SME Sector in Russia
SME sector definition
The sector of small and medium-sized entrepreneurship is viewed in conformity with international practice, which implies that this sector includes both legal entities and individual entrepreneurs. Legal entities comprise small and medium-sized enterprises. So, the sector of small and medium-sized enterprises includes the following economic entities:
1. Small entrepreneurship entities:
1.1. Small enterprises, legal entities;
1.2. Individual entrepreneurs;
1.3. Farm enterprises.
2. Medium-sized entrepreneurship entities.
Definition of a small enterprise in Russia
- Under the Federal Law of 14 June, 1995 “On Governmental Support of Small Entrepreneurship in the Russian Federation” the small business sector includes:
- small enterprises registered as legal entities (SEs) that meet the following two requirements:
- the state property of the Russian Federation or its subjects, the municipal property, and the property of non-governmental or religious organizations, charities or other foundations may not exceed 25% of the charter capital. The share belonging to one or several legal entities that are not small entrepreneurship entities may not exceed 25% either;
- the average number of employees does not exceed:
- 100 in industrial production, civil engineering or transport;
- 60 in agriculture, science or engineering;
- 30 in retail trade or consumer services;
- 50 in other sectors or types of business.
- individual entrepreneurs (IEs);
- farm enterprises (FEs);
Russian legislation provides no definition of medium-sized business. The practice is to use for international comparisons European or US qualification by employment, 250 and 500 employees (as upper limits) accordingly.
The structure of the Russian SME sector is the following:
SMEs in Russian economy
Small and medium business has become institutionally positioned in Russia as the basis of its economy, it has assumed important social and economic functions.
By the end of 2003, there were 8946.5 thousand economic entities in Russia. The contribution of enterprises with up to 250 employees ( which meets the EU SME size qualification ) to the overall indicators for all enterprises in Russia in 2003 was:
Another widely used SME sector development indicator is the number of enterprises with up to 250 employees per 1,000 of economically active population (density). In 2003 this indicator amounted to 118 enterprises and IEs per 1,000 of economically active population in Russia.
Thus, the alleged assumption about a fundamental gap between Russia and developed economies in the level of small and medium-sized business development is inconsistent, as a few basic SME development indicators show that Russia exhibits the characteristics of a market economy. A positive development in 2004-2005 was that the SME sector has again strengthened its position in the economy.
The number of small innovative enterprises in the developing SME sector is not large – estimated at 25,000 - and it is decreasing every year. It is explained first of all by readjusting the system of counting, as well as by quick growth and merging of some companies, on one hand, and strong competition and lack of sufficient state support, on the other. SMEs are mostly functioning in medicine and pharmaceuticals, machinery and equipment, and new materials.
It should be noted however that there are no exact data on the number of innovative SMEs in Russia. Statistically figures that are shown refer only to those SMEs that are operating in the sphere of "science and science services". Those registered are not necessarily involved in high-tech activity. At the same time, there is also a number of SMEs that statistically are attributed to different branches of industry such as machine building, and light industry, for example, which are not counted here. On the other hand, most SMEs, including innovative, have diversified business and cannot be attributed to a single field. The figures just help to catch a trend, not to get accurate data.
SMEs are still not in a position to be the engine of innovation that they are in most EU countries. Large enterprises, on the other hand, tend to have a more stable financial position and diversified source of revenues. They have the financial means of innovating and account for the majority of innovation activity that is currently implemented in the Russian economy. Not surprisingly, more than two-thirds of innovation expenditures are concentrated in two sectors–chemicals, chemical products, machinery and equipment. At least in Russia today, large firms rather than SMEs dominate these sectors.
Share of Industrial Enterprises in Russia Conducting Innovations
Foreign countries that are the most attractive for Russian innovation-oriented industries, as well as foreign countries that are most interested in developing innovation activity in Russia may be identified through patent statistics. The majority of external patent applications submitted by Russian inventors were in the U.S., Germany, the United Kingdom, and France.
The specificity of Russia is in its ability to make small technologies, not high quality technological chains. And therefore Russia mostly exports small products such as new materials, sensors, and coatings. However the geography of contacts is growing: Russia now sells technologies to 80 countries (compared to 46 in 1998).
