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Document Sample
POLICY BRIEF #28
SMALL AND MEDIUM-SIZED ENTERPRISES IN SLOVAKIA
Jan Oravec*
April 2005
* In October 2003 he was elected as a President of The Entrepreneurs Association of Slovakia.
He is a founding father of The F. A. Hayek Foundation Bratislava (established in 1991) and The
Slovak Taxpayers Association (1997). As an economic advisor, he writes articles, gives lectures,
TV interviews, and public speeches on various topics.
Introduction
Small and medium sized enterprises (SMEs) are defined by the EU as microcompanies (0-9
employees), small companies (10-49 employees), medium sized companies (50-249 employees),
and large companies (250+ employees), which constitute the backbone of any economy. One of
the most typical characteristics of advanced countries is the importance of this sector in their
economy. On average SMEs represent more than 95 % of all enterprises in the OECD countries,
employing between 60 and 70 % of the working population.
In the early 1990s, when Slovakia began to transition from a centrally planned economy to
a market economy, there was almost no SME sector. Just 15 years later quantitative parameters
of the Slovak SMEs are already comparable to those of the most developed countries: the SMEs
represent 99,8 % of all companies, while their share of total employment exceeds 65 %. In other
words, the SMEs represent about two thirds of the Slovak economy.
Questions to consider:
What were the initial conditions faced by the first pioneers of entrepreneurship in
Slovakia?
What were the major factors of accelerated development of SMEs during the transition
process?
What are conditions for doing business for SMEs today? What are the future prospects
of SMEs in Slovakia?
I. Initial conditions faced by the first pioneers of entrepreneurship in Slovakia
In 1990 Slovakia was a part of Czecho-Slovakia. Its economy was one of the most nationalized
economies in the world. Unlike in the other neighboring countries such as Poland and Hungary,
almost 100 % of the economy was in the hands of the state. This had devastating consequences
for a sector of SMEs.
In Poland and Hungary a communist regime has never succeeded in eliminating all small
businesses in agriculture or in services like hairdressers or shoemakers. However, in Czecho-
Slovakia even these services were completely nationalized. As a result the first pioneers of
private entrepreneurship in Czecho-Slovakia were forced to start from scratch. This is clearly
represented in Chart 1; there were only 1768 active entrepreneurs in the first year of the
transformation.
2
CHART 1
Number of self-employed persons in Slovakia 1990-2003
350000
306356
300000 286284
279597 274630
264090 263733 263733 266903 269323
248204
241199 244419
250000
200817
200000
150000
100000
50000
1768
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: National Agency for Development of SMEs, 2004
However, in the following year there was an extremely swift increase in the number of self-
employed ventures exceeding 200 000 by the end of 1991. This development in early stages of
economic transformation clearly demonstrates two important facts: One, even a relatively long
period of 40 years of communism was unable to erase entrepreneurial spirit and instincts from
minds of Slovak people, two, prospects for independent private business activities were an
attractive option that was exercised by tens of thousands of courageous individuals even in the
earliest stages of transformation.
Conditions for doing business themselves were anything but ideal in the beginning of 90s. The
first pioneers of entrepreneurship in Slovakia were exposed to many unexpected and swift
fluctuations: Slovak companies in Central and Eastern Europe collapsed as a result of so-called
socialist integration coming to an end, input prices increased dramatically as a result of
government’s efforts to deregulate prices distorted by 40 years of central planning, many
companies were unable to pay their trading partners and went bankrupt since they were seriously
hit by these changes.
With no predictability it was almost impossible to make any reliable economic calculations.
Uncertainty was enormous. However, at the same time economic liberalization and privatization
created new business opportunities.
3
II. The major factors of accelerated development during the transition process and the
current state of the SME sector in the Slovak economy
Two Major Factors
There are two major factors behind the rapid development of SMEs in Slovakia. As mentioned
above, in the earliest stages of the transition, latent entrepreneurial spirit was the primary driving
force of the SME sector development. This entrepreneurial spirit became explicitly evident
immediately after a legalisation of private entrepreneurship in Slovakia.
This very first wave of private entrepreneurship was typified by businessmen’s enthusiasm.
They were determined to start their business ventures no matter how unfavourable the conditions
for doing business were in Slovakia at that time.
The second major factor behind the fast development of SMEs in Slovakia were the
opportunities created by restructuring and privatisation. In the first half of the 1990s
privatisation of thousands of small retail shops played a crucial role. They were privatised via
public actions and financed by bank loans.
