REPORT ON SMALL AND MEDIUM-SIZED ENTERPRISES AND ENTERPRENEURSHIP 2010

Transcription

1 Ministry of Economic and Regional Development National Agency for Regional Development REPORT ON SMALL AND MEDIUM-SIZED ENTERPRISES AND ENTERPRENEURSHIP 2010 Belgrade, September 2011

2 REPORT ON SMALL AND MEDIUM-SIZED ENTERPRISES AND ENTERPRENEURSHIP 2010 Publiched by: Ministry of Economic and Regional Development National Agency for Regional Development For the Publisher: Dragijana Radonjić Petrović, State Secretary Ivica Eždenci, Director Database Building: Republic Statistical Office Technical Procesing: National Agency for Regional Development Printed by: Vizartis Circulation: 200 Belgrade, September 2011

3 INTRODUCTORY WORD The economic activity of the previous year in Serbia is characterized by a slight recovery from the global economic crisis, which is in line with trends in the EU countries. After a substantial fall in 2009, the beginning of recovery in industrial production and exports is of particular importance. However, positive trends in 2010 and GDP growth of 1.0% were not sufficient for the economy to regain the level of 2008 and stop the downward trend in employment. Technical and technological backwardness and uncompetitiveness of Serbian economy still remain the key limiting factors to more efficient integration in the international flows. Unfortunately, the beginning of recovery of Serbian economy and a modest growth, recorded in 2010, did not reflect a better business performance of the SMEE sector. The impact of the global economic crisis had an adverse effect both on business entities at an early stage of business and on already existing companies there were fewer business opportunities and starting a new business was much harder. Establishment of new enterprises and sole traders and development of the existing ones were considerably limited by loss of business confidence and a higher level of caution in taking business risks. In spite of a continued upward trend in the number of business entities, as well as the number of SMEs, the establishment of new business entities was slowed down, while the closure was accelerated which worsened the ratio of newly established and closed down enterprises and sole traders. Furthermore, survival rate of newly established SMEs fell from 71.9% in 2007 to 61.7% in Unlike small enterprises, which recovered in 2010 and directed their activities towards less risky fields, it is only this year that the medium-sized enterprises felt the real impact of the crisis, due to a slower adjustment to new circumstances, which had a decisive influence on the intensity of the SMEE sector recovery. Despite the significant impact on the overall economic development, the basic indicators of business performance in 2010 by size of enterprises show presence of key structural problems in the sector, and among most important being excessive dominance of micro enterprises and entrepreneurs with extremely small number of employees as opposed to a low level of development of medium-sized enterprises generators of the sector s development. Like in the neighbouring countries, the SMEE sector became over-indebted, thus further limiting access to fresh capital which was alleviated to an extent, by support economic measures of the Serbian Government. Major activities aimed at alleviating the effects of the crisis are: stimulation of national demand maintaining a satisfactory consumption level; granting credits to support liquidity slowing down the growth of illiquidity; as well as granting credits to support investments. As in the previous years, the Report on SMEs and Entrepreneurship 2010 presents and analyses key features, trends and share of the SMEE sector in Serbian economy, as well as the results of the policy of entrepreneurship development and findings of the survey conducted among the enterprises. The Report is a result of joint work between the key institutions in charge of creating and implementing the SME policy, aimed to impartial analyzing of the current situation, the results achieved and key problems related to small and medium-sized enterprises and entrepreneurship development in the Republic of Serbia. A valuable contribution to this year s report presented in Chapter VI Analysis of key problems and barriers to the SMEE development and recommendations for further improvements of support measures to the SMEE, was provided by NALED and ICIP and EPI projects. Belgrade, September 2011 STATE SECRETARY Dragijana Petrovic Radonjic

4 C O N T E N T S INTRODUCTORY WORD 3 METHODOLOGICAL NOTES 5 SUMMARY 7 I BUSINESS ENVIRONMENT IN SERBIA FOR SME DEVELOPMENT Macroeconomic environment Influence of the economic crisis on SME business operations 13 II SME DEVELOPMENT Importance of the SMEE sector in Serbian economy Structure of the SMEE sector by size and type of organization Business demography Employment Sectoral representation Regional representation Business efficiency of SMEs Investments Foreign trade operations Comparative analysis of SME development 43 III COMPETITIVENESS AND INNOVATION OF THE SMEE SECTOR SME competitiveness Investment competitiveness Cost competitiveness Export competitiveness Use of ICT Innovation Innovation Union Scoreboard (IUS) 59 IV RESULTS OF SME DEVELOPMENT POLICY SME development policy in Serbia Report on the implementation of the Strategy of C ompetitiveness and Innovation of SMEs 62 V RESEARCH Conditions, needs and problems of SMEs Innovative activities of small and medium-sized business entities for the period VI ANALYSIS OF KEY PROBLEMS AND BARRIERS TO SME DEVELOPMENT AND RECOMMENDATIONS FOR FUTURE IMPROVEMENTS OF THE SUPPORT MEASURES Legal and administrative barriers Brief overview of available resources of financial support Brief overview of implemented SME support programmes 100 ANNEX 104

5 METHODOLOGICAL NOTES The SME report 2010 represents an annual analysis of the assessment of dynamics of implementation of goals, measures and activities for the improvement of stimulation of SME development as one of the key segments of Serbia s economic development. The report has been made in compliance with the reporting concept of the European Commission according to Eurostat methodology. Activities on the development, harmonization of methodology and connection of data relevant for research and analysis of SME development has been continuously implemented by a Working group for statistical monitoring of the SMEs composed of the representatives of the Ministry of Economy and Regional Development, Ministry of Finance, Republic Statistical Office, National Agency for Regional Development, Business Registers Agency, Tax Administration, Customs Administration and National Employment Agency. The analysis of development of the SMEE sector in the 2010 Report is founded on comprehensive databases according to Eurostat methodology which were created at the Republic Statistical Office (number of enterprises, number of employees, total turnover, gross value added, foreign trade balance, investments into fixed assets, number of newly established and closed business entities). Databases on the number of enterprises, number of employees, turnover, gross value added, number of newly established and closed business entities were created on the basis of final balance sheets of legal entities enterprises and registers of established and closed enterprises (Business Registers Agency) while the number of entrepreneurs and the number of persons they employ were based on the data of the Tax Administration. Customs Administration data were used for the comprehensive database of the foreign trade balance, while Republic Statistical Office data were used for the analysis of investments into fixed assets. The SMEE sector consists of micro, small, and medium-sized enterprises (SME) and entrepreneurs. Classification of legal entities according to size within the SMEE sector was made according to the number of employees as follows: micro enterprises up to 9 employees, small enterprises employees and medium-sized enterprises employees. Entrepreneurs (sole traders) - physical persons doing business independently, are included in micro enterprises. Indicators of turnover, gross value added and profit which were used in the analysis of development of the SMEE sector were determined in the following manner: turnover means invoiced value of realized goods and services to third persons (excluding value added tax, and taxes and fees which are not directly related to the production process) in a particular period of time. Turnover can be described as an indicator of activities and market growth, and considering that it shows future inflow of funds based on services provided and goods sold, it is an indicator of future investments. Gross value added is defined as a difference between the value of final products in base prices (values of goods and services produced which were created as a result of production process) and intermediate consumption in purchasing prices (the value of all goods and services invested in the production process in a specific calculation period). Profit is defined as the difference between the GVA and labour costs, whereas profit rate is the ratio between profit and GVA. The Report provides the analysis of the importance of the SMEE sector within the non-financial sector of Serbia one of five institutional sub-systems on which the national economy stands. It is made of profit units in which profit is generated by production of goods and services (which are not included in the financial sector) and non-profit institutional units which provide goods and services for market at economic prices i.e. cover more than 50% of production costs. Based on the data of the Business Registers Agency, the analysis of business demography in Serbia in the period included establishing rates and closing rates, as well as SME business demography by sectors and districts. The analysis of development of the SMEE sector in 2010 includes technical structure of investments in 2009 as well as the number of exporters and importers with basic business parameters including export/import groups of products according to the Standard International Trade Classification (SITC rev 3.). The research shows basic findings of the survey conducted by National Agency for Regional Development on the needs and problems of small and medium sized enterprises and entrepreneurs, as well as the research by the Republic Statistical Office on innovative activities of small and medium-sized enterprises in the period (with 2010 as the reference year) aimed at analyzing the real relation of business policy of enterprises towards innovative activities in order to determine type, scope and quality of these activities in the enterprises. 5

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7 SUMMARY One of the significant results of Serbian transition economy is an accelerated development of the small and medium-sized enterprises and entrepreneurship sector which grew into an important economy segment. Of the total number of enterprises in 2010, the entrepreneurial sector accounts for 99.8% (318,540 enterprises). In 2010, the SMEE sector generated 66.4% of employees ( ), 65.3% of turnover (4.678 billion dinars), 55.9% of GVA (817.4 billion dinars) and 52.6% of the non-financial sector investments. This sector accounts for 45.4% of total employment, 43.9% of total investments, 44.5% of exports, 52.3% of imports, and generates 63.3% of foreign trade deficit in Serbian economy, participating in the national GDP with approximately 33%. Analysed by size, in the structure of SMEs most enterprises are micro enterprises ( ), whereas small and medium-sized enterprises (11,871) dominate in all analysed indicators (52.7% of employment, 59.9% of turnover, 60.6% of GVA, 73.7% of exports and 74.9% of imports). However, in 2010, the number of medium-sized enterprises expected to assume the role of the drivers of the overall sector development was reduced by 8.6%. In addition, medium-sized enterprises saw the biggest reduction in the number of employees (9.6%). The effects of economic crisis were not overcome in 2010, however they were largely alleviated by stimulating economic measures. A mild recovery of economic activities in 2010 (1.0% of GDP growth) was not sufficient to restore the economy to the level of Diminished cross-border investments are also one of the consequences of the crisis. In Serbia, the share of FDI in total investments went down from 68.3% in 2006 to 23.6% in Economy still faces inflation risks, drop in the employment rate, high budget deficit and a large external debt. Unlike small businesses, which recovered in 2010 and focused their activities on other, less risky areas, it was not until the last year that medium-sized enterprises, due to their slower adjustment to new circumstances, felt the real impact of the crisis, which has crucially affected the extent of recovery of the SMEE sector. Main positive trends of SME business operations compared to 2009: Continued upward trend in the number of business entities number of SMEs increased by 3.713; Slight increase in business activity turnover actually higher by 0.3%; Productivity growth of 5.7% - manufacturing industry in SME 4.3% (low-tech 2-9%, medium low-tech 6.3%, medium high-tech 5.6%, high-tech 11.1%); Curbed negative trend of decrease in profit and profitability real profit growth of 8.6%, and 10.1% growth of profit rate; Increased foreign trade value (1,020.4 billion dinars) by 6.2%, exports (339.8 billion dinars) by 15.9%, imports (680.5 billion dinars) by 1.9% and decreased deficit (340.7 billion dinars) by 9. 1%. The global recession played a big part in Serbian economic slowdown whereas its effects precipitated the deterioration of entrepreneurial climate. The most important negative effects are: Slower establishment and accelerated closing of business entities worsened the ratio between the established and closed enterprises and small businesses there were 10 closed enterprises per 10 established (28 in 2009), and 10 small businesses which ceased their operations per 9 newly established (11 in 2008). In addition, the survival rate of newly established SMEs decreased from 71.9% in 2007 to 61.7% in 2010; Diminished importance of the SMEE sector in alleviation of overall unemployment in Serbia number of the employed was reduced by persons (or 6.6%) which accounts for 71.8% employment reduction of the non-financial sector; Below average operating margins: turnover 0.3% (4.1% in the non-financial sector), drop in GVA of 1.4% (growth in the non-financial sector of 3.6%), lower growth of productivity (5.7% to 7.4%) and profitability (36.1% to 39.2% in the non-financial sector); Maintained unfavourable tendency of SME sectoral concentration manufacturing industry, wholesale and retail trade, construction and professional, scientific, innovation and engineering activities; Unchanged regional disproportions. Level of SME development in different Serbian districts, measured by GVA per employee indicator, shows that ratio between districts with the most developed SMEE sector (City of Belgrade) and those with the most undeveloped SMEE sector (Pčinjska District) is 2.4:1 (2.3:1 in 2009), and the differences in profitability of SMEs in these districts are 2.1:1 in 2010 compared to 2.9:1 in

