How can Ukrainian SME grow into national and global champions?

Small and medium companies are the backbone of any national economy. An economy with a high share of strong SMEs enjoys several benefits, such as inclusive and sustainable growth and economic growth based on knowledge and innovation. SMEs are also more flexible and community-embedded.

In Germany, the development of a strong SME sector (known as the Mittelstand) leads to the appearance of ‘hidden champions’, which contribute to the economic success of the country.

In this paper, we study the key internal factors of resource management in Mittelstand companies and the policy measures that contributed to the success of the German SME sector, as well as the applicability of the German experience to the Ukrainian SME sector.

Our paper is based on desk research, previous research projects of the Institute of Economic Research (Kyiv), field visits to German SMEs and policymaking bodies, and in-depth interviews with Ukrainian and German policymakers and business.

As for Ukraine, there are general factors that need to be taken into consideration when developing strategic policy measures for SMEs, including low levels of trust and a relatively weak rule of law, and political and economic instability. These long-term circumstances have a strong impact on both public governance and business management.

To formulate policy recommendations for Ukrainian SME policy, we analysed the development of a business from being run by an individual entrepreneur to becoming an international champion.  First, we compared absolute and relative numbers of population and businesses for the latest available years for both countries. The relative rate of operating businesses to 1,000 population at a certain moment of time shows both the willingness and the ability to run a business or to be an entrepreneur. Then we analysed the reasons why more businesses succeed and/or grow in Germany than in Ukraine at each level.

While the structure of small and medium enterprises and individual entrepreneurs in Ukraine is similar to that of Germany, the Ukrainian SME sector lacks capabilities and productivity that might lead it to become successful at a national or international level. Particularly, Ukraine substantially lags behind in the number of small and medium companies that are successful in international markets. Therefore, after conducting a comparative analysis of the German and Ukrainian SME sector at each size and market level, we suggest policy measures to increase the share of businesses that are able and willing to develop to the upper level, up to becoming exporters.

Below we summarize our recommendations for policy interventions at each stage of business development.

For prospective and new entrepreneurs:

  • Development of a sustainable policy framework by the Ministry of Education and Science and the Ministry of Economic Development and Trade to revitalize the existing innovation and science parks at universities and create new ones.
  • Giving reformed university clusters the necessary level of autonomy and freedom to engage with possible stakeholders.
  • Funding the introduction of dedicated cluster management and part-time involvement of academics.
  • Funding advisory support for clusters.
  • Support for clusters based on the principles of co-funding, sustainability, objective-based performance, and realistic goals.
  • Boosting the ideas of innovative and competitive start-ups among students by encouraging businesses to intervene into the study process, especially in technical fields.
  • Implementing programs encouraging Ukrainian labour migrants and other vulnerable population groups to launch their own businesses.

For business entity creation:

  • Unification of the taxation system framework, simplifying the transition from being a micro- to a small enterprise, including the change of legal form.
  • Microgrants and microloans should be distributed by local authorities and Ukrainian banks in cooperation with international financial institutions in order to minimize the risk of inappropriate funding allocation.
  • Combining lending with consulting or mentoring programmes to mitigate the risks of not returning loans.
  • Innovation support centres for SMEs could be established in Ukrainian regions by the ministerial SME development office, in cooperation with the World Intellectual Property Organisation and local stakeholders and using the best practices of the German Mittelstand Agency 4.0. The focus should be on less economically developed regions or settlement types.

For growing to the national level and expanding the market:

  • Enhancing cooperation and networking possibilities for SMEs (business associations, work councils, technology parks, etc.) for exploring new business opportunities, giving them not only consultancy but also a co-determination power in the policymaking process.
  • Boosting digital infrastructure usage and providing better digital infrastructure outside of big cities.
  • Compensating for personnel scarcity and skills mismatches, e.g. introducing joint vocational training schemes with technical universities with the support of business associations.
  • Sharing information on best practices of business support mechanisms at local and regional levels in order to make better use of the powers and financial resources granted to local authorities as part of decentralisation.

For foreign market entry:

  • Encouraging a company to develop its own brand rather than become an outsourcing unit when entering external markets.
  • Encouraging expansion abroad via establishing subsidiaries while retaining headquarters, R&D, and production in Ukraine.
  • Further foreign currency liberalisation measures to ease export operations.
  • Securing the constant supply of labour force and managers with a migration background and foreign language skills by encouraging short-term educational and labour mobility.

Developing a competitive SME sector based on the Mittelstand role model could help Ukraine solve economic and social problems, such as monopolisation, unemployment, and the underdevelopment of certain regions. This would pave the way for more inclusive and sustainable economic growth in the country.

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