Strengthening Competitiveness of Small and Medium-Sized Enterprises and Enhancing Their Integration Into Regional and Global Value Chains in Kyrgyzstan
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Strengthening competitiveness of Small and Medium-Sized enterprises and Enhancing their Integration into Regional and Global Value Chains in Kyrgyzstan Savia Hasanova October 2019 2 Table of Contents EXECUTIVE SUMMARY ............................................................................................... 4 1. INTRODUCTION .................................................................................................. 11 2. OVERVIEW OF SMES DEVELOPMENT AND BUSINESS ENVIRONMENT ... 14 2.1. SMES’ CONTRIBUTION TO THE ECONOMY ....................................................................................... 14 2.2. GOVERNMENT POLICY FOR CREATING A FAVOURABLE BUSINESS ENVIRONMENT ............................... 18 2.3. CHALLENGES FOR SME DEVELOPMENT ......................................................................................... 20 3. DEVELOPMENT OF FREE ECONOMIC ZONES .................................................. 25 3.1. INTRODUCTION ............................................................................................................................. 25 3.2. GOVERNMENT POLICY FOR FEZS DEVELOPMENT ........................................................................... 26 3.3. CHALLENGES IN FEZS DEVELOPMENT ........................................................................................... 29 3.4. RECOMMENDATIONS FOR FEZ DEVELOPMENT IN KYRGYZSTAN ....................................................... 32 4. CLUSTER APPROACH TO SME DEVELOPMENT ........................................... 34 4.1 RATIONALE AND DEFINITION OF CLUSTERS ..................................................................................... 34 4.2. GOVERNMENT POLICY FOR INTRODUCING CLUSTERS ...................................................................... 36 4.3. POLICY GAPS IN BUILDING CLUSTERS ............................................................................................. 37 4.4. ANALYSIS OF CLUSTER-EMERGING INITIATIVES IN KYRGYZSTAN ...................................................... 39 4.5. REVIEW OF EMERGING CLUSTER INITIATIVES IN OTHER CIS COUNTRIES ........................................... 45 4.6. RECOMMENDATIONS FOR INTRODUCING A CLUSTER APPROACH IN KYRGYZSTAN .............................. 50 5. DEVELOPMENT OF TRADE LOGISTICS CENTRES ....................................... 55 5.1. INTRODUCTION ............................................................................................................................. 55 5.2. GOVERNMENT POLICY FOR TLCS DEVELOPMENT ........................................................................... 56 5.3. PROBLEMS AND CHALLENGES ENCOUNTERED IN TLCS DEVELOPMENT ............................................ 61 5.4. RECOMMENDATIONS FOR TLC DEVELOPMENT ............................................................................... 62 6. REGISTRATION, LICENSING AND TAXATION OF SMES ................................. 65 6.1. INTRODUCTION ............................................................................................................................. 65 6.2. REGISTRATION OF BUSINESS ......................................................................................................... 66 6.3. LICENSING ................................................................................................................................... 67 6.4. TAXATION OF SMES AND THE PATENT SYSTEM .............................................................................. 69 6.5. RECOMMENDATIONS TO IMPROVE “PATENT” TAXATION .................................................................... 73 3 Glossary ADB – Asian Development Bank ALPI – Aggregated Logistics Performance Index CEI – Cluster-emerging Initiatives CIS – Commonwealth of Independent States EDF – Entrepreneurship Development Fund EAEU – Eurasian Economic Union ESCAP – Economic and Social Commission for Asia and the Pacific FAO – Food and Agriculture Organization FDI – Foreign Direct Investment FEZ – Free Economic Zone GDP – Gross Domestic Product GIZ – German Federal Enterprise for International Cooperation ICT – Information and Communications Technology IFAD – International Fund for Agricultural Development KOICA – Korea International Cooperation Agency JICA – Japan International Cooperation Agency MFI – Micro-financial Institutions OVOP – One Village-One Product RKDF – Russian Kyrgyz Development Fund SME – Small and Medium-Sized Enterprise TLC – Trade Logistics Center UNCTAD – United Nations Conference on Trade and Development UNDP – United Nations Development Programme UNESCAP – United Nations Economic and Social Commission for Asia and the Pacific UNIDO – United Nations