8 Recession did not only result in lower investment activity of SMEs, (7.6% drop), but also in a lower share of equipment and construction works in the technical structure of investments. Almost 40% of the value of SME investments was implemented in medium-sized enterprises (with the growth rate of 29.8%) where investments were the highest per employee and accounted for the biggest share in GVA (47%). Medium-sized enterprises were the ones which mostly felt the impact of economic recession. Their investments in 2009 were actually by 1/3 smaller than in the previous year, whereas their share in GVA was only 27%. Low level of competitiveness of the SMEE sector remains the main limiting factor to the wider internationalisation. The increase in productivity of SMEs is the result of the drop in employment (-6.6%) which is more dynamic than GVA (-1.4%). In high- and medium-high technology industries, the SMEE sector has shown above average results and achieved real growth rates of labour productivity, the highest being in the manufacture of motor vehicles and trailers 49.4% (small 42.6%) and the manufacture of pharmaceutical products and preparations 16.7% (medium 15.4%). On the other hand, within these areas, the only one negative rate was recorded in the manufacture of other transport equipment -28.3%, which also represents the biggest drop rate in the SMEE sector (productivity of small enterprises in this area is actually higher and amounts to 70.4%). Despite being in decline, unit labour costs are still high. Low export competitiveness is evidenced by the data that in the total number of enterprises, exporters account for only 3.9%, importers for 6.2%, share of export in the turnover for 7.3% and realised export and import per employee are below the average of the non-financial sector by almost 1/3 and 1/5 respectively, whereas export/import coverage is below 50% (58.5% for the non-financial sector, 68.6% for large companies). A low level of SME competitiveness in the manufacturing industry is also indicated by the value of RCA the 2010 deficit amounted to 7.3% of trade (there was a surplus in the manufacturing industry). In 2010 structure of growing imports and exports, low-tech products recorded the fastest growth in foreign trade volume. Micro enterprises reduced the trade in medium-high-tech products, which is why the total real growth rate is negative (-15.5%). Small enterprises still trade in low-tech products whereas the trade volume of high-tech products is actually lower by 7.6% compared to In contrast, medium-sized enterprises have increased the real growth rate of high-tech products (23.3%), however achieving a negative real growth rate in trade in mediumhigh-tech products (-19.2), which affected the whole SMEE sector. Comparative analysis of the development of the SMEE sector in Serbia and in EU countries shows that according to the share in the number of enterprises and employment, as well as in the generated turnover and GVA, the SMEE sector in Serbia is equal to that of EU average. However, the SMEE sector lags far behind the EU average according to the turnover per employee, GVA per employee and profit per employee. A comparative analysis of investments per employee and investments per enterprise in the surrounding countries and in EU-27 indicates considerably lower level of these indicators in Serbia, both in the SMEE sector and overall economy. Investments per employee in the SMEE sector totalled EUR 3,400 (EU average EUR 7,400) and investments per enterprise EUR 8,700 (ЕU average EUR 33,l400). The effects of recession have slowed down the addressing of main development problems of SMEs: incomplete institutional environment and regulations the biggest problems in the field of high total fiscal duties, unequal position in the field of public procurement, non-solving the monopoly issues, more difficult debt collection, administration and inadequate taxation system, still complicated and expensive administrative procedures, especially in the field of issuing permits, solving property-related and legal issues, etc.; insufficient knowledge and skills of entrepreneurs and employees lack of human resources of certain skills, as well as insufficient management skills for solving strategic and/or operational problems in order to maintain continuity in business; insufficient promotion of skills development in companies management skills, R&D skills and skills related to export through appropriate trainings (by granting subsidies for private services and/or directly providing trainings through training centres and other infrastructure); insufficient incentives to upgrade capacities for the management of intellectual property development in companies, including property rights trainings, seminars and presentations, direct subsidies and incentives, specialisation for protection of intellectual property in the international market; unfavourable conditions for financing and inappropriate types and scope of financial support banks with expensive loan offer and short loan period are dominating. At the national and regional level there is a lack of better developed micro-credit institutions as well as of other financial instruments which serve real financial needs of SMEs and their economic strength; undeveloped structured access to finance cooperation with private investors such as business angels; loan programmes and loan guarantee programmes; loans without collateral (mezzanine loans) that provide capital to innovative SMEs; capitalisation of the venture capital fund; tax incentives, etc. insufficient links with large companies, and thus insufficiently used opportunity for more dynamic development of SMEs as subcontractors (suppliers, contractors) for large business systems, i.e. insufficiently used advantage of the SMEE sector over large companies when it comes to certain production segments that require flexibility and fast technical and technological/market adjustment; insufficient incentives for introduction of modern technologies, innovation, standards, quality control, etc.; insufficient support for internationalisation and insufficient information about markets. 8

9 Main recommendations aimed at increasing the development level of entrepreneurial sector are part of the efforts for spurring the overall economic activity by applying the new growth model based on export demand, increase in employment, investments, decrease in public spending, strengthening of industrial sector in parallel with the development of services sector, etc. Thus, within the improvement of the existing measures and activities, it will be necessary to pay particular attention to the development of high-growth entrepreneurship, that is, to focus the activities on: 1) Establishment of a complete support system and solutions of key problems for development of the companies in the growth and development stage, drawing on the practice of highly developed OECD and EU countries that consider special measures as part of the process for construction of the system for support to the development of dynamic enterprises and gazelles. In the EU countries, it is a part of a broad process of implementation of the Lisbon Strategy for Growth and Jobs and creation of entrepreneurial, knowledge-based society. 2) Shift from the policy of support provided to the overall SMEE sector (improving business environment for opening of larger number of new enterprises) to the high-growth entrepreneurship policy committed to the creation of environment which favours the growth of enterprises and which stimulates talented people with a clear business vision to start a business. 3) Change of the existing funding method (public sources, different grants, subsidies and soft loans), relying on the combination of public and private sources through R&D loans and innovation grants, business angel finance, venture finance and IPOs 4) Alter the structure of institutional services for non-financial support in terms of turning the basic (standard) advice for firm creation, business planning and small business operation into the experiencebased advice for venture finance, strategic planning, the support for inclusion in supply chain of large companies, internationalisation and growth and development of enterprises. 5) Advantage to promising high-growth entrepreneurships in access to resources. 6) Development of regulatory reform aimed at not only the removal of bottlenecks to new business entry, but also the creation of conditions for development of high-growth firms. In addition to the reduction of VAT for small firms, it is necessary to accommodate the collection of tax revenues to the changes in firm scale and ensure that share options are treated neutrally. Former approach was more focused on seeking possibilities to avoid failure and bankruptcy while now, firm failures and bankruptcies are accepted as a natural part of market mechanism, however means are sought to reduce their economic and social costs (e.g. by giving a second chance ). 9

10 I BUSINESS ENVIRONMENT IN SERBIA FOR SME DEVELOPMENT Year 2010 saw the start of moderate recovery of economic activities and overcoming of negative effects produced by the global economic crisis. GDP growth of 1.0% was largely contributed by increase in exports. A more dynamic growth in exports compared to that of imports (24.0% and 9.7% respectively) in 2010 gave rise to 5.7% drop in foreign trade deficit and 0.7pp decrease (17.8%) of GDP. After a sharp drop in the previous year, particular importance was attached to the start of industrial production recovery (2.5% rise), coupled with the 3.9% growth of manufacturing industry. However, economy still faces a low investment level (despite the growth of 5%), inflation risks, drop in the employment rate (19.2% unemployment rate), high budget deficit and a large and growing external debt to GDP ratio (82%). Lagging behind in the usage of technology and low competitiveness of Serbian economy remain the key factors limiting more efficient inclusion in global trends. The effects of economic crisis also affected the entrepreneurial environment. Compared to 2009, business results of the SMEE sector were below average, the number of newly established SMEs decreased while the number of those closed increased. Decreased number of employees by (or 6.6%) in 2010 accounts for 71.8% reduction in the non-financial sector employment, meaning that diminishing importance of the SMEE sector in the alleviation of overall unemployment continued Macroeconomic environment In transition period, Serbia completed the first and second transition phase towards a market economy. A large part of market reforms was implemented, macroeconomic stability and a consequent high rate of economic growth were achieved, majority of (socially-owned) companies were privatised and the process of accession to the EU started with the harmonisation of numerous laws and other adjustments. The emergence of world economic crisis by the end of 2008, and its effects in 2009, precipitated the abandonment of the model of growth, which in the most part of the decade was based on national demand, inflow of foreign capital and growth in services sector. Since 2010, a new growth model has been based on export demand, increased investments, decreased public spending and strengthened industrial sector in parallel with the services sector development. The growth based on national demand resulted in widened current account deficit, which reached its maximum in 2008 (21.6% of GDP), and increased external debt (82.1% in 2010). Macroeconomic stability was maintained by constant increase in foreign exchange reserves (34.7% of GDP in 2010) and by inflation being reduced to 6.6% in 2009, nevertheless still threatening to move up in 2010 (10.3%). After a dynamic economic growth in the period of (4.9% annual average), 2009 gross domestic product recorded the drop of 3.5% as a result of the adverse effects of economic crisis on Serbian economy. Due to significantly diminished inflow of foreign capital, slowdown in credit activities and significant slowdown of wage growth, national demand dropped (about 7%). A mild recovery of economic activities in 2010 and 1.0% GDP growth was not sufficient to restore the economy to the level of The growth of GDP was largely contributed by a considerable growth in export of goods. In 2010, the export of goods grew much faster than imports (24.0% and 9.7% respectively), which in 2010 accounted for 5.7% decrease in foreign trade deficit and its percentage of GDP (17.8%) by 0.7pp. The crisis also resulted in diminished cross-border investments. In Serbia, the share of FDI in total investments went down from 68.3% in 2006 to 23.6% in The drop in national demand in the last two years (as a consequence of the decrease in personal spending) and exports growing at a faster pace than imports, improved the current account of the balance of payments. Current account deficit was reduced from 21.6% in 2008 to 7.2% in Fiscal position of Serbia kept worsening in 2009 and 2010 with a considerable decrease in revenues, which resulted in deepened fiscal imbalance. Consolidated deficit increased from 2.6% of GDP in 2008 to 4.8% in 2009 and 4.6% in Measures for alleviation of budget deficit were to cut and freeze wages and pensions in accordance with the programme supported by the MMF. Price pressures resulted in the highest inflation in the region. The total inflation in Serbia, measured by the average annual percentage change of consumer price index, which is an official inflation measure since 2009, was 10.3% at the end of 2010, which is above the upper limit of the 2010 inflation target range (6%±2%). This is primarily due to increase in prices of agricultural products (17.4%), effects of depreciation on core inflation (core inflation recorded 8.8% increase), and growth of regulated prices (their growth was 12%, which is above the growth defined for about 9%±2%). Reduced number of employees can largely be accounted for by the impact of transitional restructuring carried out through intensive disposal of surplus employees in privatised companies and by the growth model applied thus far which had been neglecting employment as an important aim of socio-economic development. 10

