Why Small Business is not Developing

P. Chagelishvili, Doctor of Economic Sciences, Professor

The problem of development of small business and small enterprises has become a puzzle for our economists. Our country cannot get out of crisis for 15 years, while some countries in which there is a similar situation (taking into account their territory, number of population, and resources) managed to overcome economic backwardness during the period of 4-5 years and now rank with the leading countries of the world.

The practice has confirmed that the level of a country’s economic development is determined not only by its territory, number of population and amount of resources but by their rational use as well.
As it can be seen from the table, a country’s economic development not always depends on the amount of the country’s resources. In some countries, in spite of a small number of population and territory, the amount of output is larger than in those ones that have much more resources. For instance, Israel has a volume of output by 15.8 times larger than Georgia, Denmark – by 32.5 times, Finland – 23.3 times. Such country as Luxemburg, the population of which is 13 times less than in Georgia produces 18.9 worth of output, which is 6,3 times more than Georgia. The above-stated clearly signifies that a country’s economic potential depends not so much on its traditional material factors, such as land, labor and capital, but on the factors like the population’s entrepreneurial talent – especially small private enterprise and knowledge. It is preferential use of these non-traditional and non-material factors thanks to which small countries with limited resources managed to achieve unprecedented success. For instance, Japan, Denmark, Iceland, Israel, Luxemburg, Finland, Sweden, Norway, etc. These countries, in which the scale of production factors does not considerably differ from Georgia, produce from 3.2 to 30 times more output per head. The secret of achieving of such high economic indicators can be explained by use of these factors. An expert of Tehran Stock Exchange Abolfaz Shokri points out concerning small entrepreneurs that “they create history in our economy, the credo of their activities is to create something, innovation, dynamics, constant improvement of work environment, riskiness, orientation for future, making of wealth, economic growth and securing of competition.”1 He considers an entrepreneur as the main factor of our time and a wizard of rescue.
The idea still dominates in science that the determinant factors of a country’s economic development are land, labor and capital, but the fourth factor – private enterprise is paid less attention, while the fifth factor – knowledge, which can get a country out of crisis and put it on the path of economic revival, is completely ignored. That is why the whole society should take care of rendering comprehensive assistance to promotion of private enterprise, which should take place by means of implementation of consecutive complex arrangements. First of all the state should take care of the development of entrepreneurs and creating of favorable economic environment for them. A country in which there is no day-to-day care for private enterprise on the part of the state will never achieve economic progress. In spite of the generally recognized advantages of small business, it is not sufficiently developed in Georgia.
In the developed countries of the world, from 40 to 90% of the total output falls on small enterprises. In the US – 40%, and 34.4% of the employed population, in Japan (in manufacturing industry) 53 and 90%.
Here a question arises –why the index of economic growth of the countries, having almost the same traditional production factors, differs by 20-30 times on average? From our point of view, the biggest mistake is a wrong appraisal of production factors… especially unjustified is the low rate of economic development of the countries in which intellectual and scientific level of the population is high. For example, Georgia in which the index of development of resources makes up 0.50 is from 8 to 50 times behind the countries with small population and territory. Drop of economic indicators of small enterprises in Georgia in 2002-2005 is especially evident. In particular, the total number of people employed at small enterprises makes 83.8% from the total number of those employed in production business, the number of enterprises – 84%, and the special share of output produced by them – 9.3% only, while 4.8% of large enterprises produce 81% of the total amount of industrial output. The essence and content of the terms “small enterprise” and “small private enterprise” needs specification and explanation. Some economists use the term “micro enterprise” instead of “small enterprise2. In order to substantiate the use of this term they refer to the Georgian “Law on entrepreneurs” and point out that “both entrepreneurial units established in the form of legal entities and natural persons are referred to micro enterprises in the economic practice.” Firstly, this term is not used in the economic practice, and secondly, the “Law on entrepreneurs” refers this kind of natural persons and legal entities to the category of individual enterprises and limited liability companies, in which the number of employees does not exceed 20 people, and the annual commodity turnover – 500 thousand GEL.
The use of the term “small enterprise” is related to the categories of business and private enterprise in accordance with their scale: small, medium and large private enterprise and also small, medium and large business.
As to knowledge, as a non-material wealth, one of its most important peculiarities is that its receiving does not have and cannot have any limits; the more knowledge a person has the richer he is from intellectual (spiritual) point of view, “however, knowledge, like any other product of labor, has turned into a commodity at certain stage of social development.”3
Professor L. Chikava considers knowledge as a commodity having special peculiarities and formulates its separate peculiarities by which it differs from other commodities, however, from our point of view, knowledge (especially scientific one) is not only an expensive commodity but also such non-material capital that not only makes a profit but at the same time it considerably increases the efficiency of use of other material factors. That is why, among the production factors, knowledge is the most effective and active factor, a rational use of which increases the level of the country’s economic development.
Knowledge differs from traditional resources very much. It is an unlimited, self-supplementing resource that has been accumulated during many years. Generators of knowledge is scientific manpower, their knowledge is particularly valuable.
