Co-funded by the European Union POLICY SEMINAR EASTERN EUROPE AND SOUTH CAUCASUS INITIATIVE SUPPORTING SME COMPETITIVENESS IN THE EASTERN PARTNER COUNTRIES Benchmarking SME performance in the Eastern Partner region: discussion of an analytical paper 24 October 2016 11
Agenda 1. Objectives and methodology 2. Outline and summary of analysis: a) Access to finance b) Internationalisation c) R&D and innovation 2
Objectives of the paper Complement the analysis and recommendations of the SME Policy Index with a deeper analysis of SME performance in the Eastern Partnership (EaP) region using the World Bank/EBRD Business Environment and Enterprise Performance Survey (BEEPS) Assess the robustness and relevance of the SME Policy Index methodology by testing the findings of the 2012 SBA assessment against firm performance in the region and across regions Solidify the analytical underpinnings of the SME Policy Index and further understand where and when the introduction of targeted SME support measures and instruments could improve SME performance Maximise the impact of the SBA assessment across the SME communities (including policy makers, private sector organisations and academia) 3
Methodology Given the dearth of, and cross-country methodological inconsistencies in, business demographics data in the Eastern Partner region, we exploit cross sectional firm-level data from the BEEPS V (2013). We focus on the areas of access to finance, internationalisation and innovation corresponding to three dimensions of the SME Policy Index selected based on relevance for SMEs and data availability. We carry out two types of analysis: 1. Benchmarking SME performance in access to finance, internationalisation and innovation in the EaP - identifying trends over time and variations across countries, and comparing with the EU pre-accession and EU-10 regions. 2. Adaptation of existing econometric models to draw correlations between firm performance and the policy environment (using scores from the relevant dimensions of the SME Policy Index 2012 assessment). 4
Benchmarking across 3 regions Eastern Partner Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU pre-accession Albania Bosnia and Herzegovina Croatia* Kosovo Macedonia, FYR Montenegro Serbia Turkey COVERED BY SME POLICY INDEX 2012 EU-10 Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovak Republic Slovenia *Croatia is considered a EU pre-accession country for the purposes of the paper as both the policy and performance data used predate Croatia s accession to the EU. 5
Agenda 1. Objectives and methodology 2. Outline and summary of analysis: a) Access to finance b) Internationalisation c) R&D and innovation 6
Access to finance: Benchmarking firm performance 1 SMEs in the Eastern Partner region finance a larger proportion of their working capital from internal funds than their EU pre-accession and EU-10 counterparts Bank financing is particularly low in Belarus, Ukraine and Azerbaijan financing from suppliers/clients is a popular alternative in Ukraine SME sources for working capital financing (2011) Internal funds Credit from banks Credit from non-bank institutions Credit from suppliers/advances from clients Other Armenia 64% 19% 1% 10% 6% Azerbaijan 93% 5% 1% 1% Belarus 83% 9% 1% 6% 2% Georgia 78% 15% 1% 5% 1% Moldova 76% 14% 1% 7% 3% Ukraine 82% 3% 1% 11% 3% EU-PA 70% 15% 1% 11% 2% EU-10 71% 12% 1% 14% 3% 7
Access to finance: Benchmarking firm performance 2 Loans to SMEs have declined across all regions since the financial crisis Armenia is the strongest regional performer, while other Eastern Partner countries lag behind the EU- 10 and EU pre-accession regions Percentage of SMEs with at least one loan from a financial institution (2009 vs 2013) 2009 2013 55% 50% 50% 40% 45% 45% 36% 38% 44% 34% 40% 28% 26% 17% 16% 17% Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU-10 EU-PA 8
Access to finance: Benchmarking firm performance 3 Average interest rates for both SMEs and large enterprises are significantly higher in the Eastern Partner region, and largely consistent across the region Average reported collateral requirements from SMEs are over 100% of the size of the loan in all regions Average annual interest rate on most recent loan (2013) SMEs Large Collateral required from SMEs as % of most recent loan (2013) 28.3 Armenia 372% 23.1 Azerbaijan 405% 13.5 12.6 17.2 16.5 15.4 17.4 12.8 12.3 16.1 18.2 6.2 9.5 8.1 7.7 Belarus Georgia Moldova Ukraine 209% 176% 227% 337% EU-PA 447% EU10 240% Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU-PA EU-10 0% 100% 200% 300% 400% 500% 9
Access to finance: Benchmarking firm performance 4 There is evidence of SME credit demand unmet by bank financing, particularly in Azerbaijan, Belarus and Ukraine SME access to finance varies across the EaP with some countries (e.g. Armenia and Georgia) at EU-10 levels Demand and access to credit by SMEs (2013) Did not have need for credit Had need for credit and was able to acquire loan Had need for credit but was refused/discouraged from applying 17% 18% 48% 31% 38% 36% 50% 42% 19% 36% 28% 15% 18% 46% 13% 16% 33% 47% 40% 46% 46% 36% 37% 42% Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU-PA EU10 10
