of the government in business practices is low. According to roughly 75 percent of micro and small business representatives, over the last year their businesses have not been inspected even once. In case of the remaining 25 percent in majority of the cases the inspection took place once or at maximum twice. Approximately 45 percent of the micro and small business representatives believe that property rights are well protected in Georgia, there has been a slight increase in the number of people who believe this way. This issue is quite crucial if we take into account that the previous administration was blamed for clear violations of property rights and particular appropriation cases. When it comes to the ability of the state providing fair grounds of competition for businesses, quite a high number more than 20 percent according to the both rounds believes that the state favors big businesses and they do not have the same rules of the game. This issues is also worthy of special attention, since the previous administration was blamed for lobbying large businesses and thus creating monopolies in the country. Tax rates and licenses and permits are not viewed as a major obstacle for micro and small business throughout the both rounds. Micro and small business status holders in Georgia are exempt from taxes, at the same time, licenses and permits are completely liberalized and brought to the minimum in the country. Likewise, the labor code is quite liberal and moreover, is not even enforced, subsequently it is not named as an obstacle by micro and small business representatives. Low enforcement level and the fact that micro and small businesses rarely employ hired workforce can explain the fact that the respondents believe that the amendments made to the code in 2013 do not concern them. While these are good news, it is far from ideal. On the one hand, by deciding not to care anymore about SMEs, the state imposed a healthy distance between small businesses and itself and by not interacting anymore with it, does not constitute a barrier. On the other hand, it did not succeed - in comparison with western standards - to establish the elementary platform for the development of a true liberal market economy. It is as if the state interpreted not 16 Emergence of Entrepreneurship in Georgia

17 interfering with the economy by not caring about it. This misinterpretation is all the more visible when looking the official status of self-employed. They are out of reach of the state, for better or for worse. Approximately 45 percent of the micro and small business representatives believe that property rights are well protected in Georgia, there has been a slight increase in the number of people who believe this way. This issue is quite crucial if we take into account that the previous administration was blamed for clear violations of property rights and particular appropriation cases. When it comes to the ability of the state providing fair grounds of competition for businesses, quite a high number more than 20 percent according to the both rounds believes that the state favors big businesses and they do not have the same rules of the game. This issues is also worthy of special attention, since the previous administration was blamed for lobbying large businesses and thus creating monopolies in the country. The state administration is assessed positively from the side of micro and small businesses, with less people agreeing to the statements that the state administration is fair, impartial, uncorrupt, quick, clear and agreeable. This once again signals exaggerated expectations from the newly elected government and possibly some disappointment. Moreover, both subgroups believe that not much has been done by the state for promoting entrepreneurship in the country, in case of self-employed, since they do not have contacts with the state, there is more uncertainty regarding whether anything has been done or not. Formal rules and relationships with state administrations do set the formal limits of what enterprises can or cannot do. In other words, the state legally defines what constitutes an opportunity. But these are often limited by informal norms and world views influenced by deeper cultural factors. So it is important to look into these more invisible set of parameters. Emergence of Entrepreneurship in Georgia 17

18 F Informal Institutions Attitude towards Entrepreneurship Self-employed think Georgian people consider self-employment as something good for the economy and the country. The general perception of businessmen in Georgia is characterized as positive by majority of the interviewed in both subgroups. Approximately 65-70% of both self-employed and micro and small firms agree that the Georgian culture favors businessman. Likewise more than half of the respondents, in both categories, think that the Georgian culture approves of those who take risks. The micro and small business representatives believe that formal business contracts provide a strong guarantee, as opposed to less reliable oral agreements. Moreover, due to Georgian culture up to 65 percent also think that family ties provide strong enough guarantee as well. However, as of the second round up to 90 percent of the self-employed (which is approximately 5 percent increase from the first round) prefer oral contracts as a form of their work relationship. Up to 77 percent believes that moral and honest behavior is rewarded. Even more, above 80 percent of the micro and small business representatives believe that moral and honest behavior is rewarded. Trust is strong among the micro and small businesses. 83.2% always trust their partners, clients and suppliers. The same holds true for the self-employed, however to a lesser extent (70%). Nothing has changed in both subgroups, clients and suppliers over the course of the past 6 months. Such figures make it hard to isolate cultural factors as barriers to business development. Non-Material and Material Resources and Opportunities Network is not a resource for Georgian small entrepreneurs The way Georgian self-employed and micro and small firms use their network show that it cannot - yet - be really considered as a resource. Neither the self-employed nor micro and small firms rely physically or financially on their network. Approximately 80% of both categories do not receive assistance regularly. Network is then used for advices: Spouses and family and relatives are the two first categories of people who self-employed might get advices from. Micro and small firms take advices from more sources: partners, spouses, people with business experiences, family and customers are the most cited categories. The organizational structure of small or micro firms thus differs from the one of a self-employed in terms of the people on which they rely for advices. 18 Emergence of Entrepreneurship in Georgia

19 Up to 70 percent of micro and small business representatives believe that the information they receive has only some influence on the way they conduct business, while almost one third of the self-employed does not even think that information has any influence on their business activities. Information and knowledge The level of information and the comprehension of business network have not changed much between the two consecutive rounds. The main sources of information used for the activities of self-employed are the media and friends and acquaintances. For micro and small firms, it is the media and suppliers and customers. Information and knowledge comes from different sources for self-employed or micro and small firms. The structure of the network and information sources is important factors influencing the potential development of an enterprise. This is exactly why self -employed and small firms in general in Georgia might benefit a lot from meeting and networking events. Moreover, both half of the self-employed and 66% of micro and small firms recognized information to have some influence on the conduct of their business. Information is important and recognized as such. Providing these entrepreneurs with more information of better quality would impact the conduct of their business. The second round shows that around 20% of both subgroups deem to be better informed than 6 months ago. Emergence of Entrepreneurship in Georgia 19