One of peculiarities of knowledge, as an extraordinary resource, is that it is not only a resource of high value but it also has an effect on the level of use of other resources. A country, that has a high knowledge potential, uses its other resources more effectively – land, capital, labor and entrepreneurs’ abilities. The role of knowledge and entrepreneurs’ abilities, as non-material resources, is especially significant for a country’s economic development. Its effectiveness, as non-material resources of the country, consists in the fact that they are less related to material and monetary resources. Its increasing, progress and effectiveness is unlimited in relation to the number of population and the territory.
A country in which the scale and quality of scientific knowledge are high also has a high intellectual level of population and training of personnel employed in the economic sphere. That is why the quality of a product produced in such country is high, as well as its competitive ability, export indicator and the country’s economic potential. The high level of economic development of most the world’s small countries exemplifies this.
From our point of view, recognition of private enterprise as an important factor of production is a real opportunity of the society’s progress, which is able to get the country out of crisis and put it on the path of economic revival. That is why the whole society should take care of revelation, training, and comprehensive assistance to entrepreneurs. Promotion of private enterprise should take place consecutively, by means of implementation of complex arrangements. First of all, the state should take care of the development of small enterprises and creation of a favorable economic environment for them. A country that does not take care of private enterprise on daily basis will never achieve economic progress.
In spite of generally acknowledged merits of small business, it is not sufficiently developed. In January-August 2005 the cost of output produced by Georgia’s large enterprises (goods and services) made up 2379.1 million GEL or 76.8% of the total volume of production sphere’s output; at medium enterprises – 383.3 million GEL or 12.4%; at small enterprises – 334.9 million GEL or 10.8%. According to statistical data, the share of large enterprises among the total number of operating enterprises makes up 2.6%, of medium enterprises – 6.9%, and small ones – 90.5%. In spite of the generally acknowledged efficiency of small enterprises, the specific share of output produced by them in Georgia in 2002-2004 decreased from 18.4 to 8.7%, including: in Kvemo Kartli region – by 3.8 times, in Racha Lechkhumi, Guria and Mtskheta-Tianeti – by 2.5 times, in Samtskhe-Javakheti – 16.2 times.
In the developed countries of the world from 40 to 90% of the total output falls on small enterprises, including: in the US – 40% and 34.4% of the employed population, in Japan (in manufacturing industry) 53 and 90%. The number of small enterprises in Georgia makes up 84%, and the specific share of output produced by them – 9.3% only, while large enterprises, the number of which makes up 4.8%, produce 81% of total industrial output.
The role of small and medium enterprises in use of local resources is especially big. Creation of large enterprises in conditions of scarcity of local resources is economically unjustified, since import of resources from other regions considerably increases production costs, while selling of finished products requires additional costs related to their exporting to other regions and countries.
Another advantage of small and medium enterprises is as follows: creation in recent years of large production complexes, concerns, corporations raised the issue of their cooperation with small and medium enterprises. Small-lot production of components and units at large production complexes is economically unjustified, that is why, according to cooperation rules, they often delegate this function to small and medium enterprises, as a result of which close production ties are established between small and large enterprises. Development of large private enterprise entails development of small enterprises.
The problems of small and medium business will be discussed forever unless a decision concerning implementation of a special program for their promotion is once and for all taken at the state level. Instead of permanent changing of laws, a similar experience of other countries should be thoroughly studied, and a business environment that will provide for the development of the aforementioned direction in our country should be created. In particular, we believe that:
Ï% The Tax Code should be perfected once and for all, and such law should be adopted that will not require changing every month;
Ï% The policy concerning privileged credits for small and medium business should be really implemented;
Ï% Other mechanisms of export promotion should be really enabled as well, in particular, the new branch protection system.
Small and medium business will be able to develop only by means of taking practical steps and not by means of constant changes of laws and, moreover, a significant level of social effectiveness in the country can be achieved this way.

India is in Need of Investments
The US President George Bush visited India. Representatives of the receiving country advise the leading American businessmen to invest money in India and stress that foreign capital plays the leading role in the country’s economic development.
The Finance Minister says that India needs American money, technologies and management experience for full enabling of the country’s potential.
On the third day of President Bush’s visit the representatives of the two countries considered the ways for intensification of economic relations. Since the beginning of the decade the US companies have invested 5 billion USD in India.
India’s Finance Ministers believes that American investments will help the country, create new jobs, improve the infrastructure and make it more competitive on the international market.
Foreign businessmen often complain that it is difficult to enter the Indian market because of strict regulation. Last month the country’s government agreed to more foreign investments in the energy market in spite of the opposition’s strong resistance.

Deflation in Japan
The Bank of Japan arranged a two days meeting at which the program concerning almost 0% interest rate was considered. Low interest rates were introduced with the purpose of struggle against low prices. The world’s second largest economy has been experiencing deflation, however, according to the figures, the country’s economy is improving. The Central Bank of Japan fears that cheap credits may cause devaluation of assets against the background of rise in prices. The country’s Prime Minister says that the Central Bank should not allow a new deflation. As is supposed, the interest rates will be raised in April.