Until recently foreign investments were prevailing in Russian venture industry. And there was no real expanding of their activity because the lack of domestic investors was a sign of instability for foreign ones. Recently several positive developments became evident. First, small firms increased their spending on protection and purchase of IP. Second, there is a growth of domestic investment, including high-tech area. Specialized crediting programmes are developed by Russian banks. Third, the government announced that its strategy is evolving from controlling and regulating to stimulating. It plans to pay more attention to indirect measures and to development of legal basis and infrastructure. By giving its support to some large-scale innovative projects, the government takes charge of technological risks and thus creates conditions for high-tech business growth.
At the beginning innovative infrastructure was quite a spontaneous process. In 1997 the Ministry of Science and Technologies suggested to unite efforts and create a programme to foster innovation development. The programme received the name "The Urging of the Innovation Activity in Science and Technology Sphere". The major goal of this programme was the creation of an innovative infrastructure, which includes the following components:
- organisations supporting innovative activity and the commercialisation of technologies,
- information network in this sphere,
- training and retraining courses,
- consulting services, including legal, and marketing.
The key element of this programme became a new concept of innovation-technology centres. But prior to their creation such elements as technological parks and science cities (or ‘naukogrady') already existed.
Chronologically technological parks were among the first new elements of the innovative infrastructure created in the late 1980s. Russia rates fifth in the world according to the number of technological parks. Currently more than 60 technology parks are listed as active, mostly as organizational departments of universities. They have different areas of specialization and the majority of technology parks are working in such areas as ecology, scientific equipment, technical equipment for measurement and control, new technologies in medicine, medical equipment, new materials, computer technologies. Regions with the most diversified activity are Moscow, St.-Petersburg and Moscow region.
In general Russian technology parks unite small innovative enterprises and provide them first, with office space at a rate below the market price for a limited time and second, arrange for them consulting services such as auditing, business plan drafting, access to telecommunications, assistance in fundraising. The support for technology parks comes mainly from the Ministry of Education and Science, some Funds and local budgets. Investment from industrial enterprises is very limited.
Science cities existed from Soviet times and had to be reoriented and adjusted to new economic conditions. The represent structures similar to technology parks but occupy a large territory, and usually form whole cities. The analogue structure is Japanese technopolis. But in contrast to Japanese technopolis Russian naukogrady were created for the development of defence-related R&D and production, and they were parts of the Soviet military-industrial complex. More than 70 science cities were established during the Soviet period. For security reasons, many were deliberately located in isolated areas, secure compounds adjacent to civilian cities. These cities generally contained one or two specialized enterprises and related research institutes. There was almost no linkage between the output of these science cities and the R&D needs of industrial enterprises in the surrounding civilian cities. Funding for these science cities was supplied almost entirely from the State budget, rather than from any commercial sources. Consequently, their work had very little commercial orientation.
Thus, the old infrastructure was not very effective, and that is the reason why the new concept of innovation-technology centres ITCs emerged. Today there are more than 53 ITCs in different regions of Russia. Some of them were established on exclusively federal support and others used combined federal and regional resources for their creation. The evaluation of ITCs revealed that for small enterprises the most attractive features in ITCs are: privileged renting conditions, possibility to take part in investment programmes, and geographical location. As much less important such resources were ranked as training programmes, consulting services, and exchange of experience with other small enterprises located in ITC. In part, it may be explained by the fact that currently professional consulting and training services are affordable outside ITC sometimes at a lower price.
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Conventionally, the market structure in Russia is highly monopolized and enterprises are extremely large-scale. This is indicated by the existence of large and extra large enterprises, that employ between 1,000 - 9,999 workers and more than 10,000 workers respectively. However, large-scale enterprises represent not more than 25% of total sales and employment. All given facts and figures have two important implications. First, small enterprises are potential sources of technical innovation, renewed competition and employment creation. Second, the growth of small enterprises is an important factor for bridging the gap between measured GDP and real income in Russia. Therefore, enhancing dynamics of small and medium enterprises would contribute towards the economic growth of the country.
(Review by A.Orekhova based on information from web-sites: www.rcsme.ru, www.eng.technet.ru, business-in-russia.com, etc.)