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DEVELOPMENT OF SMALL ENTERPRISES IN LATVIA IN THE CONTEXT OF GLOBALIZATION
Inta Kotane, PhD student
Riga International School of Economics and Business Administration
The article provides a review of the main normative documents and acts regulating the performance of small enterprises, analysis and evaluation of the main indicators characterizing the performance of small enterprises in Latvia. It is concluded that classifying small enterprises by branches the greatest proportion according to the number of enterprises, number of employees in enterprises and added value is comprised by: trade, manufacturing and real estate translations.
Keywords: small enterprises, employment, added value, Latvia.
Globalization is a diverse process related to economic, social, technological, political and other changes; as a result, a majority of world countries and geographical regions become mutually closer linked; however, they are also more interdependent. The Republic of Latvia as a Member State of the European Union shall harmonize its national interests with the norms of the European Union paying special attention to the development of small enterprises. Implementing the small enterprises development and support policy in Latvia both entrepreneurs and population will be winners.
The aim of the research: to explore the main normative acts regulating the performance of small enterprises in Latvia and the indicators characterizing the performance of small enterprises in the context of globalization.
In order to reach the aim of the article the following research tasks have been put forward:
• to describe the main normative acts regulating the performance of small enterprises in Latvia;
• to analyze and evaluate the main indicators characterizing the performance of small enterprises in Latvia.
The qualitative research methods such as the method of economic analysis and the method of content analysis have been applied within the research.
The general standpoints of the Council of Europe regarding small enterprises are described in the European Charter for Small Enterprises – small enterprises are the backbone of Europe. They are an important source of workplaces and business ideas. The efforts of Europe to involve in the new economy will be successful only when the performance of small enterprises is a priority . Latvia joined the European Charter for Small Enterprises on April 23, 2002 according to which small enterprises are considered to be the main driving force of entrepreneurship, employment as well as social and local integration in Europe. Thus, it is necessary to create the best possible environment for small enterprises and entrepreneurship. Despite the fact that the European Charter for Small Enterprises was accepted in 2000, its principles and directions of activity are still topical in 2011 confirming that there are also many issues in the facilitation of small enterprises development which have not been solved yet. Small enterprises face many obstacles to be overcome when founding a new enterprise and facilitating the development of existing enterprises. The main obstacles are lack of funding, difficulties in receiving credits, stiff competition, decreasing purchasing power of customers, and other factors. Besides, the national policy regarding small enterprises has a significant role because the state has a lot of opportunities to influence the performance of small enterprises.
The European Commission in its recommendations 2003/361/EK of May 6, 2003 has determined criteria for microenterprises, small and medium-sized enterprises (Table 1).
As it is seen in Table 1 the category of small and medium-sized enterprises is defined as small if they have less than 50 employees and their annual turnover and/or total annual balance sheet does not exceed 10 million euro. On October 7, 2009 the European Commission published a work document in relation to the application of the recommendation 2003/361/EK issued in 2003 substantiating the significance of the definition of small and medium-sized enterprises in Europe.
In a single market with no internal frontiers, it is essential that measures in favour of small and medium-sized enterprises are based on a common definition to improve their consistency and effectiveness, and to limit distortions of competition. This is all the more necessary given the extensive interaction between national and European Union measures to help small and medium-sized enterprises in areas such as regional development and research funding .
On June 25, 2008 the European Commission approved the Small Business Act for Europe aimed at improving the general political approach to business, consolidating the principle “First think about small ones” in making policies from regulations to authorities and facilitating the growth of small and medium-sized enterprises, helping to solve the problems impeding their development . The Small Business Act for Europe includes 10 principles determining the transfer of principles into political action on the scale of the European Union and its Member States.
In 2009 in order to implement the aims of the Small Business Act for Europe the European Commission launched a wide campaign – Week for European Small and Medium-Sized Enterprises to provide informative support to the existing and prospective businessmen regarding the activities of the European Union, its Member States, regional and municipal institutions to arrange and popularize business and demonstrate appreciation to businessmen for their contribution into European welfare, creation of workplaces, innovations and competition [13, pp.108].
On October 3-9, 2011 there was organized a Week for European Small and Medium-Sized Enterprises:
• to inform about the support the EU and its Member States, regional and local authorities offer to micro, small and medium-sized enterprises;
• to popularize entrepreneurship to make more people, especially youth, who would seriously consider starting an entrepreneur’s career;
• to express appreciation to entrepreneurs for their contribution into European welfare, innovations, increasing employment and competitiveness .
On June 28, 2007 the Cabinet of the Republic of Latvia approved the Programme for Promoting Competitiveness and Innovations in Entrepreneurship for 2007-2013, which is based on the best practices of the developed countries and is implemented in compliance with the European Charter for Small Enterprises and the direction determined by other European Union documents, at the same time taking into consideration the problems of small and medium-sized enterprises development being specific for Latvia.