11 The problem of high unemployment rate brought forward from the pre-transition period was even more pronounced due to the uncompleted process of ownership transformation, restructuring of companies and 2009 crisis (bankruptcy and liquidation of companies, redundancies resulting from restructuring and lay-offs due to crisis). However, in 2010 (according to the Labour Force Survey), unemployment recorded a smaller growth ( persons) compared to the big plunge in employment ( persons) in 2009, which indicates that a large number of persons who stopped working became inactive ( persons). Generally speaking, labour market is characterised by: disequilibrium between labour supply and demand reflected in the imbalance in qualification, age and professional structure; unemployment rate is considerably below EU average (Serbia 19.2%, EU %); high structural and long-term unemployment (Serbia 69.1%); high unemployment rate of youth aged between 15 and 24 (Serbia 46.2%, EU 20.5%); and high unemployment rate of persons with lower and medium education level with large disproportions in unemployment among regions. Between 2007 and 2010, in economy restructuring, the number of persons employed in legal entities decreased by (92.3% in the real and 7.7% in the public sector). Until 2008, the entrepreneurship sector absorbed a portion of the unemployed, however, since 2009, it has not been able to do so. Namely, the number of employees was reduced by 22.5% ( persons), which is much more compared to the growth in period ( persons). A precondition for a stable economy recovery and a sustainable economic growth in the next period will be a wider scope of investments in fixed capital, primarily in the sectors of exchangeable goods, and increase in export demand for Serbian products, which would contribute to the creation of new jobs and improvement of development potentials of the overall economy. Table Macroeconomic trends GDP, bn EUR 12,8 16,0 17,3 19,0 20,3 23,3 28,5 32,7 28,9 29,0 GDP, real growth in % 5,3 4,3 2,5 9,3 5,4 3,6 5,4 3,8-3,5 1,0 Inflation, end of period 40,7 14,8 7,8 13,7 17,7 6,6 10,1 6,8 6,6 10,3 Exchange rate RSD/EUR period average 59,78 60,66 65,13 72,70 83,00 84,10 79,96 81,44 93,95 103,04 Current account deficit, % GDP 2,2-4,2-7,8-13,8-8,8-10,1-17,7-21,6-7,2-7,2 Foreign direct investments, % GDP 1,4 3,1 6,9 4,1 6,2 14,3 6,4 5,6 4,8 3,0 NBS reserves, NBS, bn EUR 1,33 2,21 2,85 3,13 4,95 9,04 9,66 8,19 10,6 10,0 Fiscal deficit, % GDP -0,5-2,6-2,7 0,7 1,1-1,6-2,0-2,6-4,8-4,6 Public debt, % GDP 104,8 71,9 63,7 50,9 50,6 40,1 31,8 26,9 34,1 42,9 External debt, % GDP 85,5 58,7 55,9 49,8 60,1 60,9 60,2 64,6 77,9 82,1 Private external debt, % GDP 5,5 4,8 6,7 11,5 21,2 32,6 38,1 44,6 51,0 50,8 Source: MoF, NBS, RSO 1.2. Influence of the economic crisis on SME business operations The effects of the recession (drop in foreign and national demand and investments, risk and investment cost increase, as well as the fear of failure) had negative impact on the business operations of business entities. The healthy entrepreneurial dynamics from the previous years was disturbed (slowdown in the foundation, growth and development of new businesses, accelerated closing of businesses), thus reducing the number of small businesses, while the number of enterprises is stagnating. The results of GEM research (Global Entrepreneurship Monitor) on different aspects of entrepreneurial activities in 2009 indicate negative effects of the crisis on the entrepreneurial climate in Serbia. The number of startups and new enterprises was decreased, posing significant limitations on job creation opportunities and productivity growth. In 2010, some individuals established new business entities every month, which is considerably less compared to the average of 5000 individuals who in 2007 founded their own enterprises on a monthly basis. Since the beginning of the current economic crisis, entrepreneurial environment in Serbia has worsened. Consumer demand decreased while the loss of trust in business operations had adverse effects on the availability of financial support, which largely limited the opening of new and development of existing enterprises and businesses. The establishment pace of new businesses was considerably slowed down. Namely, in 2007, there were 6 new enterprises per one closed enterprise and two small businesses were closed per three newly established. In 2010, the number of newly established and closed enterprises almost levelled off, while the number of newly established small businesses was by about 10% lower than the number of closed ones. The market survival prospects of newly established 11

12 enterprises diminished and consequently, the share of enterprises surviving the first two years of business dropped from 92.0% (2007) to 90.6% (2010), while the survival rate of small businesses was reduced from 66.2% to 54.1%. At the same time, unemployment considerably increased, thus perpetuating forced emigration, particularly among young and educated people. The global economic crisis has adversely influenced both the early-stage business entities and those already well-established. There are less business opportunities and it is more difficult to start a business. Owing to the specific position of SMEs, the start of economic recovery and a slight growth recorded in 2010 have not contributed to improved conditions for operations of the SMEE sector, nor have they helped to achieve better operating results. Thus, while the scope of business activities in the sector of large companies increased by 12.2%, the turnover in the SMEE sector stagnated with the drop in GVA of 1.4% (large companies +12, 2%). Table: Growth /fall rate of performance indicators of non-financial sector SMEE Large Non-financial sector No. of enterprises 3,7 1,2-6,9-4,7 3,7 1,2 No. of employees -7,2-6,6-5,0-5,2-6,5-6,2 Turnover -14,7 0,3-19,4 12,2-16,2 4,1 GVA -15,7-1,4-8,5 3,6-12,7 0,8 Imports -8,9 15,9-24,2 36,5-17,2 26,1 Exports -24,2 1,9-25,1 33,9-24,7 14,4 Trade balance -33,1-9,1-28,1 28,5-31,8 1,2 Profit -15,6 8,6 1,8 14,5-8,4 11,4 Profitability rate -5,3-0,1 0,3 1,7-2,9 0,9 Source: MoF The effects of the crisis and worsening of the conditions for business operations of SMEs have particularly severely affected employment, reducing the number of employees in this sector by , which accounts for 71.8% reduction in the non-financial sector employment. The accelerated job creation trend prevailing in the period has stopped. In this period, owing to improved business climate and Government incentives, the number of employees in SMEs rose by about 187 thousand, which made up for job cuts in large companies due to restructuring (164 thousand employees), thus alleviating negative effects of rightsizing process in privatised business entities. Despite a faster drop in employment compared to the average of non-financial sector (-6.6% and -6.2%, respectively), the SMEE sector has achieved a slower growth in productivity measured by GVA value per employee (5.7% and 7.4%, respectively). Thus, SMEs still account for the least profitable part of economy (profitability rate is 36.1% compared to 43.0% in large companies and 39.2% in the non-financial sector). The effects of recession have not changed sectoral concentration of SMEs: processing industry, wholesale and retail trade, construction and professional, scientific, innovation and engineering activities. In 2010, the SMEE sector managed to curb the drop in foreign trade caused by recession resulting from the global crisis, with real increase in imports by 15.9% and 9.1% decrease in deficit. The number of SMEs participating in the foreign trade was reduced (both that of exporters and importers). The deficit of small business entities accounted for 65.4% of economy deficit. The recession caused lower values in companies production and their increased liabilities, which resulted in fewer tendencies to invest. In 2009, SMEs accounted for 52.6% in the structure of investments of the non-financial sector, and the share of investments in GVA slightly increased to 33%, primarily due to more substantial investments of small enterprises. The downward trend of investment efficiency has continued, which is expressed in increasingly higher amounts of investments necessary for achievement of GVA growth. A comparative analysis of investments in the surrounding countries and in EU-27 indicates a considerably lower level of these indicators in Serbia. It is estimated that small enterprises have started their recovery in 2010 by being more flexible and focusing their activities on other, less risky areas. Medium-sized enterprises, due to their slower adjustment to new circumstances, have not felt the real impact of the crisis until this year, which was crucial for total results achieved by the SMEE sector. As wages in the SMEE sector account for almost 2/3 of GVA, there is not much left for the companies to improve and modernize the operational process, which is necessary for a successful adjustment. Worsening of the conditions for doing business and especially for borrowing hit the SMEs most hardly. This sector, just like in the neighbouring countries, incurred more debts and became more dependent on external sources of funding. It will be necessary that the Government of the Republic of Serbia continues to invest efforts to stabilize macroeconomic indicators. Major activities aimed at alleviating the effects of the crisis are: stimulation of national demand maintaining a satisfactory consumption level; granting favourable loans for liquidity slowing down the growth of illiquidity; as well as stabilization of the financial system. 12

13 II SME DEVELOPMENT Of the total number of 319,044 enterprises in 2010, entrepreneurial sector accounts for 99.8% (318,540 enterprises). In 2010, the SMEE sector generated 66.4% of employees (814,585), 65.3% of turnover (4,678 billion dinars) and 55.9% of GVA (817.4 billion dinars) of the non-financial sector. This sector accounted for 45.4% of total employment, 44.5% of exports and 52.3% of imports, generated 63.3% of foreign trade deficit in Serbian economy and participated in national GDP with approximately 33% 1. In 2010, the effects of economic crisis on the development of the SMEE sector, compared to 2009, are as follows: Higher number of SMEs (by 3,713) as a result of an increase in the number of entrepreneurs (by 2,439) and micro enterprises (by 1.746)), whereas the number of small and medium-sized enterprises is lower by 259 and 213 respectively indicating weak economic strength of the sector; Continued downward trend of net effects (ratio between the number of established and closed enterprises and small businesses) 10 closed enterprises per 10 established (28 in 2009), and 10 small businesses which ceased their operations per 9 newly established (11 in 2008); Reduced number of the employed by persons (or 6.6%) which accounts for 71.8% of employment reduction in the non-financial sector continued tendency to diminish importance of the SMEE sector on alleviation of overall unemployment in Serbia; Below average growth of business activity (0.3% compared to 12.2% in large companies and 4.1% in the non-financial sector) affected the drop in gross value added by 1.4% (GVA growth in large companies of 12.2%, and of 3.6% in the non-financial sector); Productivity growth measured by GVA value lower than in the non-financial sector (5.7% and 7.4%, respectively), despite a higher rate of employment reduction (-6.6% and -6,2%, respectively); Remained the least profitable part of economy (non-profitability rate is 3.1% compared to 43.0% in large companies and 39.2% in the non-financial sector) despite the fact that compared to 2009, the profit of the SMEE sector is actually higher by 8.6%, and the profit rate by 10.1%. The highest profitability rate is accounted for by small enterprises (45.9%); Unchanged sectoral concentration of SMEs manufacturing industry, wholesale and retail trade, construction and professional, scientific, innovation and engineering activities; Unchanged regional disproportions. Development level of the SMEE sector in Serbian districts measured by GVA indicator per employee indicates that in 2010, the ratio between the district with the most developed SMEE sector (City of Belgrade) and the district with the most undeveloped SMEE sector (Pčinjska district) is 2.4:1 (2.3:1 in 2009), whereas profitability ratio is 2.1:1 compared to 2.9:1 in Importance of the SMEE sector in Serbian economy Slight recovery of economic activities in 2010, after the adverse tendencies brought about by the global economic crisis, is more pronounced in large than in micro, small and medium-sized enterprises (growth of turnover, GVA, exports, imports and profit are multiply higher than in the SMEE sector) and thus, compared to 2009, the SMEE sector has a lower share in the main indicators of business activity for the non-financial sector 2. Despite the fact that when compared to 2009, the total number of business entities increased owing to the increase in the number of SMEs (by 3.713) 3, reduced employment in this sector by persons accounts for 71.8% of employment reduction in the non-financial sector. SME turnover is actually higher by only 0.3%, and GVA is reduced by 1.4% (growth in large companies of 12.2% and of 3.6% in the non-financial sector). However, despite the development slowdown, the importance of this segment of Serbian economy is indisputable SMEs generate about 2/3 of employment, turnover and GVA and about 50% of exports, imports, profit and investments of non-financial sector. It is estimated that in 2010, the SMEE sector had the share of approximately 33% of national GDP 4. 1 Estimation of the Republic Development Bureau (RDB). 2 According to the RSO methodology, resident institutional units that form the national economy are grouped under five institutional sectors: non-financial, financial, the state, households, and non-profit institutional units that provide services for households (NPIH). Non-financial sector includes profit units where profit is generated through production of goods and services, but which are not a part of the financial sector and NPI units that provide market goods and services at economic prices, i.e. cover more than 50% of production costs; Source: RDB 3 Annex Table: Main business indicators of non-financial sector Estimation of MoF 13

