Formation and Development of Small Business in Georgia

Eter  Kakulia

Journal number 1 ∘ Eter Kakulia ∘
Formation and Development of Small Business in Georgia

Summary

The research article covers the issues of small business formation-development in Georgia.

The period from the 90s until the present is presented in six stages. The main pursued activities are outlined and the advantages and shortcomings of each stage are briefly described.

In order to overcome the shortcomings in the field of small business formation-development, suggestions and opinions are expressed in the form of conclusions in the research article.

Key words: small business; strategy for development; innovative small business; stage; period.

Introduction

The role of small businesses is especially large during the transformation of the economic system, since it is an important factor in the reduction of unemployment and economic stabilization at all. These very opportunities for small businesses were the basic condition for avoiding the demonstrations of social character during the transformation of the economy in Georgia.

The weakness of small business is revealed in the shortage of resources, the difficulties of getting investments, etc. This necessitates the need for effective state support. It is of paramountvimportance for similar countries of Georgia to establish small state-backed state institutions aimed at ensuring the realization of small business advantages in the country's economy and promoting active development.

* * *

The formation of small businesses in the former Soviet republics and Georgia among them started from the privatization process. Thus, the first step in the formation and development of small business in Georgia can be recognized the period from 1991-1998. During this period, the laws and the government's resolutions promoting the establishment of private sector in the country have been adopted in Georgia, among them are the following laws: "On Entrepreneurship of State Enterprises in the Republic of Georgia" (1991), "On Entrepreneurship of State Enterprises in the Republic of Georgia" (1991), "On Entrepreneurs" (1994) and Government Decisions: "Approval of Regulations on State Enterprises" (1992) On Approval of Temporary Regulations on Equity "(1992)," Individual Entrepreneurship and Individual Enterprise On Approval of the Statute Regulations "(1993)," On Approval of Regulations on Limited Liability Society ", etc.

According to the law adopted in Georgia in 1991 and : "Privatization of state enterprises in the Republic of Georgia" and according to other normative acts the privatization of state property began with the small soviet enterprises; Georgia was the first country in the post-Soviet space, in October 1991, performing the open public trading auction on the first act of privatization, privatization of the shop "Goliath". Mass privatization of small enterprises reached its peak in 1995-1996. It is in these years that small business skills are able to promote social and political stabilization during the economic crisis and employ the population. In these years, small businesses have been identified as an asset factor in terms of establishing social and political stabilization and citizens’ employement during the economic crisis.

In accordance with the Law on Entrepreneurs (1994), private enterprises established under the Law on Entrepreneurship until 1 March 1995 were re-registered until January 1, 1996. Registered joint ventures were transformed into limited liability companies. Based on the abovementioned requirements, the Cabinet of Ministers of Georgia adopted a resolution on April 11, 1995 (# 196), which would provide the re-registration of enterprises. Registration was not in local governing bodies (City Hall, Board), where the enterprises underwent primary registration and did not pay large amount of unauthorized or unauthorized expenses, but through the Regional Courts through the Neighborhood in Public Register (being created in 1994). For secondary registration start-up entrepreneurs needed to re-charge new fees, change of documents, stamp and stamp preparation and other expenses. Many newly established small firms were not registered for time due to lack of finances and were declared annulled. The re-registration of enterprises facilitated the law abidance of their activities, but on the other hand, it appeared to be the obstacle for formation small business.

Until 1999, according to the methodology of the State Department of Statistics, the number of employed workers in the sectoral scope was the criterion for assessing small enterprises.

Small enterprise covered: Industry, agriculture, transport, communications enterprises, where the number of employees were more <50 person were employed;

In construction < 35; Education and scientific profile organizations <30;

Wholesale and retail trade and services field < 20 and other organisations <25 employed (i.e enterprises where the number of employees was < 50 considered to be small)

The second stage of small business formation-development begins since 1999 and lasts up to the first half of 2002. One of the hindering factors of small business formation in the country could be considered the fact that the concept of small enterprise regulated by law, its assessment criteria and their statistical values did not exist until 1999. On July 23, 1999, the Law on Support of Small Enterprises was enacted in Georgia, with the estimation criterion of small enterprises, along with the number of employees, the annual turnover indicator of the enterprise, whose statistical value did not exceed the following margin: In the industry - 40 employees and 500 thousand GEL; In construction - 20 employees and 300 thousand GEL; Transport and communications - 20 employees and 200 thousand GEL; In agriculture - 20 employees and 150 thousand GEL; Wholesale and retail trade - 10 employees and 50 thousand GEL; In education, health and culture - 25 employees and 60 thousand GEL; During the implementation of other types of economic activity - 15 employees and 100 thousand GEL (ie small business was defined by two criteria - the number of employees and the annual turnover, whose statistical values were determined from 1 to 40 persons and 500 thousand GEL annual turnover).