SMEPI Policy Index Dimension 6 scores (2012) Access to finance: Benchmarking firm performance 5 Countries with a better developed legal and regulatory framework and targeted tools for access to finance (as measured by SME Policy Index Dimension 6: Access to finance for SMEs) are more likely to have a higher percentage of SMEs with access to credit. 3 2.5 Serbia Georgia Croatia Turkey 2 Albania Montenegro Bosnia-Herzegovina Armenia FYR Macedonia 1.5 Ukraine Azerbaijan Belarus Moldova Kosovo 1 0.5 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of SMEs with a loan from a financial institution (2013) 11
Access to finance: Measuring impact of policies on performance (1/2) Objective: To examine the influence of the policy environment on SME access to finance in transition economies. Based on Hainz and Nabokin (2013) we look at: Determinants of firm access to loans among those firms that demand them Determinants of perceived access to finance (as measured by firm perception question in BEEPS) Addition of a variable on SME Policy Index 2012 scores for Dimension 6 (for Eastern Partner and EU pre-accession regions) to measure impact of the policy environment Access to credit and demand for credit are defined as follows: Categories Demand Access - Firm has a loan 1 1 - No loan, because application turned down 1 0 - No loan, because discouraged from applying 1 0 - No loan, because no need 0-12
Access to finance: Measuring impact of policies on performance (2/2) Firm level factors affecting performance Impact of policies on performance Increasing firm size is related to increased demand and access to loans the impact of firm size is particularly strong for access, suggesting smaller firms are more credit constrained and rely more on internal financing. Among firms with credit demand, large firms are less likely to identify access to finance as an obstacle to doing business. Manufacturing firms have a greater likelihood to demand loans than retail and other services firms, although they do not appear to differ in terms of actual or perceived access. SME Policy Index 2012 Dimension 6: Access to finance for SMEs scores are insignificant in the demand equation but have a positive and significant impact on likelihood of accessing a loan: Policy environment does not affect the need for external financing, although it does affect ease of access. Policies to ease access to finance do not appear to have a distortive effect on the market, as they do not influence demand. SME Policy Index Dimension 6 variable is also strongly positively correlated with perceived access to credit, suggesting that firm perceptions of access to finance are linked to objective measures of the policy environment. 13
Agenda 1. Objectives and methodology 2. Outline and summary of analysis: a) Access to finance b) Internationalisation c) R&D and innovation 14
Internationalisation: Benchmarking firm performance 1 SMEs have difficulties accessing export markets. Large firms exhibit higher rates of both direct and indirect exports. Exports vary significantly across Eastern Partner countries, with the lowest rates observed in Azerbaijan. Firms in the EU-10 and EU pre-accession regions are considerably more active in export markets. Average percentage of annual sales exported directly or indirectly (2011) Direct Exports Indirect Exports 40% 35% 30% 25% 20% 15% 10% 5% 0% SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU-10 EU-PA 15
Average SME exports (% of sales) in 2011 Internationalisation: Benchmarking firm performance 2 A clear positive correlation is observed between innovation (R&D expenditure) and SME internationalisation. Performance in the Eastern Partner countries is weak when compared with countries in the EU-10 and EU pre-accession regions. 30% 25% Turkey 20% 15% Latvia Lithuania Estonia Czech Republic Slovenia 10% 5% Albania Slovak Republic Bulgaria Hungary Moldova Ukraine Belarus Poland Montenegro FYR Macedonia Serbia Bosnia-Herzegovina Romania Croatia Kosovo Armenia Georgia 0% Azerbaijan 0% 5% 10% 15% 20% 25% % of SMEs that spent on R&D (2010-2012) 16
Average SME exports (% of sales) in 2011 Internationalisation: Benchmarking firm performance 3 Countries with better rates of SME financing tend to have a higher share of SMEs active in international markets. Access to loans varies substantially across the Eastern Partner countries, but is generally weak when compared with countries in the EU-10 and EU pre-accession regions. 30% 25% Turkey 20% 15% Latvia Lithuania Estonia Czech Republic Slovenia 10% 5% Ukraine Slovak Republic Croatia FYR Macedonia Bulgaria Bosnia-Herzegovina Serbia Romania Belarus Hungary Montenegro Moldova Poland Kosovo Albania Armenia Georgia Azerbaijan 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% % of SMEs with a loan in 2013 17