14 14 Table: SME development indicators SMEs Large companies Non-financial sector share of SMEs No. of enterprises ,8 99,8 No. of employees ,7 66,4 Turnover (mil. dinars.) ,8 65,3 GVA (mil. dinars) ,1 55,9 Export (mil. dinars) ,5 46,4 Import (mil. dinars) ,9 54,3 Trade balance (mil. dinars) ,8 65,4 Investments (mil. dinars) ,6... Source: MoF 5 Despite a considerable impact of the SMEE sector on the overall economic development, main business indicators by size of enterprises in 2010 show the presence of big development problems, the most important of which is the unfavourable structure with insufficient number and low development level of medium-sized enterprises, which are the drivers of the sector development. Table: SME business activity indicators in 2010 by size of enterprises Micro Small Medium SME value % value % value % value % Number of enterprises , , , Number of employees , , , Turnover (mil. dinars) , , , GVA (mil. dinars) , , , Employment per enterprise Wage per employee 1 (thousand of dinars) Turnover per enterprise (mil. dinars.) 6,1 145,3 621,2 14,7 100 GVA per enterprise (mil. dinars) 1,1 24,3 115,7 2,6 100 Exports (mil. dinars) , , , Imports (mil. dinars) , , , Trade balance (mil. dinars) , , , Export/import ratio 52,5 38,4 59,1 49,9 Source: MoF Analysed by size, in the structure of SMEs most enterprises are micro enterprises (306,669) 6, whereas small and medium-sized enterprises (11,871) dominate in all analysed indicators (52.7% of employment, 59.9% of turnover, 60.6% of GVA, 73.7% of exports and 74.9% of imports). However, in 2010, the number of mediumsized companies expected to take on the role of development drivers for the entire sector went down by 8.6%. In addition, cuts in the number of employees were most pronounced in medium-sized enterprises (9.4%). The effects of the crisis and overall conditions for business operations have also intensified the following development problems: 1) Limited production and economic resources have increased the dependency of this sector on the external sources of financing. The global crisis and unfavourable business conditions have affected the investment level. The investments of the non-financial sector 7 in 2009 reached 493,9 bn. dinars, which is in real terms by 17.6% less than in In the SMEE sector investments went down by 7.6%, and in large companies by 26.4%. Only small enterprises increased their investments by 29.8% and thus, despite reduced investments in 2009, SMEs increased their share in the investment structure of the non-financial sector from 46.9% in 2008 to 52.6% in The SMEE sector uses half of their investments for construction works (48.5%). Analysed by size, small enterprises used a part of their investments for equipment (56.2%), whereas entrepreneurs, micro and mediumsized enterprises invested over 1/2 in construction works. The relation between investments and turnover indicates that investment activities are still at a low level: large enterprises use 11.3% of the turnover and SMEs 5.9% (12.5% and 5.6% in 2008, respectively). 5 Ratio between annual wage budget (total cost of wages, benefits and other personal expenses) and the number of employees 6 Total number of entrepreneurs in 2010 was , and total number of employees 232,176. A number of entrepreneurs report their final balances. They can be divided to micro, small, and medium-sized by the number of employees, but for these entrepreneurs no indicators are available such as: gross value added and turnover, nor are data on exports, imports, and investments. Therefore, entrepreneurs as a group have been added to micro enterprises. 7 Annex Table : Investments in fixed assets of the non-financial sector of economy

15 2) Insufficient internationalisation and low level of competitiveness Foreign trade of the SMEE sector in 2010 made a deficit of 340,7 mil. dinars (65.4% of the non-financial sector deficit), and export/import coverage was below the average of both economy and large companies (49.9% compared to 58.5% and 68.6%, respectively). More moderate and slower growth of imports (by 1.9% - 680,5 bn. dinars) than that of exports (by 15.9% - 339,8 bn. dinars) contributed to 9.1% decrease in foreign trade deficit in comparison to Compared to 2009, SMEs have decreased their share in the structure of exports and imports of Serbian non-financial sector in favour of large companies which have increased their foreign trade activities by 1.4 times (exports 36.5% and imports 33.9% higher). Table: Export and import structure of non-financial sector in Serbian economy in 2010 Exports Imports Micro 12,1 12,2 15,7 13,6 Small 12,6 13,0 21,2 19,7 Medium 25,8 21,2 24,0 21,0 SME 50,5 46,4 60,9 54,3 Large 49,5 53,6 39,1 45,7 Total Source: MoF 3) Unfavourable structure of the SMEE sector by business activities. Insufficient number and low performance of the sector in tradable business activities, particularly in manufacturing industry, is yet another indicator of a low development level of this sector. Technical, technological and innovation development of manufacturing industry is the basis of overall development and improvement of Serbian competitive position. Table: 2010 business indicators of SMEs by industries Number of enterprises Employment Turnover GVA number % of economy number % of economy mil. dinars % of economy mil. dinars % of economy Tradable sectors , , , ,4 Manufacturing industry , , , ,9 Other tradables , , , ,5 Non-tradable sector , , , ,5 Construction , , , ,5 Trade , , , ,7 Professional, scientific, innovation and , , , ,0 engineering activities Other non-tradables , , , ,3 Total SME , , , ,9 Source: MoF Analysed by industries, in 2010, SMEs operated in non-tradable industries, generating in the non-financial sector 42.8% of employment, 46.9% of turnover and 38.5% of GVA. The majority of SMEs ( or 67.2%) is concentrated in four sectors: manufacturing industry, wholesale and retail trade, construction and professional, scientific, innovation and engineering activities. In 2010, in the SMEE sector these industries accounted for 72.8% of employment, 80.7% of turnover and 71.7% of GVA (48.3%; 52.7% and 40.0% of the non-financial sector, respectively) Structure of the SMEE sector by size and type of organization In 2010, the total number of business entities increased. In relation to 2009, the number of business entities rose by as a result of increase in the number of SMEs entrepreneurs by and micro enterprises by 1.746, whereas the number of small, medium and large enterprises dropped by 497. There were business entities operating in Serbia in 2010, whereas SMEE sector comprises business entities and has a share of 99.8% in the total number of enterprises. 15

16 Table: Number and structure of business entities in the non-financial sector in 2010 Type of organisation SMEs Large Total Number Number Number Structure (%) Enterprises 89, , Entrepreneurs 228, , Total 318, , Structure (%) Source: MoF In the SMEE 8 sector structure, micro enterprises prevail (306,669) 9 with a share of 96.3%, while based on the type of organizations the biggest share belongs to entrepreneurs (228, % of SMEE sector) and limited liability companies ( % of SMEE sector). Table: Number and structure of business entities in the SMEE sector in 2010 Type of organisation Micro Small Medium-sized Total Number Number Number Number Structure (%) Enterprises 77,989 9,614 2,257 89, Joint-stock companies , Limited Liability Companies 72,035 8,594 1,483 82, Other 2 5, , Entrepreneurs 228, , Total 306,669 9,614 2, , Structure (%) Source: MoF Chart 10 The conducted reforms characteristic of the transition period abolition of all formal restrictions related to establishing and operating an enterprise, creation of favourable entrepreneurial climate (new legal solutions in the area of registration, bankruptcy and execution procedures) contributed significantly to growth of the entrepreneurial sector in Serbia. However, crisis and deterioration of general conditions in the country and worldwide slowed down the dynamic development of SMEE sector in Serbia. Also, although SMEE sector had a dynamic development before the world economic crisis, that did not represent a higher level of development of the entrepreneurial sector since those were micro enterprises and entrepreneurs businesses of weak economic and insufficient competitive strength in the market. Even though a significant improvement was achieved in the development of institutional infrastructure aimed to stimulate SMEE development, the overall business climate still is not motivating enough and has not been adapted to accelerated development of SMEE, which particularly reflected in slowing down the dynamics of SMEE sector development in the time of crisis. 8 Annex: Table: SMEE sector in the period ; Table: Change in the number of SMEs in the period Entrepreneurs are included in the group of micro enterprises. 10 Including: general partnership, limited partnership, social companies, public companies, cooperatives. 16

17 2.3. Business demography Statistical data of business demography are structural indicators used for assessment of progress in entrepreneurship development, dynamics of establishment of new business entities, as well as growth of small and medium-sized enterprises. Since 2008, as a result of economic crisis and worsening of business operating conditions, the number of established enterprises and sole traders has decreased, while the number of business entities that are closing down has increased. Helathy entreprenurial dynamics from the previous years was disturbed resulting in significant limitations on job creation opportunities and productivity growth. Prior to the crisis, the number of established and closed sole traders was higher than the number of etablished and closed enteriprises. Also, enterprises and sole traders were most often established in the first quarter, and the majority was deleted from the register in the middle or end of the year. However, due to spreading of the world crisis, negative tendency of establishing and closing business entities lose seasonal character. Table: Number of newly established and closed SMEs Number of enterprises Number of sole traders Net effect established closed established closed enterprises sole traders ,5 1, ,9 1, ,7 1, ,8 1, ,0 0,9 Source: MoF according to the data from RSO In 2010 tendency of decreasing number of established and increasing the number of closed business entities (enterprises and sole traders) was accelerated. There were enterprises established (6.2% less than in 2009) and enterprises closed (159.7% more than in 2009). Meantime, there were newly established sole traders (11% less than in 2009), while were closed (2% more than in 2009). In addition to unfavourable business climate, accelerated pace of business entities closures was greatly influenced by implementation of the regulation from the Bankruptcy Law on automatic deletion of business entities due to illiquidity longer than three years period. Net effect, i.e. the ratio between the number of established and closed enterprises has been declining every year: in 2007, there were almost 6 new businesses per one closed business, and in 2010 only 1 new enterprise. The net effect of sole traders is also declining every year, but slower than in case of enterprises in 2007 there were 15 new sole traders per 10 sole traders that were closed, and in 2010, there were 9 new sole traders. Table: Birth and death rate of enterprises and sole traders in % Enterprises Sole traders Total birth rate death rate birth rate death rate birth rate death rate ,9 1,9 23,7 14,0 22,3 10, ,2 5,0 22,6 14,9 20,7 12, ,8 6,4 20,2 16,1 18,0 13, ,3 4,1 17,4 16,1 15,7 12, * 10,7 10,5 15,6 16,6 14,2 14,9 Source: MoF according to the data from RSO 17

