20% of SMEs generate more than half of the sector's profits | FinReview
13 March 2020

20% of SMEs generate more than half of the sector’s profits

As of February 1, 2020, 1.3 million SMEs are operating in Kazakhstan. However, more than 60% of their income is generated by only a fifth of enterprises. That is, the state needs new impulses to stimulate the business sector.

In the rapidly growing process of economic globalization, stimulating the growth of small and medium-sized enterprises is a key role. It is SMEs, due to their maneuverability and relatively small capital intensity, that are quicker and easier to adapt to changing market conditions. This is especially true during a period of growing competition in modern world markets.

What is the economic role of SMEs?

SMEs play an important role in the economy of any country, as it contributes to solving the problems of population employment, ensures the growth of export potential and the filling of the domestic market with consumer goods and services, increases tax revenues to the budget and increases the welfare of the population. Therefore, at the government level, the development of SMEs is given great importance, stimulating its growth, for example, due to various benefits and subsidies.

Obviously, the higher the share of SMEs in the country’s GDP, the higher the welfare of the population and the more rapidly developing economy. In developed countries, this share exceeds 50%, for example, in the UK it is 51%, in Germany – 53%, and in Japan – 75%. According to the results of 2019, the share of SMEs in GDP in Kazakhstan amounted to 29.5%. The government plans to achieve a 50% target by 2050.

As of February 1, 2020, about 1.6 million SMEs were registered in Kazakhstan, of which 1.3 million were active. In comparison with 2019, the number of operating SMEs increased by 4%.

Among them, the share of individual entrepreneurs was 64%, small legal entities – 19.7%, peasant or farm enterprises – 16.1%, medium-sized legal entities – 0.2%.

Recall that small businesses include enterprises with an average annual number of employees of no more than 100 people and an average annual income not exceeding 300,000 times the monthly calculated indicator.

The subjects of medium business are companies with an average annual number of employees from 101 to 250 people and an average annual income above 300,000 MCI, but not exceeding 3,000,000 MCI.

It is noteworthy that the highest average annual growth in the number of enterprises is shown by legal entities of small business, their growth amounted to 11.4%. And the number of medium-sized enterprises, on the contrary, has been declining annually on average by 12% since 2012. Given that almost half of medium and large enterprises are either state-owned or associated with them, reducing their number is aimed at stimulating the competitiveness of the economy through private business.
As a result, the share of enterprises’ own funds in the structure of investments in fixed assets for the year increased from 73% to 90%. So, as of February 1, 2020, the volume of investments in fixed assets of SMEs amounted to 198.6 billion tenge. That is, SMEs are already demonstrating high financial stability.

Nevertheless, in the territorial distribution, the business sector is developing unevenly. Most business activity is concentrated in the city of Almaty, Turkestan region and the city of Nur-Sultan. In these regions, SMEs generate more than 35% of the gross regional product, over 50% of budget revenues and provide jobs for more than half of the economically active part of the population. So, in the city of Almaty, 190.2 thousand SMEs are concentrated, which formed 39.9% of GRP, more than 65% of tax revenues and provided jobs for 7 out of 10 economically active parts of the population. The SMEs of the Turkestan region generated 35.8% of the funds in the GRP structure and provided jobs for 214.8 thousand people, while the enterprises of the Nur-Sultan city generated 48.6% of the GRP and created 363.1 thousand jobs.

The least entrepreneurial activity is concentrated in the North Kazakhstan (29.9 thousand enterprises), West Kazakhstan (42.6 thousand enterprises) and Akmola regions (44.9 thousand enterprises).

Only a fifth of the current SMEs are profitable

The most attractive type of entrepreneurial activity in the country is wholesale and retail trade. A third of SMEs or about 442 thousand enterprises are involved in this area. Following trade, agriculture, forestry and fisheries are very popular – almost 252 thousand enterprises operate in the field. Closing the three leaders of the operation with real estate, which involved about 81 thousand enterprises.

The current structure of SMEs, in which more than 60% of entities are represented as individual entrepreneurs, does not ensure the development of the services sector as a whole. So, in the first nine months of 2019, the volume of production by SMEs amounted to 21.1 trillion tenge. At the same time, individual entrepreneurs produced only 7.7% of the products. The main volume of the issue, namely 87%, was provided by legal entities of small and medium enterprises. The remaining 5.2% came from peasant farms.

That is, individual entrepreneurs do not actually form market mechanisms. Moreover, only 20% of the total number of SMEs form more than 60% of the profit of the entire sector.

SMEs – untapped potential sector

The business sector, despite an increase in the number of SMEs and an increase in output, demonstrates low rates of development. The main factors restraining growth are:

Firstly, low labor productivity. So, for the nine months of 2019, the indicator amounted to 4.3 million tenge, while production of goods reached 5.7 million tenge, and services – 3.6 million tenge. The difference between the production of services and goods is associated with a more significant increase in employment in the material sector compared with the general increase in production.

Secondly, there is an imbalance in the regional development of the sector. So, in the republic, 71 enterprises of SMEs per 1 thousand inhabitants. The highest ratio is observed in the cities of Nur-Sultan (118 enterprises), Almaty (100 enterprises) and Atyrau region (77 enterprises), and the smallest – in North Kazakhstan (54 enterprises), Kyzylorda (57), Almaty (59) regions.

This uneven distribution is associated with the presence of imbalances in the legal regulation and procedures for registering an enterprise (the main criteria for the number of days and procedures for starting a business). For example, when registering an enterprise in the city of Nur-Sultan, it is necessary to go through 4 procedures, the duration of which is about 4.5 days, and in the Almaty region the number of procedures is increased to 6 with a duration of 6 days.

Thirdly, the investment potential is not fully disclosed. SME development is limited by a lack of financial resources. As a result, only 20% of enterprises account for more than 60% of sector profitability, while the remaining 1.1 million enterprises are developing at a slow pace. To accelerate their pace of development is possible due to investment income. However, over the past five years, investment activity in several sectors of the service sector has been gradually decreasing. At the same time, the largest decline was observed in the real estate business (-57.1%), information and communications (-28%), financial and insurance activities (-42%). That is, the business sector needs new mechanisms for the growth of investment income.

Fourth, enterprises prefer to maintain a small form and form of individual entrepreneurship. Moreover, the profitability of the sector is formed precisely by legal entities of small and medium-sized enterprises. Therefore, it is necessary to stimulate the sector through subsidies and benefits, which will increase the number of SMEs.

Investment is an impetus for entrepreneurship

The slowdown in the development of SMEs in Kazakhstan is explained by the transition from the agricultural economy, which formed a third of the country’s GDP at the beginning of independence, to an economy based on the extraction of mineral resources. As a result, this led to the concentration of SMEs in low-profile sectors, since access to more profitable sectors is limited by high barriers in the form of a lack of financial resources, qualifications, innovative developments, and high competition with more stable entities.

Under the conditions of a market system, stimulation of the growth of SMEs can be achieved through the influx of investments. The Astana International Exchange stock exchange operates in Kazakhstan, the potential of which will allow enterprises to gain access to new financial instruments and attract additional capital. In addition to cash flow, the influx of investments will allow SMEs to strengthen technical equipment, expand human resources and improve business mechanisms.