Transcript Barriers to small scale entrepreneurship in Russia and Ukraine Dr John Round

Barriers to small scale
entrepreneurship in Russia and
Ukraine
Dr John Round
Faculty of Sociology
and Centre for Advanced studies
[email protected]
Higher School of Economics , Moscow, 2011
www.hse.ru
Outline
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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
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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.
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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’.
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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.
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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.”
Coping tactics or strategies?
[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 spaces
de Certeau, 1984:36
Coping tactics rely on;
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Knowledge
Social networks (social capital – but not in a Putnam form)
The use of place
Relations to formal institutions
Enterprise development
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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).
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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).
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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?
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Micro-enterprises – selling of food/flowers/property
development/renting rooms
The importance of place in everyday economies
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Many enterprises take place through networks which
operate across spaces;
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Apartment buildings
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From the household to another location
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Across communities
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At/through the workplace
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Between locations
Almost all rely on informal social networks built on
trust and reciprocity - only 21 percent rely solely on
formal income
Do off-the-books entrepreneurs’ motives change over time?
Initial reason given for starting up a business, Ukraine off-the-books entrepreneurs 2005/06
Source: Ukraine off-the-books entrepreneurs survey, 2005/06
Motivations behind entrepreneurial behaviour
Motive
%
(n=298)
To generate sufficient income to live/survive
To generate additional income
Desire to have own business
To fill a gap in the market
55
34
4
2
3
2
100
Other
Total
%
Motives unchanged
43
From necessity-orientated to opportunity-orientated
47
From opportunity-orientated to necessity-orientated
10
Distribution of off-the-books entrepreneurs: by gross household income
Source: Ukraine off-the-books entrepreneurs survey, 2005/06
Household by gross income
Lowest
Quartile
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
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