18 Basic indicators of business demography show constantly lower birth rates of enterprises/sole traders (number of new enterprises/sole traders as a percentage of the total number of active enterprises/sole traders) and higher death rates of enterprises/sole traders (number of deleted enterprises/sole traders as a percentage of the total number of active enterprises/sole traders), which results in a lower total birth rate and higher total death rate of business entities. All new enterprises, as well as enterprises deleted from the register, are small and medium-sized. Chart: Density of SMEs and newly established enterprises In 2010, there were on average 42.7 SMEs (43.0 in 2009) per inhabitants, and 6.1 (6.7 in 2009) newly established enterprises. When looking at the active population between 15 and 64 years of age, in 1,000 population there are 63.1 SMEs, or 9 newly established enterprises. According to the density of SMEs, Serbia is on the same level as EU, with 41.6 SMEs in population, and the highest value within the EU is in the Czech Republic (86.4) and the lowest in Romania (20.5). Chart: Density of SMEs in Europe, data for

19 Survival rate of enterprises indicates how many enterprises established in the n year survive in n+2 year, after that an enterprise can be considered to have adapted to the market conditions and positioned itself in the market. Based on the data of newly established SMEs in 2007 and 2010, the following can be concluded: just above 61% of newly established SMEs survive the first two years of operation and continue to operate in the following year; survival rate of newly established SMEs is considerably lower in 2010 than in 2007, prior to the crisis; a higher survival rate is to be found in enterprises (90.6%) than in sole traders (54.1%). established Table: Survival rate of business entities Enterprises Sole traders Total survived survival rate % established survived survival rate % established survived survival rate % ,484 12,405 92,0 47,948 31,741 66,2 61,432 44,146 71, ,386 10,315 90,6 43,575 23,581 54,1 54,961 33,896 61,7 Source: MoF according to the data from RSO Sectoral analysis In 2010, business operations were most often started in the following sectors: Wholesale and retail trade ( or 27.1%), Manufacturing industry (7.831or 17.1%) and Accommodation and Food Services (5.192 or 11.3%). The biggest number of enterprises deleted from the register was also found in these three sectors (35.1%, 16.9% and 10.2% respectively, out of total number of enterprises and sole traders deleted in 2010). Key findings of the indicator analysis by sectors are as follows: net effects of establishing new enterprises in all sectors are lower in 2010 compared to the previous year (in 2009 there were 10 closed enterprises closed per each 13 newly established ones, and in 2010, the number of established and closed enterprises leveled off). Sudden drop in net effect was particularly recorded in Finance and Insurance industries (in ; in ). Survival rate of business entities in the first two years of operation is the highest in Public administration and Defense; Compulsory social security (100%), Electricity, gas, steam and air conditioning supply (77.8%) and Mining and quarrying (77.0%). Table: Basic indicators of business demography by sections 2010 Net effect Survival rate (%) established closed Agriculture, forestry and fishing ,8 0,9 71,9 Mining and quarrying ,3 0,9 77,0 Manufacturing industry ,5 1,0 64,5 Electricity, gas, steam and air-conditioning supply ,2 7,7 77,8 Water supply ,0 1,7 69,3 Construction ,2 1,0 63,3 Wholesale and retail trade ,0 0,8 58,9 Transport and storage ,1 1,0 71,9 Accommodation and food services ,3 1,1 46,0 Information and communication ,7 1,7 73,2 Finance industry and Insurance industry ,9 1,4 69,9 Real estate activities ,5 1,1 64,0 Professional, scientific and engineering activities ,6 1,6 67,5 Admin. and supporting retail services ,3 1,2 57,2 Public administration and defense; compulsory social security 3 1 1,5 3,0 100,0 Education ,7 1,3 69,5 Health and social security ,1 1,1 71,5 Arts, entertainment and recreation ,7 1,4 55,9 Other retail services ,3 1,0 60,6 Total ,3 1,0 61,7 Source: MoF according to the data from RSO 19

20 Regional analysis Big differences in the level of development among districts in Serbia are shown in the indicators of business demography as well. Potential entrepreneurs in the developed districts have better prospects for starting new businesses. The analysis indicates that, in that context, the leaders are the City of Belgrade ( or 29.2% of all newly established enterprises in 2010) and South Backa District (4.660 or 10.2%). In these regions, the perspective for survival and development of started business activities is higher, resulting in lower death rate of enterprises (67.2% and 62.8%, respectively). On the contrary, in Pirot District there were only 367 enterprises and sole traders established or 0.8% of the total number of newly established enterprises in Serbia in 2010, whereas 483 business entities was closed down. Net effect is the highest in the City of Belgrade with the highest survival rate as well (of over 2/3 of established business entities). Table: Basic indicators of business demography by region 2010 Net effect Established Closed Survival rate (%) Belgrade Region Belgrade District Vojvodina Region North Backa District Central Banat District North Banat District South Banat District West Backa District South Backa District 4, Srem District Sumadija and West Serbia Region ,2 0,9 58,7 Macva District 1, Kolubara District Sumadija District Zlatibor District Morava District Raska District Rasina District Pomoravlje District East and South Serbia Region ,1 1 56,8 Bor District Branicevo District Zajecar District Nisava District Toplica District Pirot District Jablanica District Pcinja District Podunavlje District Total

21 2.4. Employment In 2010, there were employees in the non-financial sector of Serbia, of which 66.4% ( ) employees in the SMEE 11 sector. Table: Number and structure of employees in the non-financial sector in 2010 Type of orgaization SMEs Large Total Number Number Number Structure (%) Enterprises Entrepreneurs Total Structure (%) Source: MoF Within the SMEE sector, micro enterprises employ ( ) people which is almost ½ of employees in the SMEE sector 12, while small and medium-sized enterprises employ 52,8% people (small enterprises 23,9% people, and medium-sized enterprises 28,8% people). According to the type or organization, almost 85% of employees in the SMEE sector work in Limited liability companies ( employees 56.3%) and entrepreneurs businesses ( employees 28.5%). Type of orgaization Table: Number and structure of employment in the SMEE sector in 2010 Micro Small Medium-sized Total Number Number Number Number Structure (%) Enterprises ,5 Joint-stock companies ,2 Limited Liability Companies ,3 Other ,0 Entrepreneurs ,5 Total ,0 Structure (%) 47,3 23,9 28,0 100,0 Source: MoF At the beginning of the transitional processes it was expected that dynamic development of the SMEE sector would create a great number of new jobs which would be enough to compensate for the decreased employment in large and unpromising medium-sized companies. As expected, the dynamic development of SMEE sector in the period before the crisis outbreak increased employment considerably, however the increase of employment in the SMEE sector was not strong enough to compensate for the fall of employment in large enterprises. The situation was seriously deteriorated under conditions of economic crisis when the positive trend of continuous increase in the total number of employees in the SMEE sector, which continued for many years (in the period ) ceased, which led to a significant rise in unemployment in the economy. In 2010, compared to 2009, total employment, as well as employment in all types of enterprises (except for micro enterprises, excluding entrepreneurs) decreased. Measures and activities of the Serbian Government on alleviation of economic crisis effects and support of production and employment growth (Government s package of measures in the field of economic and monetary policy aimed at maintaining the macroeconomic stability, package of support measures for revival of production activities and protection of the population s living standards, as well as continuation of investment activities in building the most important infrastructures, especially Corridor 10) significantly slowed down and alleviated the fall in employment, but did not succeed in ceasing and transforming the negative trend of unemployment growth in the economy. 11 Number of employees in legal entities based on the data from Business Registry Agency (BRA), and for entrepreneurs based on the data from Tax Administration. 12 Annex: Table: Employment in the SMEE sector in the period Annex: Table: Change in the number of employees in the SMEE sector in the period

22 Chart Compared to 2009, in the non-financial sector of economy, employment dropped by people (6.2%), where employment in the SMEE sector was decreased by people (6.6%), and in large companies by (5.2%). Within the SMEE sector, the biggest fall in employment was in entrepreneurs businesses (by people 10.5%) and medium-sized enterprises ( people 9.4%), while in small enterprises employment was lowered by people (3.2%). Employment growth was recorded only in micro enterprises (excluding entrepreneurs) by 190 people, 0.1% Sectoral representation SMEs have a defining influence on the indicators of business activity in all business industries except the following: Mining, Electricity, gas and steam supply, and Transport and storage, where large companies dominate. SMEs working within the industries Wholesale and retail trade and repair of motor vehicles, ( enterprises or 30.9%) and Manufacturing industry ( or 17.0%) account for 47.9% of all enterprises in non-financial sector, and employ 38.3% people, achieve 45.1% of turnover and 29.6% GVA of the nonfinancial sector in Serbia in The biggest share in SMEs belongs to the following industries: Wholesale and retail trade and repair of motor vehicles, Manufacturing industry, Transport and storage and Professional, scientific and innovative engineering activities. In 2010, these industries comprise 76.9% of the number of enterprises, 77.1% of employees, 86.0% of turnover and 78.1% of GVA of the SMEE 14 sector. Table: Breakdown of SMEs industry structure in 2009 and 2010, SMEE sector = 100 Industry sections Number Employment Turnover GVA Export Import Total SMEs Wholesale and retail trade and repair of motor 32,8 30,9 29,1 28,8 46,9 47,1 28,5 28,0 32,8 30,9 29,1 28,8 vehicles Manufacturing industry 16,6 17,0 28,6 28,9 21,3 21,9 24,9 24,9 16,6 17,0 28,6 28,9 Саобраћај и складиштење 9,8 9,7 4,3 4,3 6,2 5,3 6,5 6,4 9,8 9,7 4,3 4,3 Professional, scientific and innovative engineering 9,7 10,8 6,8 7,1 5,6 5,3 9,5 8,9 9,7 10,8 6,8 7,1 activities Construction 8,6 8,5 8,3 8,0 6,9 6,4 10,0 9,8 8,6 8,5 8,3 8,0 Other industries 22,6 23,1 25,5 22,9 13,2 14,0 20,6 21,9 22,6 23,1 25,5 22,9 Source: MoF 14 Annex Table: Industry breakdown of performance indicators of SMEE in 2010;Table:Industry breakdown of the number of employees in 2010; Table:Industry breakdown of turnover in 2010 (RSD m); Table:Industry breakdown of GVA in 2010 (RSD m) 22