Because large companies previously employed tens of thousands employees, many SMEs came
into existence as spin-offs of competition among bankrupting “corporate dinosaurs.“
There are already tens of thousands of SMEs-corporations in Slovakia and their number
exceeded 60 000 as it can be seen from following chart .
CHART 2
Number of SMEs – corporations in Slovakia, 1998-2003
70000
60000
50000
40000 0-49
50-249
30000
20000
10000
0
1998 1999 2000 2001 2002 2003
Source: National Agency for Development of SMEs, 2004
4
The Current State of SMEs
One of the most persuasive facts that illustrates SMEs growing importance is its increasing share
of total employment. The share of SMEs on total employment is growing steadily and today
equals almost 66 % of total employment in the economy.
CHART 3
Share of SMEs on Total Employment in %, 2003
100%
90%
38 34
80% 42,9 44 42,3 40,9
70%
60%
18,4
17,7 18
50% 20,2 18
19,3
40% 19,1
17,7 18,6
30% 15,1 14,3 16,9
20%
22,9 23,7 25,4 28,6
10% 21,8 22,4
0%
1998 1999 2000 2001 2002 2003
Self-employed 0-49 50-249 250+
Source: National Agency for Development of SMEs, 2004
The SME sector is absorbing tens of thousands of workers laid off by large companies during
their painful restructuring. As displayed by the following chart, a number of people employed in
companies with more than 250 employees is declining quite rapidly while the number of self-
employed individuals is increasing dramatically.
CHART 4
Number of Employees According to a Size of Business, 2003
1000000
900000
800000
1998
700000
1999
600000
2000
500000
2001
400000
2002
300000
2003
200000
100000
0
Self-employed 0-49 50-249 250+
Source: National Agency for Development of SMEs, 2004
5
By exploring the importance of SMEs in greater detail one can look at statistics showing the
weight of SMEs at the industry level. It is no surprise that SMEs are the most important segment
of industries like market services, retail trade, road transportation, and construction. Their share
of turnovers in the manufacturing industry is still lower compared to that of other industries.
CHART 5
Share of SMEs on Turnovers of Selected Industries in %, 2003
100%
15,5 13,4
90% 19,5
27,5
80%
14,1 20,9
70% 22,4
68,1
60% 23,9
50% 42,1
26,8 45,1
40% 17,8
30%
14,3
20%
7,8 31,3 28,3 30,7
10% 20,7
9,9
0%
Manufacturing Construction Retail Transport Market services
Self-employed 0-49 50-249 250+
Source: National Agency for Development of SMEs, 2004
Another interesting indicator shows share on total value added. In the case of SMEs in Slovakia,
their share of value added is 45 % on average.
CHART 6
Share of SMEs on Added Value in mil. Sk, 2003
100%
80%
196694 212616 246577 260678 251979 287135
60%
40% 69032 73726 78286 93892 99410
100610
20%
102549 117976 132070 136844 145042 137294
0%
1998 1999 2000 2001 2002 2003
0-49 50-249 250+
Source: National Agency for Development of SMEs, 2004
6
Slovakia has a small and very open economy. Exports plus imports represent 150 % of the
Slovak GDP. We can use the following two charts to examine the SME secotr’s role in foreign
trade.
Its share of imported goods and services is relatively higher. On exports side there is a visible
dominance of large companies.
CHART 7
Volume of Exports According to a Size of Business, 1998-2003
700
600
1998
500
1999
400 2000
300 2001
2002
200
2003
100
0
Self-employed 0-49 50-249 250+
Source: National Agency for Development of SMEs, 2004
CHART 8
Volume of Imports According to a Size of Business, 1998-2003
500
450
400
1998
350
1999
300
2000
250
2001
200
2002
150
2003
100
50
0
Self-employed 0-49 50-249 250+
Source: National Agency for Development of SMEs, 2004
7
One of possible reasons is increased foreign investments into Slovakia in recent years.
Companies like Volkswagen, Kia Motors, Peugeot-Citroen and many others have built their
factories in Slovakia and export their production world-wide.
On one hand, this development means a relative decline of SMEs in exports statistics. However,
on the other hand, it is also an important business opportunity for them since large companies
often build cooperation clusters with local SMEs. This is evident in the case of German car-
making company Volkswagen.
