Executive summary
Small and medium-sized enterprises (SMEs) play an important role in Georgia’s economy, accounting for 65% of total employment and 59.3% of value added in 2019, up from 58.1% in 2015. However, they remain mostly concentrated in low-value-added sectors, and their productivity is still well below EU levels. Moreover, Georgian SMEs have been particularly affected by the COVID-19 crisis, notably because of their over-representation in hardly hit sectors such as services and tourism, and higher risk of liquidity shortages. By end 2020, some 5.4% of small and 2% of medium firms were reportedly permanently closed (against 0.4% of large ones), while 82% and 86% of small and medium firms, respectively, had experienced decreased liquidity or cash flow availability since the pandemic outbreak (against 68% of large firms). Dedicated and comprehensive policies for the SME sector are therefore needed, both to sustain a strong, inclusive, green and resilient recovery, as well as to further foster the development of the SME sector in the long run.
To this end, the OECD has assisted the Government of Georgia in designing policies based on the assessment of the current state of play, taking stock of the progress achieved and identifying remaining challenges to i) prepare Georgia’s new SME Development Strategy 2021-2025 and its first related Action Plan, and ii) accelerate the digital transformation of SMEs.
Part 1 focuses on the work conducted on the SME Development Strategy 2021-2025 and its first Action Plan, providing an overview of the main issues identified by the OECD for each of the Strategy’s seven dimensions, as well as policy recommendations for future action plans and key performance indicators (KPIs) to monitor implementation progress.
Georgia has considerably improved its institutional framework and operational environment, e.g. through the expansion and formalisation of public-private participation in policymaking, fast-growing availability and use of e-government services, and the long-awaited reform of the insolvency framework. However, the spike in business failures resulting from the pandemic calls for actions to promote restructuring and entrepreneurial fresh starts. Awareness-raising initiatives on changing regulations could be stepped up to help SMEs keep track of new legislations, and SME statistics could be further broadened, using OECD databases as examples.
Several steps have been taken to foster the development of entrepreneurial skills and culture, including the creation of a labour market information system, non-formal learning initiatives, and the introduction of entrepreneurship in national school curricula at all levels of education. Yet there is a persistent skills mismatch, and little co-operation between enterprises and Vocational Education Training (VET) institutions. Given the rise of economic lay-offs, Georgia could consider measures to help laid off workers transition to new jobs, strengthen industry/VET schools linkages, and foster digital skills development.
Access to finance for Georgian SMEs is improving, thanks to more favourable credit conditions, measures to develop alternative bank financing, and initiatives to foster financial literacy (e.g. a dedicated National Strategy and guidebooks for entrepreneurs). Alternative and digital finance solutions could be further developed through the enhancement of the legal environment (e.g. regulatory sandboxes, legal definition of business angel, harmonisation with advanced EU Venture Capital (VC) regulations, etc.). Further steps could also be taken to prepare for the post-COVID era, to adapt financial support instruments and address the risk of a solvency crisis.
On SME internationalisation, SME exports have been increasing (+41% since 2015), which goes in line with improvements in the overall trade environment reflected in the OECD Trade facilitation indicators. However, exports remain mostly directed to neighbouring markets, little diversified and low value-added. Exports to the EU are increasing, but slower than exports towards neighbouring countries. More could be done to tackle persistent information barriers and improve knowledge of market opportunities and requirements (e.g. export help desks), reduce high shipping costs and delivery times to EU countries (e.g. warehousing options), and develop e-commerce. Trade financing options could also be considered to overcome specific financial barriers experienced by exporting companies.
Georgia has strengthened its policy and legal framework for innovation by adopting a dedicated law and expanding its innovation infrastructures and financing tools. Yet spending on research and development remains well below OECD levels, and support for innovation in non-IT sectors is still limited. Moving forward, Georgia could introduce indirect financial incentives for innovation, demand-side policies, and financing tools targeted at supporting the digitalisation of non-IT sectors.
The overall environment for women entrepreneurs has improved via the creation of a sub-committee on women entrepreneurship, the introduction of gender-sensitive measures in recently adopted laws, and the enhancement of women participation in support programmes. However, women still encounter more difficulties in accessing finance, and data show a persistent gender gap in employability and wages. Conducting regular studies on barriers to women entrepreneurship and awareness-raising activities could help tackle remaining stereotypes and issues.
The Government is making increasing efforts to promote the green economy development through various policy documents, as well as green measures implemented in response to the pandemic. However, Georgia should adopt an overarching vision for green growth by setting concrete definitions and policy goals, and foresee measures tailored to SMEs, e.g. in terms of efficiency and awareness-raising. Tasking Enterprise Georgia with leading support for SME greening would help improve co-ordination and outreach.
Part 2 delves deeper into the topic of digitalisation, as the latter can be a driver of structural transformation for SMEs. Digital technologies can help increase SME productivity through easier access to strategic resources, broaden the customer base, achieve scale and capitalise on network effects. The potential of digitalisation remains however untapped, especially among SMEs whose levels of technology uptake lag behind that of large firms. The report assesses the current state of play in terms of framework conditions, such as broadband connectivity, the regulatory environment and digital literacy, and SME digitalisation, looking at past policy achievements and upcoming measures, and outlines policy recommendations for each of these aspects.
Georgia has provided efforts to develop an institutional and policy framework for the digital transformation. Adopting a comprehensive National Digital Strategy would help define clear objectives and measures, and increase co-operation between stakeholders. In that regard, the Government of Georgia could task one of the existing SME agencies with leading support for SME digitalisation to increase policy efficiency and outreach.
In terms of framework conditions, Georgia appears as one of the most connected countries of the Eastern Partnership. Affordability, especially of fixed broadband, and speed remain an issue. Fostering competition, investment and innovation while strengthening the demand-side could help. The legal and regulatory framework in place, enhanced by a national regulatory authority, would benefit from further harmonisation with EU standards and the adoption of a dedicated e-commerce legislation. Digital security and data protection could be improved by strengthening incident response capacities, stepping up dedicated initiatives and completing the legal framework. As for digital skills, Georgia has implemented several policy initiatives, but still lags behind EaP and OECD peers. Additional measures could be considered, such as conducting regular digital skills needs assessment and gathering all training initiatives in a single place.
As for support programmes targeted at SMEs, Georgia has put considerable effort in supporting the emergence of “digital-by-default” firms, through both financial and non-financial tools (e.g. infrastructure development, training, and networking). Yet initiatives for the digital transformation of “traditional” sectors are relatively scarce. This Note provides a blueprint to fill this gap, suggesting policy options to raise awareness of the benefits of digitalisation, enable firms to carry out a diagnosis of their digital maturity and needs, provide tailored financial and non-financial solutions, and ensure coordination and cooperation within the digitalisation ecosystem.