Average SME exports (% of sales) Average SME exports (% of sales) Average SME exports (% of sales) Average SME exports (% of sales) Internationalisation: Benchmarking firm performance 4 A clear positive correlation is observed between SME internationalisation and policies to foster and facilitate trade (SME Policy Index Dimension 7: Standards and technical regulations, SME Policy Index Dimension 10: Internationalisation of SMEs, OECD Trade Facilitation Indicators, World Bank Doing Business: Trading Across Borders). 30% 30% 25% Turkey 25% Turkey 20% 20% 15% 10% 5% 0% Bosnia- Croatia Herzegovina FYR Macedonia Serbia Kosovo Montenegro Belarus Moldova Ukraine Armenia Albania Georgia Azerbaijan 0 1 2 3 4 15% 10% 5% 0% Bosnia- Herzegovina FYR Macedonia Croatia Serbia Belarus Moldova Montenegro Kosovo Albania Ukraine Armenia Georgia Azerbaijan 0 1 2 3 4 SME Policy Index 2012 Dimension 7: Standards and technical regulations SME Policy Index 2012 Dimension 10: Internationalisation 30% 30% 25% Turkey 25% Turkey 20% 15% 10% 5% 0% 0 5 10 15 20 25 OECD Trade Facilitation Indicators (2012) 20% 15% 10% 5% 0% Czech Republic Latvia Lithuania Slovak Serbia Croatia FYR Macedonia Republic Bosnia- Bulgaria Belarus Hungary Romania Herzegovina Poland Moldova Montenegro Ukraine Albania Armenia Georgia Azerbaijan Czech Republic Slovenia Estonia Latvia Croatia Slovak Lithuania Bosnia-Serbia FYR Republic Macedonia Herzegovina Hungary Bulgaria Belarus Romania Moldova Montenegro Poland Kosovo Albania Ukraine Armenia Georgia Azerbaijan 0 20 40 60 80 100 World Bank Doing Business: Trading Across Borders 2011 18
Internationalisation: Measuring the impact of policies on firm performance (1/2) Objective: To examine the influence of aspects of the domestic business environment on the degree of internationalisation of SMEs in transition economies. Based on Shirokova and Tsukanova (2013) and Lejárraga et al. (2014), we measure the determinants of SME internationalisation (i.e. exports as a share of sales), using a set of firm-level characteristics and country-level institutional factors. Addition of variables on SME Policy Index 2012 scores for Dimension 7: Standards and technical regulations and Dimension 10: Internationalisation of SMEs (for Eastern Partner and EU preaccession regions) to measure the impact of the policy environment and support measures. 19
Internationalisation: Measuring the impact of policies on firm performance (2/2) Firm level factors affecting performance Impact of policies on performance Firm size has a positive and significant influence on a firm s propensity to export. Larger firms are more likely to engage in both direct and indirect export activity. Firms with a high share of foreign ownership, firms with an internationally recognised quality certification and firms using technology licensed from a foreign company are also more likely to be exporters. Manufacturing firms have a substantially higher likelihood of engaging in exports. The link between innovation and internationalisation is illustrated by the strong positive correlation between R&D expenditure and export activity. Formal training programmes have a positive impact on SME internationalisation. The World Bank Doing Business 2011 Trading Across Borders variable is positively correlated with SME exports, suggesting that country-level border procedures and trade costs have an important influence on a firm s ability to export. The SME Policy Index (2012) scores for Dimension 7: Standards and technical regulations and Dimension 10 Internationalisation of SMEs are important predictors of firm exports. This suggests that SMEs can benefit greatly from the removal of technical barriers to trade and government programmes to promote export-oriented SMEs to access international markets. The OECD Trade Facilitation Indicators variable is also positively correlated with firm exports, providing further evidence of the benefits that can come from improving border procedures and reducing trade costs. 20
Agenda 1. Objectives and methodology 2. Outline and summary of analysis: a) Access to finance b) Internationalisation c) R&D and innovation 21
R&D and innovation: Benchmarking firm performance 1 Innovation performance varies greatly across the region although in general performance is poorer than EU-10 and EU pre-accession region Gap between SMEs and large enterprises more notable in certain countries e.g. Georgia and Ukraine Firms reporting product innovation (2010-2012) No innovation Innovation not new to market Innovation new to local market 1% 3% 4% 8% Innovation new to domestic market 1% 4% 2% 4% 1% 9% 6% 9% 4% 4% 3% 13% 7% 9% 8% 19% Innovation new to international market 3% 3% 1% 4% 4% 1% 12% 9% 5% 14% 8% 8% 15% 4% 8% 8% 4% 6% 6% 5% 4% 9% 6% 6% 10% 12% 11% 11% 8% 3% 17% 3% 6% 10% 9% 6% 5% 9% 16% 84% 84% 98% 88% 72% 55% 92% 69% 71% 65% 82% 65% 72% 60% 72% 63% SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large SMEs Large Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU-10 EU-PA 22