The third stage of small business formation-development starts from the second half of 2002 and lasts up to the first half of 2006 In 2002 the Law on making amendments to the law “On Small Business Support” was adopted (July 4, 2002, No. 1641), which stated that "small and medium enterprises in the territory of Georgia belong to all the organizational and legal forms of enterprises established in accordance with the Law of Georgia on Entrepreneurs, in which the average annual number of employees and whose annual turnover does not exceed the following margin levels:

A) for small enterprises - 20 employees and 500 thousand GEL;

B) For medium enterprises - 100 employees and 1500 thousand GEL ".

The law "On Small Enterprise Support" was called the Law on Small and Medium Business Support.

It is noteworthy that the determination the size of small and medium enterprises as well, was not justified. The practice demonstrated that the above mentioned law did not respond and meet the standards of time.

The fourth stage of small business formation-developmentcovers the period from the second half of 2006 until the entry into force of the new tax code (2011).

The Government's strategy was to put all forms of business on equal terms, which led to the law "On Small and Medium Business Support" (2002) was abolished in July 2006, and the definitions on small and medium enterprises were moved to the law on "National Investment Agency of Georgia".

At the same time, the government's decision to reverse the state support for small and medium business development was abolished. The Liberal Economic Course has been declared by the government, which states that all sectors of the economy are governed by free market laws only, that the state does not give priority to one sector and allocates a single tax regime for all enterprises.

Under the same tax policy, small entrepreneurship failed to compete with the big business and its share gradually decreased in the business sector. Although the number of registered new enterprises has increased during this period, however, this does not cause significant changes in the output indicator.

The fifth stage of small business formation-development− This is 2011-2014 years. According to the new Tax Code of 2011: Microbusiness Status may be granted to a physical person who does not use the employed individual force and independently performs economic activity from which the total gross revenue earned by him does not exceed 30,000 GEL during the calendar year.

Small business status may be entrusted to an entrepreneurial individual whose joint income from economic activity does not exceed 100,000 GEL during the calendar year.

Micro business is a new form of business in Georgia. Business formation existed in Georgia today are adequate to the EU business formations (micro, small, medium, large), but we cannot say this considering quality or quantitative terms.

Apparently, in the Law “On National Investment Agency” (2006) and in the "Tax Code" (2011) small business characteristics are radically different. It turns out that these two laws have the same economic phenomenon - "small businesses" is being granted the status of different characteristics. According to the Tax Code [Chapter XII] by the introduction of micro and small business status and tax privileges, there was no substantial change in the establishment of its place in the economy.

Small business share in GDP, which was within the range of 7-8%, has not changed much. As for the release of micro business taxes, it is not practically innovative, because the entrepreneurs of this category do not pay taxes.

Starting from the end of 2014, the sixth period of exceptional importance in the formation and development of small businesses for Georgia begins and continues till today.

There is a significant period in relations between the EU and Georgia. On September 1, 2014, a large part of the Association Agreement between the EU and Georgia - Deep and Comprehensive Free Trade Agreement was launched in advance. On December 18, the European Parliament voted for a majority vote, reaffirming support for the association process. These mentioned documents make many preconditions for Georgia's accession to the European Union.

Introduction the Small Business Development Promotion Policy is one of the main requirements set by the EU toward partner countries. Although EU integration in Georgia is considered to be the strategic direction, the principles and instruments of EU policy have not yet been implemented in the national economy of the small business. Today, the country has a large capacity to sustain the economy and its primary business - by developing the Association / Deep and Comprehensive Free Trade Agreement.

Based on this, significant activities have been carried out since 2016, small and medium entrepreneurship development strategy has been developed for 2016-2020, which reflects the development of small and medium entrepreneurship: Including improvement of access to finance for small and medium entrepreneurs; Improvement of entrepreneurial training in accordance with EU practice; Carry out specific support measures to encourage innovative entrepreneurship; Develop new instruments for promotion of export.

