Background Information: Support to Small and Medium-Sized Enterprises in Ukraine

This call for proposals seeks to enhance small and medium-sized enterprise (SME) competitiveness and growth in selected regions of Ukraine and responds to Canada's recent commitments to help restore economic stability in Ukraine. It is also aligned with the overall objective of the Ukraine Development Strategy of Foreign Affairs, Trade and Development Canada (DFATD) to promote sustainable economic growth in a strengthened democracy. DFATD's Ukraine Development Program contributes to maintaining economic stability and promoting sustainable economic growth, with the objective of increased and more inclusive private-sector-led growth, investment, and job creation. To achieve this, Canada prioritizes support to the innovation and growth of SMEs and the facilitation of effective and participatory local economic development. Strong growth in SMEs can contribute to poverty reduction and cushion the harsh impacts of the economic and political transition that Ukraine is now experiencing. Support to Ukrainian SMEs, especially those managed by women, can help them become a driving force for economic growth through the adoption of new technologies and modern business management practices, attraction of investment, and exploration of new markets.

Context

Ukraine achieved independence in August 1991 upon the dissolution of the Soviet Union. However, 24 years later, it is still struggling to consolidate democracy within a functioning free-market economy. From 1992 to 2012, Ukraine's gross national income (GNI) per capita (in current US dollars) increased from US$1,420 to US$3,500. By comparison, over the same period, Poland's GNI per capita increased from US$2,030 to US$12,660 as a result of deep and broad democratic and economic reforms. According to the World Bank, the stunted condition of the private sector in Ukraine is one of the main explanations of its poor growth performance.

Ukraine: key facts and figures

Table 1: Key facts and figures

Region: Eastern Europe
Administrative division: 24 oblasts (regions), one autonomous republic of Crimea, and two cities with special status.
Income category: Lower middle income
Population: 45,489,600
GNI per capita: US$3,960
Doing Business 2015 rank: 96
SMEs out of all enterprises (2013): 99.8 percent
SME turnover (2013): 57.6 percent
SME employment (2013): 67.8 percent

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SME sector

SMEs constitute 99.8 percent of Ukrainian enterprises, but their contribution to the economy is estimated at only 15 percent of the country's GDP, compared to the European average of 50-70  percent. The SME sector is very heterogeneous, dominated by single entrepreneurs and microbusinesses which have low productivity and remain confined to local markets. Ineffective state policies and failure to implement key business reforms at both national and local levels have discouraged private sector development, foreign and domestic investments, and job creation in Ukraine.

An innovative SME sector can contribute to productivity growth, challenge the current oligarchic networks in Ukraine and enhance the country's competitiveness in the global markets.

In 2012, the Government of Ukraine brought its classification of SMEs into alignment with the European Union (EU) definition for comparability of statistics, although the EU definition uses three criteria (annual number of employees, turnover or balance sheet total) instead of two. The SME definition in Ukraine is summarized in the table below.

Table 2: Classification of SMEs in Ukraine
Enterprise categoryAverage annual number of employeesAverage annual gross income from sales (at the National Bank of Ukraine rate)
Single/micro0–10≤€2 million
Small10–50≤€10 million
Medium51–250≤€50 million
Large>250>€50 million

The SME sector in Ukraine has the potential to facilitate economic growth, investment and job creation. Entrepreneurship is an effective mechanism of poverty reduction that stimulates the creation of a middle class through people's self-employment and small-enterprise development.

Business environment and economic framework in Ukraine

In addition to a number of adverse economic and political factors such as macroeconomic instability, the military crisis in the east of Ukraine, and the annexation of Crimea by the Russian Federation, the SME sector analysis defines a number of specific conditions and challenges that impede SME development in Ukraine:

  • Corruption and fraud in business and public authorities
  • Unfavourable regulatory framework and high administrative burden
  • Limited access to finance
  • Outdated and ineffective business-support infrastructure
  • Inefficiency of business protection in courts
  • Low entrepreneurial culture and literacy
  • Monopolization of markets and lack of competition
  • Lack of comprehensive state policy in support of SMEs

Nevertheless, there are significant opportunities to strengthen SMEs due to a well-qualified labour force and the entrepreneurial nature of Ukraine's population. Ukraine has universal literacy and high school enrolment: the combined gross enrolment ratio in education for both sexes was 90 percent in 2009, higher than in some Organisation for Economic Co-operation and Development (OECD) countries.Footnote 1