23 Foreign trade activity of the SMEE sector is mainly concentrated in Manufacturing industry and Wholesale and retail trade ,225 exporters achieved billion dinars of export (39.7% of the non-financial sector, 85.6% of SMEs export), 14,902 importers achieved billion dinars of import (48.9% of the non-financial sector, 90.1% SMEs import). The biggest volume of export and import was achieved by medium-sized enterprises. Mediumsized enterprises dominate in export of the following industries: Agriculture, forestry and fishing, Mining, Manufacturing industry, Finance industry and Insurance industry. Micro enterprises dominate in export in: Water supply and waste water management, Construction, Wholesale and retail trade and repair of motor vehicles, Transport and storage, Information and communication, Administration and supporting retail services and Other retail services, while small enterprises are leading in Professional, scientific, innovative and engineering activities. As for import, medium-sized enterprises dominate in the industries as follows: Mining, Manufacturing industry, Electricity, gas and steam supply, Transport and storage, Finance industry and Insurance industry, Professional, scientific, innovative and engineering activities and Arts, entertainment and recreation. Micro enterprises dominate in: Real estate activities, Administration and supporting retail services, Education and Other retail services, while small enterprises dominate in other industries. Foreign trade balance of SMEs is negative (340.7 billion dinars), 16 but it is more favourable than in 2009 (trade deficit of SMEs dropped by 11.1 billion dinars). By industries, SMEs achieved trade surplus in Agriculture, forestry and fishing (7.5 billion dinars), Mining (505.5 billion dinars), Water supply and waste waters management (8.3 billion dinars), Finance industry and Insurance industry (3.4 billion dinars). The highest deficit was registered in Wholesale and retail trade and repair of motor vehicles (294.2 billion dinars, 86.3% of the SMEE sector deficit) and in Manufacturing industry (27.9 billion dinars 8.2%). Low-technology industries dominate in the Manufacturing industry of SMEE sector with a share of over 50% by all basic indicators of business operations (except by export 40.6%). The smallest share is held by high-technology industries (medium-high-technology industries and high-technology industries) accounting for 10.0% of the total number of enterprises, employing 16.9% of people and generating 20.9% of turnover, 20.3% of GVA, 20.7% of export and 34.5% of total import of SMEs, indicating particularly unfavourable technological structure of domestic small and medium-sized enterprises manufacturing low value added products. 15 Annex Table: Foreign trade activity industry breakdown in Annex Table: Foreign trade activity industry breakdown in 2010 by size of enterprises 23

24 Table: Indicators of SMEE sector in the Manufacturing industry in 2010 by technological structure (%) Industries No. of enterprises No. of persons employed Turnover GVA Export Import Manufacturing industry SMEs 100,0 100,0 100,0 100,0 100,0 100,0 Low technology industries 63,6 59,0 55,6 54,4 54,6 40,6 Manufacture of food products 19,3 26,0 29,3 23,7 24,1 7,9 Manufacture of beverage 1,4 1,9 2,6 2,5 1,3 1,2 Manufacture of tobacco products 0,0 0,3 1,1 0,7 1,3 2,3 Manufacture of textiles 3,4 2,5 1,7 2,3 2,5 3,2 Manufacture of clothing 9,5 7,7 3,2 5,0 5,2 4,9 Manufacture of leather and leather products 2,0 2,6 1,3 1,7 3,7 2,3 Manufacture of wood and wood products 9,1 5,3 3,9 3,9 4,0 2,6 Manufacture of paper and paper products 3,1 2,4 4,5 4,5 6,0 8,7 Printing and reproduction of audio and video recordings 5,5 3,5 3,1 4,5 1,4 2,5 Manufacture of furniture 4,1 4,4 3,1 3,2 3,8 3,4 Other manufacturing industries 6,0 2,4 2,0 2,4 1,3 1,7 Medium-low-technology industries 26,4 24,1 23,5 25,3 24,8 24,9 Manufacture of coke and oil derivatives 0,1 0,3 0,7 0,5 0,6 1,2 Manufacture of rubber and plastic products 5,5 5,6 5,4 6,4 6,3 8,7 Manufacture of non-metal mineral products 5,4 4,6 4,0 4,4 2,6 2,6 Manufacture of basic metal 0,8 2,2 2,2 1,3 3,8 1,7 Manufacture of metal products, excluding machinery 14,1 11,1 10,9 12,2 11,3 10,4 Repair and installation of machinery and equipment 0,5 0,4 0,3 0,5 0,2 0,2 Medium-high-technology industries 6,6 12,8 13,2 14,1 15,8 17,6 Manufacture of chemicals and chemical products 1,9 3,2 6,0 4,8 4,6 7,3 Manufacture of electrical equipment 1,4 2,8 2,1 2,8 2,2 2,7 Manufacture of Machinery and equipment not mentioned elsewhere 2,3 3,9 3,3 4,3 4,6 4,1 Manufacture of motor vehicles and trailers 0,7 2,1 1,3 1,5 2,3 1,6 Manufacture of other transport equipment 0,3 0,8 0,6 0,7 2,1 1,9 High-technology industries 3,4 4,1 7,7 6,3 4,8 16,8 Manufacture of basic pharmaceutical products and preparation 0,1 0,3 0,6 0,8 0,5 0,6 Manufacture of computer, electrical and optical products 3,3 3,8 7,1 5,5 4,4 16,3 Note: Distribution of industries is done according to international classification of industries. Source: MoF 24

25 2.6. Regional representation SMEE sector dominates in all the regions and districts of Serbian economy. SMEs have the biggest share in Sumadija and West Serbia Region (accounting for 99.9% of enterprises, 73.0% of employees, 76.3% of turnover and 66.3% of GVA in the region), and the smallest share in Belgrade Region (with 99.8% of enterprises, 56.2% employees, 63.0% of turnover and 50.8% of GVA in the region). SMEE sector dominates in all districts accounting for over 99.7% of enterprises (all enterprises in Toplica District), 17 employing over 60% of people in district (except in Podunavlje 55.6%, Bor 56.1% and Belgrade District 56.2%). SMEE 18 sector has a dominating influence on turnover and GVA of almost all districts, except in Podunavlje and Pirot District (large companies make bigger profit) and Bor, Branicevo, Pirot and South Backa Districts where large enterprises have prevailing influence on the value of GVA. The biggest share in the structure of the SMEE sector in Serbia belongs to enterprises from Belgrade and South Backa Districts, while the smallest is held by enterprises from Toplica and Pirot Districts. SMEs in Belgrade District make 30.3% ( enterprises) of all entrprises in the SMEE sector and acount for 32.5% of emloyees, 44.4% of turnover and 43.4% of GVA of the non-financial SMEE sector. SERBIA NORTH SERBIA SOUTH Source:MoF Table:Regional breakdown of the SMEE sector in 2010, by regions and districts (SMEs economy = 100) Belgrade Region Vojvodina Region Sumadija and West Serbia Region South and East Serbia Region Number of enterprises Number of employees Turnover GVA Export Import Belgrade District 30,3 32,5 44,4 43,4 36,0 62,5 West Backa District 2,2 2,3 2,1 2,5 2,9 0,8 South Banat District 4,3 3,2 3,1 3,1 2,7 1,3 South Backa District 9,9 10,4 12,3 12,2 15,5 8,9 North Banat District 1,5 2,0 1,6 2,5 3,6 1,3 North Backa District 2,6 3,2 3,0 3,9 3,7 3,2 Central Banat District 1,8 2,1 1,8 2,3 1,8 0,8 Srem District 4,2 4,4 4,0 4,4 5,0 4,1 Zlatibor District 4,0 3,5 2,3 1,9 3,1 1,3 Kolubara District 2,5 2,0 1,6 1,6 1,9 0,8 Macva District 3,6 3,2 2,7 2,1 3,1 1,6 Morava District 3,4 3,4 3,0 3,4 3,8 3,1 Pomoravlje District 2,7 2,5 1,8 1,3 1,4 0,7 Rasina District 3,0 2,6 1,8 1,3 2,0 1,0 Raska District 3,8 3,4 2,2 1,8 2,0 1,5 Sumadija District 3,7 3,4 2,6 2,8 2,1 2,0 Bor District 1,2 1,2 1,1 0,8 1,3 0,4 Branicevo District 2,0 1,6 1,1 0,8 0,4 0,3 Zajecar District 1,2 1,3 0,7 0,6 0,5 0,2 Jablanica District 2,0 2,0 1,2 1,0 1,6 0,6 Nisava District 4,1 4,3 2,6 2,8 2,6 1,7 Pirot District 0,9 1,1 0,4 0,7 0,4 0,3 Podunavlje District 2,3 1,7 1,3 1,1 1,0 0,5 Pcinja District 1,9 1,7 1,0 1,2 1,4 0,9 Toplica District 0,8 0,8 0,4 0,5 0,2 0,1 Big disproportion in the level of development among the regions is characteristic of Serbian economy. GVA per person employed in the SMEE sector is the highest in Belgrade region, 2.1 times higher than compared to South and East Serbia region. There is also big disproportion in the district development, although it was slighltly reduced in The level of GVA per person employeed is the biggest in the developed districts (Belgrade and South Backa Districts), with the following enterprises having above average value of GVA per person employed: all the enterprises in the territory of Belgrade District, as well as all the medium size enterprises in South Banat, South Backa, North Banat, North Backa, Central Banat, Srem and Morava Districts and small enterprises in South Banat, South Backa and Srem Districts. 17 Annex Table: Regional breakdown of the number of enterprises in 2010; Table: Regional breakdown of the number of employees in 2010; 18 Annex Table: Regional breakdown of the SMEE sector performance indicators in 2010; Table: Regional breakdown of GVA in 2010; Table: Regional breakdown of turnover in 2010; 25

26 Chart The level of GVA by district shows that, GVA per person employeed in the SMEE sector is above average of non-financial sector only in Belgrade District, while Belgrade and South Backa Districts have a value of GVA per person employed above the average of the SMEE sector in Serbia. Within the SMEE sector, small and medium sized enterprises in Belgrade and South Backa District and medium sized enterprises in North Backa District are above the average of non-financial sector. In 2010, ration between GVA per person employeed in the SMEE sector of Belgrade and Zajecar District is 2.4:1 which is more favourable than in 2009 when this ratio was 3:1. Chart 26

27 Despite decreased foreign trade activities compared to the period before the crisis, SMEs are dominant only in Belgrade region (67.8% of export and 71.8% of import). In Vojvodina region SMEs have a share of 45.3% in export and 38.4% in import, in Sumadija and West Serbia region 44.3% in export and 49.6% in import, whereas the lowest impact of the SMEE sector on foreign trade activities is in South and East Serbia region which is the only one with surplus in foreign trade activities (the surplus is due to the foreign trade activities of large and medium sized enterprises, as micro and small enterprises made deficit in foreign trade). In 2010, SMEs show prevailing influence on the volume of export and import achieved in a great number of districts. The biggest influence of SMEs is in North Backa (81.2% export and 92.3% import), Raska (87.1% and 95.0%), Branicevo (98.9% and 68.9) and Morava District (73.6% and 85.6%), and the smallest in Podunavlje (4.3% export and 4.8% import), Pirot (7.9% and 13.0% and Zlatibor District (20.1% and 28.4%). The biggest share of foreign trade activities of SMEs (over ½ of export and 80% of import) is concentrated in Belgrade District (4,775 exporters made billion dinars of export 38.5% of SMEs export and 16.7% of non-financial sector, and 8,791 importers made billion dinars of import 34% of the non-financial sector, 62.5% of SMEs import) 19 and South Backa District (1,355 exporters made 52.5 billion dinars export 7.2% of non-financial sector, 15.5% of SMEs export, and 2,197 importers made 60.3 billion dinars import 4.8% of non-financial sector, 8.9% of SMEs import). The biggest deficit was made by SMEs 20 from the territory of the Belgrade (89.0% of deficit), Srem (3.2%), North Backa (2.7%) and Morava District (2.7%). Surplus was achieved by SMEs from 11 districts:west Backa (4.5 billion dinars), Bor (1.7 billion dinars), Zlatibor (1.5 billion dinars), Jablanica (2.3 billion dinars), Central Banat (952.4 million dinars), Kolubara (647.,3 million dinars), Zajecar (398.7 million dinars), Pomoravlje (229.0 million dinars), South Banat (76.7 million dinars), Macva (76.2 million dinars) and Podunavlje District (72.5 million dinars). The biggest exporters and importers within the SMEE sector in the majority of districts are medium sized enterprises, except that in export of Zlatibor, Rasina and Bor Districts (small enterprises dominate) and in Pomoravlje, Raska and Podunavlje Districts (there prevail micro enterprises including entrepreneurs) and as to import, the dominant ones are small eterprises in Belgrade, South Banat, South Backa, Zlatibor, Pomoravlje, Rasina, Branicevo, Zajecar, Nisava and Podunavlje District Business efficiency of SMEs In 2010, SMEs have recorded a mild increase in the scope of their activities. Compared to the previous year, turnover is 0.3% higher, however not sufficiently to reach the level of five years ago (compared to 2006 the turnover of the SMEE sector is less by 5.1%, and that of large companies by 13%). Gross value added of SMEs in 2010 is in real terms 1.4% less than in 2009 (0.8% growth in economy, 3.6% growth in large companies). Unlike large companies, GVA of the SMEE sector did not drop below the level it had in A negative trend of reduced profit and profitability was stopped in Compared to the previous year, large companies have shown more intensive growth in profit than SMEs (14.5% to 8.6%, respectively), but small and medium-sized enterprises have kept a dominant place in the generation of profit (51.6%). Within the SMEE sector, the highest rates of profit and profitability were shown by medium-sized companies: 12.3% and 15.9% respectively. 19 Annex Table: Foreign trade activities of the SMEE sector regional breakdown in 2010; 20 Annex Table: Foreign trade activities regional breakdown by size of enterprise in 2010; 27