Specific supporting measures have already been made for the development of innovative entrepreneurship. Necessity requires the introduction of innovative small enterprises. In the EU, an innovative small enterprise must meet the following standards:

· For the past three years, one year spending on research and development has to exceed 15% of turnover;

· The respective Member State (its competent agency) must confirm that the production and operation of the enterprise is competitive in the EU market.

· The enterprise is considered to be young if it is not of more age than 6 years since its foundation. [T. Vashakidze, 2010]

The economy, which has decision to go through innovations, cannot ignore the small innovative enterprises that are the guiding force of introduction new technologies and innovations in economy.

The strategy aims to create a favorable environment for small and medium enterprises, enhance their competitiveness and innovation capabilities, resulting in revenues and job growth and consequently, achieving inclusive and sustainable economic growth. For the purposes of the strategy, it is predicted that by 2020 production of small and medium enterprises should increase by 10% on average. In addition, the growth of employees in small and medium enterprises should be 15%. By 2020 production growth should be 7% [the Small and Medium Entrepreneurship Development Strategy 2016-2020].

According to the Reformer [https://reformeter.iset-pi.ge/ka], the target indicators planned for the 2020 under the Strategy have already been completed in 2016.

	2016	2020
Annual growth of small and medium enterprises production	14.8%	10%
Increase of employees in small and medium enterprises	20.5%	15%
Increase in productivity of small and medium enterprises	19.6%	7%

From April 2017, a new methodology of determining the size of enterprises according which:

The enterprise where the annual average number of employees exceeds 249 persons or average annual turnover - 60 million GEL belongs to the large enterprises.

All organizational-legal enterprises where the average annual number of employees varies from 50 to 250 people, and the average annual turnover - from 12 million GEL to 60 million GEL belong to medium enterprises.

All organizational-legal form, where the average annual number of employees does not exceed 50 employees and average annual turnover - 12 million GEL belongs to small enterprises. From 2018 it has been planned that all institutions will move to a new methodology, which will enable to compare Georgia with other countries. Methodology, according to which the small, medium and large business characteristics are determined in Georgia are, at first glance, lack of credibility.

Today Georgia actively participates in the Eastern Partnership of Small and Medium business areal and collaborates with the Organization for Economic Co-operation and Development (OECD), European Education Fund (ETF), European Bank for Reconstruction and Development (EBRD) and other international organizations with small and medium entrepreneurship development strategies, in order make improvements according to international and European practices.

Conclusion

The first stage of small business formation-development is characterized by the massive privatization of small soviet enterprises; The Second and the third stage was characterized by the attempt to establish and improve the legal regulation system; The fourth stage by declaring the Liberal Economic course by the Government, according to which the Government imposes a similar tax regime for all size enterprises; Fifth stage by an attempt to adopt the experience of developed countries where only the status of micro and small business and introduction of tax benefits were determined in the Tax Code [Chapter XII]. Today is the sixth stage - the full recognition of the experience existing in the European Union, which has demonstrated that the Strategic Development of small and medium enterprises for 2016-2020 has been developed in line with challenges in the Association / Deep and comprehensive Free Trade Agreement.

The study shows that the Georgian governments have not unimportant approach to the small business development, which is due to the fact that it has been neglected and has not yet resolved its legal regulation.

The issue of promoting innovative small businesses remains to be out of interest in Georgia today. An innovative small business for Georgia’s economy shall be defined or the definition of EU shall be recognized. It is necessary for the state to encourage innovative products manufactured in small enterprises.

Today, in order to strengthen the relationship between science, education and business (private sector) in Georgia the coordination center of these organizations (Science, Education and Business Coordination Center) should be established. The aim of the organizations will be to establish links between science, education and private sector. This will form the foundation of the formation of national innovation system. The latter should support the innovative potential of the country, import innovation in technologies.

Micro-business is not defined by the methodology for calculating the main indicators of business statistics developed in Georgia in 2017. We think that amendments should be made to the tax code on the formation of the micro business status. Its parameters will be defined by the average annual income of 500,000 GEL, the number of employees up to 5 persons.

A coordinating organization (Small Business Administration (Mb) and Small Business Development Unified National Fund should be created in the country to support small business development. They should ensure the emergence of existing problems in small business development and the problem of small business in the field of access to finances.

Today, it is necessary to regulate small business development. The law (or the package of laws) should be adopted on the development of small business that will regulate all legal issues related to it.