III. Conditions for doing business for SMEs today and future prospects for SMEs in
Slovakia
Conditions for doing business for SMEs today
During several of the last few years, Slovakia introduced a wide range of far-reaching reforms
aimed at improving the business environment and increasing public sector efficiency:
1. Labour Market Reform
2. Flat Tax Reform
3. Pension Reform
4. Business Environment Reform
5. School System Reform
6. Health Care Reform
7. Fiscal Decentralisation Reform
Tax reform in particular has contributed greatly to improving conditions for businesses through
introducing an almost “revolutionary” change to the tax system which simplifies the current
system and institutes a reduced universal flat rate (corporate income tax, personal income tax,
VAT of 19 %).
These improvements re reflected in various rankings of Slovakia: 2005 Doing Business of the
World Bank announced Slovakia as the No. 1 country in the world for improvements to the
business environment. Its ranking also improved significantly in the 2004 Index of Economic
Freedom, compiled by the Fraser Institute, 2004 Competitiveness Ranking of The Swiss IMD
Institute, and in the 2004 Tax Misery Index published by The Forbes Magazine.
Since SMEs are usually more sensitive to unfavourable conditions than large companies, the
Slovak SMEs benefited greatly from the above mentioned improvements.
However, it does not mean that there is no space left for further improvements. The most serious
barriers to SMEs success are as follows:
1. High social security contributions
2. Relatively high burden of red tape
3. Lack of financing of early stages of business activities (seed and venture capital) ,
4. Inefficient judiciary and low enforcement of law
8
Future prospects of SMEs in Slovakia
Taking into account a relatively short history of the SMEs sector in Slovakia it is a relatively
consolidated segment of the economy, even when compared to other countries. In the following
two charts, Slovakia is compared to 15 EU old member countries plus Island, Norway,
Switzerland, and Lichtenstein. Qquantitative parameters of the Slovak SMEs are already
comparable to those of the most developed countries: the SMEs represent 99,8 % of all
companies, while their share of total employment exceeds 65 %.
% Share on Number of Total Companies
120
95,4 99,8 99,8
100 92,3
80
EU-19
60
SR
40
20
6,5 3,7
0,9 0,8 0,2 0,2
0
0-9 10-49 50-249 SMEs 250+
% Share of SMEs on Total Employment
80
69,7
70 65,9
60
50
39,4 EU-19
40 34,1
31 30,3 SR
30
17,4 16 18,9
20 13
10
0
0-9 10-49 50-249 SMEs 250+
Today Slovakia is successfully emerging from a period of difficult economic and social
transformation. Its economy underwent radical structural adjustments both at macro and micro
levels. It is well integrated within the world economy represented by the most developed
countries of the world.
Today it is creating a stable environment for SMEs. Favourable policies of the government are
putting Slovakia ahead of even more advanced economies in Europe. As a result, a strong
positive impact is expected as growth rates are expected to continue to increase and exceed 5 %
in coming years. All in all, future prospects for SMEs in Slovakia are highly positive.
9
ABOUT THE AUTHOR
MR. JÁN ORAVEC graduated in 1987 from Commenius University in Bratislava (Philosophy –
Political Economy), The Swinburne University of Technology, Melbourne, Australia in 1994
(Business Administration) and Southern Methodist University, Dallas, Texas, USA in 1993-1995
(Bank Management). In 1996 he received his PhD. degree in economics at the Institute of
Slovak and World Economy in Bratislava.
He started his professional career at the Institute of Economics of the Slovak Academy of
Sciences in 1987. In the beginning of 90-ies he was active in financial sector (financial manager
in investment fund, Director of the Investment Banking Dept. in Devin Bank, internships in Banc
One, Dallas, Texas, USA and Westpac Bank, Sydney, Australia).
In 1999-2002 Mr. Oravec was working as a Chief of Strategy at the Ministry of Economy of the
Slovak Republic. During that period he served as a chairman and member of various
Supervisory Boards (SSE, a.s., - one three regional electricity distribution companies, The
Slovak Guarantee and Development Bank, Transpetrol, a.s., Slovak Consolidation Agency,
Slovak Post-Privatisation Fund), a chairman of a Board of Directors (National Agency for
SMEs) and a vice-Chairman of the Government Council for Science and Technology.
In October 2003 he was elected as a President of The Entrepreneurs Association of Slovakia. He
is a member of a presidium of The National Union of Employers, he represents employers in the
European Economic and Social Committee, in the Slovak Council of Economic and Social
Agreement. He is also the member of the Economic Council of the Slovak Government, and
member of the Collegium of the Finance minister. He is a founding father of The F. A. Hayek
Foundation Bratislava (established in 1991) and The Slovak Taxpayers Association (1997). He is
an economic advisor, he writes articles, gives lectures, TV interviews, and public speeches on
various topics.
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