R&D and innovation: Benchmarking firm performance 2 Manufacturing SMEs more likely to introduce product innovation and more likely to introduce innovations that are new to the market Most innovations new to the firm in Armenia and Ukraine technology catch-up dynamics Manufacturing SMEs reporting product innovation (2010-2012) No innovation Innovation not new to market Innovation new to local market Innovation new to domestic market 1% 4% 2% 1% 5% 9% 13% 14% 12% Innovation new to international market 1% 7% 9% 4% 2% 23% 5% 3% 1% 4% 6% 9% 5% 5% 9% 13% 6% 7% 17% 11% 99% 84% 86% 79% 56% 60% 63% 65% Armenia Azerbaijan Belarus Georgia Moldova Ukraine EU-10 EU-PA 23
% of SMEs introducing a product innovation (2010-2012) R&D and innovation: Benchmarking firm performance 3 Innovation appears to have fallen across all countries in the post-crisis period Some Eastern Partner countries have been affected more strongly (e.g. Georgia and Azerbaijan), and all countries have fallen below 30% in 2013 100% Percentage of SMEs introducing product innovation per country 90% 80% 45 line 70% 60% 50% 40% 30% 20% 10% Georgia Hungary Czech Republic Croatia Kosovo Romania Bosnia-Herzegovina Poland FYR Macedonia Slovenia Serbia Bulgaria Moldova Belarus Ukraine Estonia Lithuania Latvia Slovak Republic Armenia Albania Montenegro Turkey Azerbaijan 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of SMEs introducing a product innovation (2006-2008) 24
% of SMEs exporting directly or indirectly (2011) R&D and innovation: Benchmarking firm performance 4 Close relationship between innovation and internationalisation with few exceptions Correlation not as strong in Eastern Partner countries other barriers and quality of innovations may be reasons why export performance not very strong across the region 100% 90% Percentage of innovative and exporting SMEs by country 80% 70% 60% Slovenia 50% Turkey Czech Republic 40% Estonia Serbia Slovak Republic Lithuania Croatia 30% FYR Macedonia Latvia Bulgaria Bosnia-Herzegovina Montenegro Poland Kosovo 20% Hungary Belarus Romania Ukraine Moldova 10% Albania Armenia Azerbaijan Georgia 0% 0% 10% 20% 30% 40% 50% 60% 70% % of SMEs introducing a product innovation (2010-2012) 25
SMEPI Policy Index Dimension 8b scores (2012) R&D and innovation: Benchmarking firm performance 5 Overall positive relationship between a good policy environment for innovation (as measured by SME Policy Index Dimension 8b: Innovation) and percentage of SMEs that invest in R&D. The EaP countries are clustered in the lower end of both, indicating potential to improve policies and consequently performance. 4.5 4 Croatia 3.5 Turkey Serbia 3 2.5 2 Albania Belarus Ukraine Moldova Georgia Montenegro Armenia FYR Macedonia Bosnia-Herzegovina 1.5 Azerbaijan Kosovo 1 0.5 0 0% 5% 10% 15% 20% 25% % of SMEs investing in R&D (2010-2012) 26
R&D and innovation: Measuring impact of policies on performance (1/2) Objective: To examine the influence of the policy environment on SME investment in R&D and explore the link between R&D, innovation and productivity in transition economies. Based on the Crépon, Duguet, Mairesse (1998) model, which has three stages: 1. Firms make a decision on whether and how much to invest in R&D 2. Firms produce innovation output (sales from innovative products) determined by investment in R&D 3. Labour productivity is determined by innovation output Addition of variable on SME Policy Index 2012 scores for Dimension 8b (for Eastern Partner and EU pre-accession regions) to measure impact of the policy environment and support measures 27
R&D and innovation: Measuring impact of policies on performance (2/2) Firm level factors affecting performance Impact of policies on performance Likelihood to report R&D expenditure and innovation output both increase with firm size. While larger firms invest less in R&D in per employee terms, due to their size, they are more likely to report R&D and invest more in absolute terms, resulting in higher innovation output. Manufacturing firms are the most likely to report R&D expenditure, followed by non-retail services and retail. Labour intensive industries are less likely to report R&D expenditure and have a lower volume of sales due to innovative products. Exporting firms invest more in R&D, conforming to expectations regarding increased technology transfer and adoption with internationalisation, particularly for those countries which are within the technology frontier. Innovation output appears to have a very strong impact on productivity. The SME Policy Index: Dimension 8b Innovation scores have a positive and significant impact on the likelihood to invest in R&D, and have a positive but insignificant impact on R&D intensity. 28
Contact details Meryem Torun Policy Analyst OECD Global Relations meryem.torun@oecd.org Daniel Quadbeck Project Manager OECD Global Relations daniel.quadbeck@oecd.org Jibran Punthakey Economist/Policy Analyst OECD Global Relations jibran.punthakey@oecd.org 29