Prospects for deregulation and SME development

The Government of Ukraine has committed to undertaking a number of fundamental reforms to restore the macroeconomic and financial stability of the country and facilitate economic growth. In particular, it has begun to implement a broad-based deregulation and entrepreneurship development reform to enhance economic dynamics and to facilitate investment. The Parliament of Ukraine is considering improvements to the law on state assistance for the development of SMEs in Ukraine. The state oversight institutions are undergoing a major reform to eliminate excessive regulatory procedures and streamline government-to-business processes. In particular, the government's newly established Office of the Business Ombudsman is a step forward in the fight against corruption. It will work to create a fair, friendly business environment, improve transparency in regional business practices, develop local entrepreneurship, and attract investors. A new State Regulatory Service was set up in December 2014.

Gender equality

The SME sector is an important pathway to greater social and gender equality in Ukraine. In Ukraine, women represent 50.9 percent of all self-employed individuals. Women head 26 percent of small enterprises, 15 percent of medium-sized enterprises and 12 percent of large enterprises. Women-led or -owned enterprises predominantly represent trade and services, including the hotel and restaurant business. Such enterprises are usually smaller in size, in comparison to those led by men, and generate less profit irrespective of the economy sector or their size. Women entrepreneurs often face more regulatory barriers, higher rates of administrative inspections (for example, fire and sanitary inspections) and have more problems accessing credit. Apart from the gender dimension, SMEs have an important social role: they are an important enabler of the development and consolidation of a wider middle class in Ukraine, a social force that will hold an enduring interest in transparent and accountable governance.

Environment

SMEs and local economies are inseparably linked to environmental sustainability. SMEs function within the opportunities and constraints of local ecosystems, affecting the natural environment. The majority of Ukrainian enterprises do not have any environmental programs, "green" projects, or special recycling programs. The smaller the company, the less likely it is to have an environmental policy. Only about 10 percent of Ukrainian SMEs have clearly defined ecological standards, while in large companies, the percentage is as much as 40 percent. Big businesses quite often engage in environmental security projects, although they do not allocate substantial budgets for that. The use of alternative energy sources is not very common.

Governance

Governance is the fundamental crosscutting theme for all Canadian development programming in Ukraine. Canada's objectives for integrating a governance perspective into its international assistance programming are to:

  • enhance the accountability and transparency of partner countries' institutions and processes;
  • support citizens' participation to ensure ownership and sustainability in social and economic development processes; and
  • strengthen the capacity for equitable service delivery.

A strong capacity to manage public finances, respect legal contracts and deliver services, combined with transparency and accountability to citizens, are key factors to strengthen prospects for economic growth. DFATD's Sustainable Economic Growth Strategy addresses governance-related barriers to growing businesses and investing in people by focusing on building legislative and regulatory frameworks that enable sustainable growth.

Donor environment and aid effectiveness

A number of donors and international financial institutions are engaged in promoting sustainable economic growth in Ukraine. The United States Agency for International Development (USAID) works to develop private sector competitiveness by improving the business enabling environment, private sector capacity and workforce development. Significant support to Ukrainian SME associations is provided through the Center for International Private Enterprise office in Ukraine.

The EU provides capacity building support to government institutions and supports reforms as part of the prerequisites for implementing the EU-Ukraine Association Agreement and the Deep and Comprehensive Free Trade Agreement. Support to institutions responsible for the business enabling environment is an important part of this work. In 2011, Ukraine joined the EU's Small Business Act cooperation framework and is getting technical assistance for its implementation through the OECD, European Bank for Reconstruction and Development and European Training Foundation.

The World Bank Group, and the International Financial Corporation (IFC) in particular, is working to improve the business enabling environment in Ukraine. The IFC provides customized advice on improving and simplifying regulations, encouraging and retaining investment, and helping foster competitive markets, economic growth, and job creation.

The European Bank for Reconstruction and Development (EBRD) provides advice and mentoring to enterprises via the Business Advisory Services mechanism and Enterprise Growth Programme (EGP). These focus on strengthening companies' organization, management, operations, sales, marketing and finance. The EBRD contributes to the development of a sustainable infrastructure of business advisory services, as well as the improvement of the policy and regulatory environment for business through policy dialogue. As part of the EBRD's Gender Action Plan, the bank supports women's entrepreneurship through financial institution projects that increase access to finance for women-owned SMEs and women entrepreneurs, as well as addressing barriers that impede their access to credit, particularly in rural areas.

Footnotes

Footnote 1

Education at a Glance, OECD Indicators 2010

Return to footnote 1 referrer