Executive summary

Azerbaijan’s economy was significantly affected by the COVID-19 pandemic. In 2020, Azerbaijan’s gross domestic product (GDP) contracted by 4.3% due to the economic shock of the pandemic and related business closures. The crisis has had a particularly negative impact on small and medium-sized enterprises (SMEs), which remain an untapped source of economic development in Azerbaijan with only 14.9% share of value added and 45% share of employment in 2019. This is a significantly lower contribution compared to OECD and other Eastern Partnership (EaP) countries.

Since 2015, Azerbaijan made significant progress in improving the business environment for SMEs, by reforming the operational and regulatory environment and strengthening the institutional support for SME development through the establishment of the Small and Medium Business Development Agency and the Innovation and Digital Development Agency. However, a significant gap remains with regards to the digital transformation of SMEs. A discernible digital divide still exists within Azerbaijan, with relatively low levels of broadband connectivity and significant regional differences. Moreover, digital skills gap among the population and, in certain areas, the slow pace of regulatory environment reforms prevent more rapid adoption of digital solutions by SMEs and the general population. SMEs in Azerbaijan are also lagging behind regional peers and OECD members in adopting digital solutions and the range of support services offered for SMEs aimed at promoting digitalisation in non-information and communication technolgy (ICT) sectors remains limited.

While several strategic policy documents envisage implementation of policies supporting digitalisation, a national digitalisation strategy has not yet been adopted, which prevents a more comprehensive and co-ordinated approach to SME digitalisation. Digitalisation has the potential to help SMEs tap into new markets, lower operational costs, increase productivity and ultimately boost their profitability and competitiveness. Promoting SME digitalisation calls for measures that will improve policy co-ordination, enable SMEs to access digital infrastructure, improve regulatory environment, boost digital skills and provide SMEs with targeted financial and non-financial programmes boosting adoption of digital solutions.

Table 1. Summary of policy considerations: way forward
Objective	Recommendation	Way forward
Objective 1: Putting digitalisation at the centre of SME policy making	Leverage “Azerbaijan 2030 Vision” to boost SME digitalisation	Adopt a National Digitalisation Strategy that would set priorities and objectives for digitalisation, including for the SME sector Include digitalisation-specific policy actions in the mid-term strategies Establish process- and result-oriented key performance indicators (KPIs) for each policy action
	Improve co-ordination among institutions responsible for digital transformation	Establish a Digitalisation Commission that would bring together institutions responsible for the digitalisation agenda Promote policy coherence and co-ordination
	Improve data collection on SME digitalisation	Expand the range of collected SME digitalisation-related data Focus on diffusion of digital technologies among SMEs, cybersecurity and e-commerce Disaggregate data by enterprise size and sector where possible and relevant
Objective 2: Creating framework conditions for SME digitalisation	Improve SME access to digital infrastructure	Foster accessibility of broadband (quality and affordability) Reduce unnecessary regulatory barriers and promote competition and policies enabling investment into digital infrastructure Ensure independence of the recently established National Regulatory Agency and provide it with sufficient financial and human resources
	Strengthen the regulatory framework for digitalisation	Adopt a National Cybersecurity Strategy Foster adoption of cybersecurity measures by SMEs by, for example, establishing a national certification scheme for digital security Foster utilisation of e-government services and promote their inter-operability Increase financial inclusion and strengthen logistics for e-commerce Improve customer protection
	Support digitalisation skills development among students and general population	Conduct skills needs assessments accompanied by skills anticipation exercise Implement complex education programmes to increase general numeracy and science skills among students Develop policies to address digital skills requirements mong general population Increase awareness among SMEs and general population about availability of training and education opportunities
Objective 3: Promoting the adoption of digital solutions by SMEs	Promote digital culture and increase digital awareness among entrepreneurs	Implement programmes to promote digital awareness Communicate to entrepreneurs and managers the benefits and risks associated with the adoption of digital solutions
	Understand SME digitalisation needs	Deepen the scope of the survey implemented by the SMBDA among SMEs on barriers to their growth and operations Launch an online digital maturity self-assessment tool
	Reinforce provision of non-financial support services	Increase the provision of training and advisory services to boost adoption of digital solutions by SMEs Small and Medium Business Development Agency of Azerbaijan (SMBDA) could implement complex digitalisation-specific programmes combining financial and non-financial support
	Boost financial support for SME digitalisation	Improve ability of SMEs to access external financing Entrepreneurship Development Fund and SMBDA could consider expanding existing financial support programmes or launch new initiatives targeting SME digitalisation Improve regulatory framework to support the uptake of alternative sources of external financing
	Ensure high quality of provided support services	Systematically monitor and evaluate existing support programmes Ensure that selected external providers meet qualification criteria to deliver their tasks in the required quality SMBDA could provide SME development centres with methodological guidelines on the delivery of support services
	Leverage existing business and innovation support infrastructure to create eco-system conductive to digitalisation	Improve co-ordination among innovation agents and involve the private sector in the design and delivery of support programmes (e.g. business associations) Monitor all existing initiatives and direct SMEs toward relevant programmes