Small businesses are the essential part of an economy in most countries of the world. Economic growth levels of countries and innovation are directly related to small businesses.
They play a critical role in achieving sustainable domestic growth. It is known that 9 out of 10 jobs are small enterprises. In Azerbaijan a number of small enterprises are about 100 000 and it contributes to reduction of unemployment rate to a great extent. Enterprises mainly accumulated in retailing, construction, processing industry, trade, agriculture areas. Since 2014 Azerbaijan has entered new post-oil edge, to limit the dependence on oil sector. A recent slump in oil prices forced government to diversify the economy in order to maintain sustainable economic development. A primary way of getting additional money to the country lies on the development of small businesses and the support of the government on this matter.
However, if government can not implement effective programs in a timely manner, it will hurt small enterprises and will limit their further operations. The government lacks a certain action plan or strategy aimed at increasing entrepreneurship. Stimulation of the economy depends on applying these determinants and it would be helpful to stimulate economy. First of all, small enterprises should get more access to financial sources. There is different kind of financial institutions in the country such as banks, non-bank institutions, micro-lending firms that provide additional liquidity to the entrepreneurs. However, certain type of difficulties arises when they apply for getting additional money for their businesses.
The most widely used money borrowing system is banks. In the first step percentage of credit is afraid of entrepreneur with minimum 24% rate. Sometimes banks require the business owners to have a – collateral before lending them such as house or a private car. Because of Lack of complicated activities of banks, entrepreneur should collect needed documents from state agencies which can take a month to get. Even if the banks get the loans they are usually provided in small amounts or at higher rates. All of them are the main obstacles that stand in front of small businesses. Providing loans without any collateral or not requiring additional documents would speed up the process. From the banks’ perspective, it is indeed risky to lend to newcomers to the business since new small enterprises can be driven into corner quickly.
That is why while giving credit to them, their projects should be analyzed carefully by creditors of banks and credit institutions and decision should be made money is lent out or not. After this credit rates must be minimized, which will attract borrower and number of financial sources must be established and their capital should meet needed amount of the entrepreneurs. Other credit institutions such as- non-banking firms, local and foreign micro-lending firms also exist in the country; however the aggregate capital of all these firms totaled to 454.1 million AZN which is insufficient to finance most of the enterprises. Additional problem comes from these institutions that they mainly concentrated around the capital city. In rural regions people suffer from the lack of such credit institutions, those are the reason why fundamental increasing of business units and diminishing of unemployment did not notice in out of the Baku.
Additionally, the existence of National Business Promotion Foundation should be pointed out which provides loans at a much lower interest rates – 6 %. However, the overall amount of capital is small which is not sufficient to cover the needs of SME’s. In addition, the Foundation usually provides loans to real business projects rather than to new and small businesses. In current situation overall financial sources is limited and shortage of money for financing all SMEs is impossible. Thus, evaluations of SME would be reasonable. Furthermore, the Ministry of Economic Development and other related government agencies should help to get small businesses and their customer to the market by promoting free market mechanism. Research in various countries and regions would be high costly for small enterprises, because their own budget is not enough to find additional clients. Hence, support of government to enterprises is vital.
For example, the exhibitions in western countries in order to promote domestic products products and services of national business entrepreneurs are a great opportunity to enhance trade relationships with foreigners. Demand is the main factor on this stage that will motivate businesses to increase production. Following case is proof for that idea. An American woman who came to Azerbaijan to teach English soon noticed that there is a good business opportunity and as a result, started a business in textile industry. She helped Azerbaijan rural women to earn money with weaving which is traditional handicraft in this region. However, previously due to lack of demand and organized market, those women always sewed for themselves just to meet their own needs. Currently, Right now their handcraft socks are being sold in the US markets.