28 Chart Business operations of Serbian entrepreneurs were largely affected by adverse tendencies from previous period drop in turnover of 18.2%, GVA of 10.2% and profit of 9.2% in 2010 compared to 2009 has neutralized positive trends of these indicators for micro enterprises and reduced the growth rates of the overall SMEE sector Total turnover The turnover 21 of SMEs in 2010 reached the value of 4,678 billion dinars or 14.7 billion dinars per enterprise and 5.7 million dinars per employee. Share of small and medium-sized enterprises in the turnover of the non-financial sector is 65.3%, which is 2.5 structural points less than in 2009, primarily due to decreased activities of entrepreneurs which actually decreased their turnover by 18.2% (other categories of enterprises have recorded a real growth). Table: Total turnover of non-financial sector in 2010 by size and type of organisation of business entities Type of organization SMEs Large companies Total in bn. dinars in bn. dinars in bn. dinars structure (%) Enterprises ,8 Entrepreneurs ,2 Total Structure (%) 65,3 34,7 100 Source: MoF As in the previous years, micro enterprises have a defining influence on the value of turnover of SMEs 22 in 2010 (40.1%) despite a downward trend in the period (58.9% in 2004). According to the type of organisation, small limited liability companies generate 17.0% of the SME turnover (46.5% of the turnover of the non- financial sector). Table: Total turnover of the SMEE sector in 2010 by size and type of organisation of business entities Type of organisation Micro Small Medium Total bn. dinars bn. dinars bn. dinars bn. dinars structure (%) Enterprises ,8 Joint-stock companies ,4 Limited liability companies ,0 Other ,4 Entrepreneurs ,2 Total bn. dinars ,0 Structure (%) 40,1 29,9 30,0 100 Source: MoF 21 Turnover by the Eurostat standards includes the value of realised goods and services invoiced to third parties (except for the value added tax and taxes not directly linked to production processes) in a given period of time. Turnover can be viewed as an indicator of activity and market growth, and given that it points to future inflow of money on the basis of provided services and sold goods, it is also an indicator of future investments. 22 Annex: Table: Total turnover of the SMEE sector in the period

29 Compared to 2009, the turnover of SMEs is in real terms higher by only 0.3%, which is considerably below average of economy and large companies (+4.1% and +12.2%), due to the drop in turnover in micro enterprises (-5.1%). Small enterprises have shown the most dynamic growth (turnover 6.7% higher), which resulted in the growth of their share in the total turnover of SMEs by 1.8 structural points (from 28.1% in 2009 to 29.1% in 2010). Business activity, measured in turnover by employed person, is in the SMEE sector slightly below the level of large companies and the overall economy. The biggest business activity in the SMEE sector was achieved by small enterprises (24% above average in the non-financial sector). In relation to 2009, business activity of the SMEE sector is in real terms lower by 7.4% (18.3% in large companies). Table: Indicators of business activities by size of business entities in 2010 Turnover per enterprise Turnover per employee million dinars growth rate growth rate million dinars (%) (%) Micro 6,1-6,4 4,9 1,5 Small 145,3 9,5 7,2 10,4 Medium 621,2 11,6 6,0 12,5 SMEs 14,7-0,9 5,7 7,4 Large 4925,4 17,7 6,0 18,3 Total 22,4 2,9 5,8 10,9 Source:MoF Gross value added Gross value added (GVA) 23 shows the trends in total business activities and the level of development of market economy. In 2010, the non-financial sector in Serbian economy achieved 1,462.7 billion dinars of gross value added (4.6 million dinars per enterprise). In the SMEE sector, 817 bn. dinars of GVA were made or 55.9% of GVA in the non-financial sector (57.1% in 2009). Table: GVA of the non-financial sector in 2010 by size and type of organisation of business entities Type of organisation SMEs Large Total in bn. dinars in bn. dinars in bn. dinars structure (%) Enterprises ,3 Entrepreneurs ,7 Total ,0 Structure (%) 55,9 44,1 100,0 Source: MoF Analysed by size 24, the highest GVA in the SMEE sector was achieved by micro enterprises (39.4%), and according to the type of organisation, by limited liability companies (64.6%). Table: GVA of non-financial sector in 2009 by size and type of organisation of business entities Type of organisation Micro Small Medium Total bn.dinars bn.dinars bn.dinars bn.dinars structure (%) Enterprises ,3 Joint-stock companies ,8 Limited liability companies ,3 Other ,2 Entrepreneurs ,7 Total ,0 Structure (%) 39,4 28,6 32,0 100,0 Source: RDB 23 Gross value added is a difference between the value of final products in base prices (the value of produced goods and services resulting from the process of production) and inter-phase consumption in purchasing prices (the value of all goods and services that in a given calculating period was consumed in the process of production). After adjustments made to the Eurostat methodology and standards and practices of EU member states, RSO prepared a database for GVA for 2004, 2005, 2006, 2007, 2008, 2009 and Annex: Table: GVA in the SMEE sector in the period

30 In 2010, GVA of the SMEE sector was reduced by 1.4%, unlike large companies which recorded the growth in GVA of 3.6% (+0.8% in the non-financial sector). GVA growth of 3.6% in small enterprises was not sufficient to neutralize negative trends in micro (-3.3%) and medium-sized business entities (-3.1%). Despite the dominant share of the SMEE sector in the creation of GVA of the non-financial sector, productivity and efficiency of business operations in Serbia are significantly determined by large business systems. In 2010, 504 large companies (0.2% of the total number of business entities) employ 33.6% persons and achieve 44.1% of GVA in the non-financial sector. Share of small and medium-sized enterprises in the total GVA is smaller than their share in employment (55.9% to 66.4%, respectively), which is reflected in a lower productivity level of SMEs compared to large companies by 35.8% (compared to the average of the non-financial sector by 15.8%). Table: Derived GVA indicators GVA per enterprise GVA per employee GVA/Turnover thousand dinars growth rate (%) thousand dinars growth rate (%) in % growth rate (%) Micro , ,5 17,1 1,9 Small , ,2 16,8-2,9 Medium , ,0 18,6-4,9 SMEs , ,7 17,5-1,6 Large , ,3 26,0-7,6 Total , ,4 20,4-3,2 Source: MoF Productivity indicators are the best for large companies GVA per company and GVA per person employed are much higher than the average of SMEs and of the non-financial sector. Compared to 2009, real GVA per enterprise in the SMEE sector is smaller by 2.5%, whereas the growth in GVA per employee (5.7%) is a result of reduced employment in this economy segment (6.6%). Production and market activity, measured by the share of GVA in turnover, registers growth in all size classes of enterprises. Among SMEs, the biggest drop in share compared to 2009 was that of medium-sized enterprises (-4.9%) SME profitability In 2010, a negative trend of decrease in profit and profitability as a consequence of the global crisis was stopped. Compared to 2009, the profit of the SMEE sector is actually higher by 8.6% (+11.4% in the non-financial sector, +14.5% in large companies). Profit rate is higher by 10.1% in SMEs and by 10.5% in large companies. SMEs have made more than ½ of profit of the Republic of Serbia despite the fact that the share of this economy segment is reduced by 1.3 structural points compared to The SMEE sector made the profit to the amount of 295,4 bn. dinars 25 in 2010, or 51.6% of the nonfinancial sector (572,8 bn. dinars). The majority of profit was made by small enterprises 36.4% (18.8% of the non-financial sector profit) and micro 26 enterprises 33.3% (17.1%), whereas medium-sized enterprises generated 30.4% of SME profit (15.7% of the non-financial sector). According to the type of organisation, most profits were achieved in limited liability companies 79.0% of the profit of the SMEE sector (40.7% of the profit of the non-financial sector). Cooperatives, public and socially-owned companies of the SMEE 27 sector had a non-profitable business (public companies were generally profitable). 25 Profit = GVA labour costs 26 Entrepreneurs with generated profit of 47.1 billion dinars (15.9 of profit of SMEs 8.2% of profit of the non-financial sector) were included in micro enterprises. 27 Annex: Table: Profit of the non-financial sector of Serbia in 2010 by type of organisation and enterprise size (RSDm). 30

31 Table: Profit and profitability level in 2010 by size of enterprises Total Micro Small Medium Large SMEs Non-financial sector Profit (million dinars) Share in SMEs profit, in % 33,3 36,4 30,4 100,0 - - Share in profit of the non-financial sector, in % 17,1 18,8 15,7 51,6 48,4 100,0 Profitability 30,5 45,9 34,3 36,1 43,0 39,2 Profitability level (profitability of SMEs = 100 index points) Profitability level (profitability of the non-financial sector = 100 index points) Source:MoF 84,4 127,1 95,0 100, ,8 117,2 87,6 92,2 109,7 100,0 Despite a growth in profitability compared to 2009, due to low profitability of entrepreneurs ( 25.4% rate), the SMEE sector has achieved below average profitability profitability rate 28 of SMEs in 2010 is 36.1% (39.2% in the non-financial sector and 43.0% in large companies). Profitability level of SMEs is higher by 8.9 index points in relation to the SMEE sector i.e. by 0.3 index points relative to the non-financial sector as a result of high profitability level of limited liability companies (index level 123,0 and 113,3 respectively). Within limited liability SMEs 29 small enterprises are the most profitable (48.9%). Profit (million dinars) Table: Profit and level of profitability of the SMEE sector in 2010 by type of organisation SMEs SMEs joint-stock company SMEs Ltd. SMEs other Entrepreneurs SMEs Non-financial sector Share in SMEs profit in % 84,1 5,8 79,0-0,8 15,9 100 Share in profit of the nonfinancial sector, in % 43,4 3,0 40,7-0,4 8,2 51,6 100,0 Profitability 39,3 24,0 44,4-6,5 25,4 36,1 39,2 Profitability level (profitability of SMEs= 100 index points) Profitability level (profitability of the non-financial sector = 100 index points) Source: MoF 108,9 66,5 123,0-18,0 70,4 100,0 100,3 61,2 113,3-16,6 64,8 92,1 100, SME profitability by industries The SMEE sector has a defining influence on the value of profit made in all industries in the nonfinancial part of economy, except in mining, electricity, gas and steam supply, water supply and waste water management, information and communications and art, entertainment and recreation, where large companies generate majority of profit 30. SMEs are concentrated in labour-intensive and service industries with faster capital turnover and shorter cycle of production. More than 70% of SME profit is generated in wholesale and retail trade (31.7%), manufacturing (25.1%) and construction (12.1%). 28 Profitability rate = Profit / GVA* Annex: Тable: Profitability rates of the non-financial sector of Serbia in 2010, by type of organisation and enterprise size (in%) 30 Annex: Table: Profit of the non-financial sector of Serbia in 2010, by industry (RSDm) 31