Industrial Development Organization VAT – Value Added Tax WB – World Bank WTO – World Trade Organization 4 EXECUTIVE SUMMARY Sustainable development of small- and medium-sized enterprises (SMEs) is an essential driver of Kyrgyzstan’s economic development. SMEs stimulate domestic demand, facilitate competition and are more likely to generate innovations than larger firms. The SME sector is flexible in reacting to economic changes and is able to efficiently utilize labour and existing infrastructure. Given the high poverty rate and significant level of economic inequality in the country, the SME sector can be considered as one of the most important sectors of the Kyrgyz economy and has great potential to solve many of social problems, create new jobs and generate income. This study presents a comprehensive overview of the approaches to strengthen the competitiveness of SMEs and enhance their integration into regional and global value chains in Kyrgyzstan. The study reviews the policies implemented for the development of SMEs during the past decade, including efforts to improve the business environment, development of clusters, trade logistics centers and enhancing the role of free economic zones. The study also discusses current issues related to building a favourable business environment for SMEs, focusing on taxation, registration and licensing. The study concludes by observing that, despite the continuous attempts to reform the business sector, experience shows that not all of these reforms have been successful in practice. Lack of communication among relevant government agencies, lack of strategic design, absence of sustainable sources of finance and many institutional problems did not allow for the effective implementation of the above-mentioned initiatives. The study recommends the implementation of a consistent and interlinked policy for the development of free economic zones (FEZs), which can be further transformed into clusters of highly competitive SMEs. As in the case of FEZ development, the cluster approach needs to be complemented by appropriate policy reform, trade capacity building, private-public dialogue, regional economic development, and workforce development. Another important component of SMEs and cluster development is the establishment of trade logistics centres (TLCs). It is proposed that the logistic centers will subsequently be integrated into logistic chains that will perform transport functions for economic clusters, thus reducing transportation costs and boosting overall productivity of SMEs. Optimization of taxation, particularly of a “patent” taxation system, and introduction of tax incentives must be consistent with the above mentioned approaches. It is necessary to reduce the number of administrative barriers, including tax administration, and identify optimal procedures for SME registration and licensing, especially within the proposed FEZs and clusters. SMEs create jobs, but do not boost productivity in the formal sector For the past decade, SMEs’ contribution to the Kyrgyz economy has varied – from 46% in 2008 to 39% in 2017. According to preliminary data, in 2018 there were over 400,000 SMEs in Kyrgyzstan, including individual entrepreneurs, and around 5 430,000 peasant farms. Individual entrepreneurs contribute the highest share of SMEs value-added of GDP – over 24%, while the contribution of all SMEs to GDP amounted to 41.5%. SMEs are one of the main drivers for the creation of new jobs in the country. During the past ten years the number of SMEs has grown on average by 5.8% annually, mainly because of the increase of individual entrepreneurs. The majority of SMEs are run by male managers, while female managers account for one third of SMEs. With respect to SMEs contribution to international trade, they constitute 35% of Kyrgyzstan’s total exports, and the main destination for SMEs’ export are member States of the Eurasian Economic Union. The average contribution of the SME sector is relatively high compared to other Central Asian countries (for example, in Kazakhstan and Tajikistan SMEs contribute less than 30% of GDP). However, the problem with SMEs development in Kyrgyzstan is that the sector employs more and more people without resulting in significant expansion of economic contribution and productivity. In 2001, the share of employed population in SMEs sector was 12.6%, while in 2017 it reached 20.3% and the number of employees increased two times. Meanwhile, the SMEs’ contribution to GDP declined by 6%. A deeper analysis suggests that SMEs do not have stimulus for growth. Even though there are no formal barriers to starting SMEs, there are barriers which restrain SME growth. Small companies have a higher liquidation rate and are reluctantly transformed into medium-sized companies. Small companies, which have almost the same size as medium-sized ones, do not create additional