Recently, the government has taken important steps in order to motivate small entrepreneurship activity in the country. For example, the registration process of enterprises has been eased through the implementation of the single window principle that helps to register the businesses very easily. Since one window system applied, duration of registration procedure for new enterprises decreased from 53 days to 3-7 days and a number of procedures decreased from 13 to 5.
In Azerbaijan potential for tourism is great and government should pay particular attention to it by motivating businessmen to invest in this sector of the economy. For example, in neighborhood- Georgia people earn money with selling delicious food of Georgian cuisine, symbols of country, souvenirs. Local people rent their homes to foreigners and this is the main source of income of touristic zone population and local municipalities. In turn, an inflow of tourist spending is a great support for financing the national budget. Municipalities can finance some part of local projects with the money generated by tourism. Thus, Georgian experience can be learned and applied in our national entrepreneurship program. Another potential for small entrepreneurship is an agricultural sector where businesses can efficiently run.
Giving credits with lower rates, subsidizing their enterprises and increasing the amount of subsidy, supplying of seeds with lease, supplying of various fertilizers, help on buying technical instruments for plant are one of the significant points of agricultural enterprises suffer from. After this steps government should develop strategy that will support exporters with export credits, importers to reasonable rated import credits, supplying exporters and importers with government guarantee while taking credits from foreign financial institutions, ensuring exporters covering economic and political risks should be analyzed and make a decision. For example, ‘Chobani’ is national strained yogurt brand of the USA. The company had been established by Turkish immigrant who left his village to find life with high welfare.
When he wanted to found small agricultural business to produce yogurt he needed 800 000 $ for buying production facilities in South Edmeston, New York. But, there was a huge question mark – How to find 800 000 $. After doing some research he realized that firm does not need all of the money to start.
Since, there is government support to small enterprises in US, half of the needed amount was covered by the US Government and 320 000$ was provided by financial institutions. Founder- Hamdi Ulukaya injected only 10 % of initial capital. Right now that small enterprise turned to big company where more than 2000 employee works.
In 2012, ‘Chobani’ opened one of the world’s largest yogurt plants in the state of Idaho where he always points out that the state officials showed maximum support to open that plant there. State expects total economic impact of ‘Chobani’ business only in Idaho to be 1.3 billion $. In 2017 the company is listed by Fortune magazine among the ’50 companies that are changing the world’.
This case is an excellent example how the government support should help the SMEs to become a world renowned company. Insurance in agriculture stay as dead end yet. Some decrees issued about insurance early 2000’s, but they were only covering some piece of agriculture such as corn, sugar beet, vegetables, wheat, barley. According to decision, half of these crops were insured by government. Insurance package was only covering natural accidents such as fire, storm, flooding and freezing which is not enough and the biggest disadvantage of this package. A list of agricultural products financed by insurance includes only a certain part of crop products. Besides, small amount of funds are used to stimulate agricultural insurance. Records show that although 400 000 AZN and 550 000 AZN were allocated in recent years, only 7800 AZN of these funds were paid as insurance coverage.
Another issue is the absence of close cooperation and ties between the government and business subjects. Consultations among them and talking about barriers to enter business, suggestions to solve obstacles would be beneficial for both sides. But interview results show there is no any meeting. Not consulting and meeting results with financial literacy of people. Lack of financial literacy is one of the biggest problems in small enterprises. In some conditions, it seems businessman takes too much loans which may put pressure on business subjects since. They should pay back these liabilities when they mature.
Higher interest rate boosts that pressure and in most cases this kind of debt accumulation results with bankrupt of small enterprises. Within volatile environment, these enterprises are shutting down easily and that is why literacy about finance is useful for each entrepreneur. Business incubators are the way to train people on this issue with giving recommendations and offers. Volatile environment require businesses to stand on your own legs, being long –lived and innovative and spread all over the country. When roadmap for economy is prepared, abovementioned key points and alternative ways to solve them would be added. Proper strategy for volatile condition should be applied and in that case diversifying economy with the help of small enterprises will be effective.