20 Information and knowledge The level of information and the comprehension of business network have not changed much between the two consecutive rounds. The main sources of information used for the activities of self-employed are the media and friends and acquaintances. For micro and small firms, it is the media and suppliers and customers. Information and knowledge comes from different sources for self-employed or micro and small firms. The structure of the network and information sources is important factors influencing the potential development of an enterprise. This is exactly why self -employed and small firms in general in Georgia might benefit a lot from meeting and networking events. Moreover, both half of the self-employed and 66% of micro and small firms recognized information to have some influence on the conduct of their business. Information is important and recognized as such. Providing these entrepreneurs with more information of better quality would impact the conduct of their business. The second round shows that around 20% of both subgroups deem to be better informed than 6 months ago. Education Majority (up to 90 percent) of self-employed claim that they have learned what they are doing by practice on the spot. To some degree they are also using the education acquired at school. Micro and small business representatives are more successful in using the knowledge acquired at school and more of them have a university degree. Indeed, the educational levels of the interviewed entrepreneurs differ, with higher level for micro and small firms. Almost half of the self-employed have finished a general secondary education, whereas it is only 25% for micro and small. Only 8% of the self-employed interviewed have master s degree against 30% for micro and small firms. Aids programs It is important to know if the entrepreneurs interviewed for this study are benefiting from aid programs and governmental development scheme, because it might bias a bit the perception of opportunities entrepreneurs have of their economic environment. 90% of the micro and small firms and 60% of the self-employed interviewed, however, do not benefit from such programs. The ones who do benefit mostly from the state run agricultural programs Otherwise, general awareness of the programs and the agricultural fund created by the government is high, more than half of the respondents have heard of the program, but they say they do not qualify for it. 20 Emergence of Entrepreneurship in Georgia

21 Perception of opportunities: micro and small enterprises are more confident than self-employed Majority in both subgroups state that they don t know those individuals who used the aid program and now have a successful business. Interestingly, there is a slight decrease in the number of self-employed who know a person who started up a business within the past 2 years, and a slight increase in the number of micro and small business representatives who personally know an individual who started up a business. One third of micro and small business representatives and up to only 10 percent of the self-employed thinks that there will be good opportunities for starting a business in the area they live. By the same token, more than half of the micro and small firms think they have the expertise and skills for doing what they do. However, roughly 40 percent of the self-employed think the same. Emergence of Entrepreneurship in Georgia 21

22 A similar difference regarding fear of failure separate micro and small firms from self-employed. Whereas half of the self-employed admit that fear of failure would prevents them from starting something new or introducing new services, only 35% of micro and small firms do so. 22 Emergence of Entrepreneurship in Georgia

23 Material resources and opportunities The structure of the market as a barrier The structure of the Georgian markets appears to be an obstacle for doing business in Georgia. Value chains, especially those supposed to use the products of self-employed and small businesses and self-employed, are underdeveloped. This causes high concentration on the local markets, which is the main market for most 80% of self-employed and micro and small enterprises. This fact has not changed in between rounds. Markets have been identified as a major hindering factor by the government in developing agribusiness as well. Therefore, these categories of enterprises are unable to benefit from the opportunities offered by the international trade and are completely alienated from the international markets of goods and services. However, reopening of the Russian market is assessed positively by the micro and small businesses; approximately one third considers it as a future possibility. The material resources for doing business (mostly field for the self-employed and equipment for the micro and small) were mostly inherited in case of the self-employed and purchased in case of micro and small. The interviewed do not plan to use the same resources to pursue some other activities, since most probably they are specifically tailored for the initial business purposes. After the first round, the issue of having bank accounts came as a surprise. It turned out that only 17 percent of the self-employed had a bank account. As a matter of fact the figure has increased by 3 percent as of the second round, and another 10 percent have approached a bank for finding out more information on the topic. The structure of the financial market as a barrier Access to finance is often cited as one of the main barrier of private sector development. The Georgian case shows that the problem lies in the establishment of a proper financial market. Only half of the micro and small firms and 20% of the self-employed interviewed have a bank account. The figure has increased by 3 percent as of the second round for both subgroups and another 10 percent of self-employed have approached a bank to open an account of to finding out more information during the past 6 months. The financial market shows the same structural weakness than the market for goods and products, which cannot be distributed nationally because value chain and distribution is not yet established. Thus, capital cannot be allocated properly when more than half of the workforce does not have a bank account. Emergence of Entrepreneurship in Georgia 23

24 This indicates that bank-real sectors relationships are too weak and that the private lender sector is an important part of the financial sector, probably not the most efficient one. Indeed, one has to question how come most of the self-employed that have bank account also have credit and even more so, in terms of percentage, than micro and small firms? Most certainly, most an important share of self-employed do not have bank account, but have credit by private lenders. Family is the one that the self-employed turn to in case of financial problems; approximately 10 percent of them borrow from family and friends. Around 18 percent have applied for a credit line this year and those who did not apply name high interest rates as a major cause of not doing so. High interest rates are major concern for this particular micro and small firms as well. High collateral requirements were not named as a major cause. According to the World Bank report on access to finance in Georgia, high collateral requirement and reluctance from the side of the banks to take immovable property as a guarantee was named one of the major causes for low access to finance for businesses. Access to finance is definitely named as a major obstacle by more than third of the self-employed, while quite a few name it as a very severe obstacle. 24 Emergence of Entrepreneurship in Georgia

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26 Economic Policy Research Center (EPRC) 85/24 Paliashvili/Mosashvili str. Building I. Floor IV Tbilisi.Georgia. Tel/Fax: (995 32) info@eprc.ge