The situation in the field of small and medium-sized enterprises is the indicator for the development of commercial environment in Latvia because exactly this sector is the most sensitive to the changes in the economic and normative environment and policy implemented by state institutions. The situation in the sector shows how favourable or obstructive is the state economic and tax policy, what is the level of the capital market, infrastructure and educational system development, how effective is the state support policy, how well-arranged and stable are the normative acts in business .
Analyzing the indicators characterizing small enterprises in Latvia (Table 2) we can see that in 2005-2010 on average the number of small enterprises was 9073, but the proportion in the total number of enterprises – 13.15%. In 2005-2010 the average number of employees in small enterprises was 28%, added value – 26.4% out of the added value of all enterprises, investments into capital assets – 30.2%, turnover – 28.8% and wages and salaries – 26.6%. Up to 2008 the tendencies of the indicators characterizing small enterprises in Latvia clearly indicate development; however, the financial and economic crisis causes rapid downfall of all indicators characterizing small enterprises. The forecast proves that in 2011 the pre-crisis indicators will be reached.
In Latvia since January 1, 2003 the support for small and medium-sized enterprises is regulated by the Law on Control of Aid for Commercial Activity, which does not guarantee a right
to receive aid for commercial activity. The aim of the law is determine the issues of the national competence of Latvia in the field of support for commercial activity. The law provides the allowed aims for aid, supported costs and maximum aid intensity, as well as the national control procedures of provided aid for commercial activity to reduce the negative impact of aid on competition and exclude a possibility to gain economic advantages receiving an illegal aid .
Use of all kinds of support programmes, but especially structural funds, is one of the main conditions for stabilization of small enterprises, extension of their influence and facilitation of their development as well as assistance in solving financial problems of small enterprises.
The Latvian Mortgage and Land Bank has a significant role in the support system for small and medium-sized enterprises in Latvia; as a state-owned bank it has the functions typical for a development bank. The Latvian Mortgage and Land Bank offers a wide range of services for entrepreneurs, providing the main support to the directions facilitating the development of national economy and creation of added value. Within the framework of the support programmes provided by the bank business entrants and newly founded businesses, experienced entrepreneurs, who want to develop their business and increase competitiveness as well as farmers can receive funding for various purposes.
Comparing the sector of small enterprises in Latvia and the European Union, it can be concluded that the percentage of small enterprises in Latvia out of the total number of enterprises is considerably greater than on average in the European Union (Figure 1). On average in 2010 the percentage of small enterprises in the European Union was 6.6%, but in Latvia – 12.3%. It proves that in Latvia the structure of the number of enterprises is oriented to the categories of a larger size. Comparing the average number of employees by categories of enterprises in the European Union it can be concluded that in Latvia in 2007 the percentage of the employed persons in small enterprises was by 8.3% larger than on average in the European Union, and also the value added of small enterprises in Latvia in 2010 was by 6.6% larger than on average in the European Union.
Analyzing the proportion of small enterprises in Latvia by branches in 2005-2010, we can conclude that the largest part was related to trade, manufacturing and real estate transactions (Table 3). The trends are similar in the European Union as well, for example, in 2010 small enterprises by
branches were distributed as follows: trade – 26.21%, manufacturing – 22.6% and real estate transactions – 17.67% .
Analyzing the number of employed persons in small enterprises of Latvia by branches in 2005-2010 it can be concluded that the largest part includes trade, manufacturing and real estate activities (Table 4).
Analyzing the value added in small enterprises of Latvia by branches in 2005-2010 it can be concluded that the largest proportion includes trade, real estate transactions and manufacturing (Table 5). Although in 2009-2010 transport and storage was a little ahead of manufacturing by value added.
Thus, in the distribution of small enterprises in Latvia by branches according to three main indicators characterizing the performance of enterprises the largest proportion is comprised of three branches: trade, manufacturing and real estate transactions.
Problems facing smaller business include: finding financing, coping with administrative requirements and accessing markets in other countries, in the European Union and elsewhere. The new suggestions how to reduce administrative load to small enterprises, how to help them overcome the economic crisis and encourage establishment of new enterprises envisage the following measures:
• to cut red tape further – creating one-stop centres where small businesses can apply for European, national and local grants, and simplifying accounting and other legal requirements;
• to improve access to finance by streamlining procedures and expanding loan guarantee schemes;
• to help small businesses reach overseas markets through increased support and free-trade agreements;
• to harmonise the corporation tax, and make it easier for companies to recover debt in other European Union countries;
• to promote entrepreneurship and job creation by reducing to one month the time it takes to get licences and permits .
Despite the fact that the policy for small and medium-sized enterprises differs among the Member States of the European Union, all Member States of the European Union have acknowledged it as one of the preconditions for the EU economic development, which already provides a significant contribution to theses countries and have the largest development potential in the future.