32 Industries SME profit (million dinars) Table: Profitability of SMEs in 2010 by industry Share in SME profit (in %) Share in nonfinancial sector profit (in %) Profitability Profitability level (SME profitability = 100 index points) Profitability level (non-financial sector profitability = 100 index points) Trade ,7 81,2 40,9 113,1 104,3 Manufacturing industry ,1 55,6 36,5 100,9 93,0 Construction ,1 67,6 44,8 123,9 114,2 Traffic ,8 59,7 38,1 105,4 97,2 Professional, scientific, innovation and engineering activities Agriculture, forestry and fishing Source: MoF ,6 100,1 22,7 62,9 58, ,0 98,6 43,1 119,3 110,0 Small enterprises have the biggest share in the SMEs profit (36.4%), and they make the biggest profit in the industries of agriculture, forestry and water management, wholesale and retail trade, traffic, warehousing and communications, administration and supporting retail services and education. Medium-sized enterprises have the biggest profit share in mining, processing industry, water supply and water management, and micro enterprises in all other industries. Table: The biggest profit by size of SMEs, by industry SMEs Industry % of SMEE sector Construction 38,0 Accommodation and food services 82,4 Micro Information and communication 51,8 Real estate activities 61,0 Professional, scientific, innovation and engineering activities 53,1 Other service activities 90,5 Agriculture, forestry and fishing 44,6 Wholesale and retail trade and repair of motor vehicles 40,8 Small Traffic and warehousing 44,0 Administration and supporting retail services 95,5 Education 47,4 Mining 80,1 Medium Source: MoF Manufacturing industry 48,7 Water supply and waste water management 45,9 Medium-sized enterprises account for 48.7% of the SMEs profit 31 in the manufacturing industry, and small and micro enterprises for 51.3% (21.6% and 29.7% respectively). Medium-sized enterprises have a defining influence on the profit of the majority industries in manufacturing (14) as well as on the non-profitable business operations of SMEs in manufacture of base metals and manufacture of motor vehicles and trailers where they generated loss of 716 million dinars and 634 million dinars, respectively. 31 Annex: Table: Profit of manufacturing in

33 SMEs Micro Small Medium Industry Table: The biggest profit by size of SMEs, by sub-industries of manufacturing % SME subindustry Manufacture of clothes 42,6 Manufacture of wood and wood products, excluding furniture 53,6 Other manufacturing activities 47,0 Manufacture of computers, electrical and optical products 47,5 Manufacture of electrical equipment 47,1 Manufacture of machinery and equipment, not mentioned elsewhere 64,0 Repair and installation of machinery and equipment 56,8 Manufacture of food products 59,4 Manufacture of beverages 65,6 Manufacture of textiles 51,7 Manufacture of leather and leather products 49,5 Manufacture of paper and paper products 69,3 Printing and reproduction of audio and video recordings 42,1 Manufacture of chemicals and chemical products 82,8 Manufacture of basic pharmaceutical products and preparations 77,4 Manufacture of rubber and plastic products 44,0 Manufacture of non-metal mineral products 46,5 Manufacture of metal products, excluding machinery 50,7 Manufacture of furniture 59,8 Source: MoF SMEs have above average profitability rates in most industries 32, where the most profitable are small and medium-sized enterprises in the following industries: real estate activities (78.8% profitability rate), construction (44.8%), finance industry and insurance industry (43.6%) and agriculture, forestry and fishing (43.1%). Profitability rate of SMEs in manufacturing industry 33 is higher than that of large industrial companies and of the non-financial sector average (36.5% to34.4% and 35.5%, respectively). Compared to 2009, profit is in real terms higher in all industries which define SME profit level (in trade 5.8%, manufacturing industry 6.9%, construction 7.2%, traffic 3.1%). Construction has shown the highest profitability rate 44.8% (10.8% more than in the previous year). Chart Chart 32 Annex: Table: Profitability rates of the non-financial sector in Serbia in 2010, by industry 33 Annex: Table: Profitability rates of manufacturing in

34 Profitability of SMEs by districts In 2010, the SMEE sector has been profitable in all districts, while large companies operated without profit in South Banat, North Banat, Šumadija, Zaječar, Podunavlje and Pčinj District. However, generally speaking, profit has not been made only in Podunavlje district, while in other districts, the profit made in the SMEE sector has neutralised losses generated by large companies. The most profitable SMEs in Serbia generating 1/3 of the non-financial sector profit operate on the territory of the City of Belgrade (46.5% of profit in the SMEE sector and 24.0% of profit in the non-financial sector) 34 and in South Banat District (13.8% and 7.1%, respectively). Compared to 2009, SMEs have increased profit in all districts except in Kolubara (-7.5%), Pomoravlje (-17.9%) and Rasina District (-15.1). The highest increase in profit was recorded in Zaječar (13 times), Bor (2.1 times) and Pirot District (2.1 times), which has not had a significant impact on the change in the SME profit structure share of these three districts in profit generation is still small (1.2%). Above average profitability rates (Serbian SMEE sector 36.1%) were made by SMEs operating on the territory of the developed regions in the following districts: City of Belgrade (37.9%), South Bačka (44.3%), North Bačka (41.1) and Srem (36.7%), whereas the worst results in profitability were recorded in Pirot (23.8%), Bor (20.9%), Zaječar (20.4%) and Pčinj District (17.9%) 35. Table: SME profitability by districts in 2010 Region/District Profit of SMEs by districts SME profit share by districts in the profit of Serbian SMEE sector SME profitability by districts Level of SME profitability by districts (profitability of the SMEE sector = 100 index points) Level of SME profitability by districts (profitability of the non-financial sector = 100 index points) Belgrade region ,5 37,9 105,1 92,0 Belgrade district ,5 37,9 105,1 92,0 Vojvodina region ,5 39,4 109,1 91,2 West Banat ,8 32,9 91,2 69,8 South Banat ,7 32,9 91,1 153,1 South Bačka ,8 44,3 122,7 88,1 North Banat ,9 37,6 104,1 170,1 North Bačka ,5 41,1 113,7 105,1 Middle Banat ,6 32,3 89,5 92,1 Srem District ,2 36,7 101,6 98,6 Region of Šumadija and Western Serbia ,5 32,4 89,8 99,4 Zlatibor District ,5 32,9 91,0 80,9 Коlubara District ,4 29,9 82,9 91,0 Мačva District ,5 34,9 96,7 85,1 Моrava District ,0 36,0 99,8 105,2 Pomoravlje District ,4 29,9 82,9 121,0 Rasina District ,2 25,7 71,1 96,5 Raška District ,2 33,8 93,5 96,2 Šumadija District ,4 31,3 86,8 150,0 Region of Southern and Eastern Serbia ,5 26,4 73,1 90,7 Bor District ,4 20,9 57,9 45,4 Braničevo District ,8 26,5 73,5 58,6 Zaječar District ,4 20,4 56,4 116,7 Jablanica District ,0 28,6 79,1 87,7 Nišava District ,4 28,7 79,4 87,4 Pirot District ,4 23,8 65,9 57,2 Podunavlje District ,2 31,1 86,1-89,9 Pčinj District ,5 17,9 49,6 176,5 Toplice District ,4 32,3 89,4 100,0 Total Serbia ,0 36,1 100,0 92,1 Source: MoF 34 Annex: Table : Structure of profit of the non-financial sector of Serbia by districts in Annex: Table : Profitability rates by districts in

35 2.8. Investments Investments of the non-financial sector in 2009, with the value of 494 billion dinars or an average of 1.6 billion dinars per company, account for 83.4% of the total investments in Serbia (592.4 billion dinars) 36 and they are 17.6% lower compared to 2008 (81% of total investments). Despite reduced investments of SMEs in 2009 compared to the previous year (by 7.6% in real terms), share in the structure of investments of the non-financial sector was increased, notably owing to higher allocations for investments (47% of GVA) of small enterprises. Table Investments in 2009 Value, in million dinars Structure, in % Annual growth/fall rate, % Average annual growth/fall rate , % TOTAL INVESTMENTS ,9-1,3 Non-financial sector ,0-17,6 2,2 Large companies ,4-26,4-1,1 SMEs ,6-7,6 5,5 Medium ,0-33,2 6,6 Small ,3 29,8 16,0 Micro ,2 2,7 38,9 Entrepreneurships ,2-18,3-16,0 Source: MoF, according to the BRA and RSO data Investments of the SMEE sector are still above 2006 level (annual real growth rate in the analysed period is 5.5%), except for entrepreneurships where investments have been considerably reduced, particularly in the last two years of crisis. Economic trends in recession have mostly affected medium-sized enterprises which in 2009 allocated for investments 4 times less, in nominal terms, than in the previous year, i.e. real drop rate is -33.2%. Chart Source: MoF, according to the BRA and RSO data 2.9. Foreign trade operations In 2010, the drop in international trade as a consequence of global economic recession and financial crisis was stopped. Thus, Serbian economy, after the drop in foreign trade in 2009 (bigger drop in imports than in exports of goods), in 2010 recorded a real growth of 18.1%. Despite the fact that import still accounts for two thirds of foreign trade in Serbia (65.3%), share of import in 2010 was decreased by 2.8 pp. In Serbian economy, the SMEE sector generates 44.5% of exports and 52.3% of imports and 63.3% of foreign trade deficit. The volume of foreign trade in the non-financial sector amounts to bn. dinars in 2010 (growth of 18.5% relative to previous year) or 96.3% of the total foreign trade in the Republic of Serbia. Despite the increased value of total foreign trade by 6.2% in real terms, the SMEE sector has decreased its share in the trade structure of the non-financial sector from 55% in 2009 to 49% in Annex Table Serbian investments by size of enterprise and technological structure in

36 Table Foreign trade operations of the non-financial sector, in bn. dinars Exports SMEs 226,8 274,5 275,4 339,8 Total 510,1 598,4 545,8 733,1 Imports SMEs 652,6 751,8 627,1 680,5 Total 1.057, , , ,8 Trade volume SMEs 879, ,3 902, ,4 Total 1.567, , , ,9 Balance SMEs -425,8-477,3-351,8-340,7 Total -547,2-643,7-483,4-520,8 Source: МoF, according to the BRA and RSO data Foreign trade balance is still negative, but the SMEE sector has managed to reduce the deficit by 9.1% in real terms (the non-financial sector recorded the real growth of 1.2%). However, only 34.6% of the non-financial sector deficit is accounted for by large companies, whereas the remaining part was generated in the foreign trade of the SMEE sector. The value of exports in the SMEE sector actually increased by 15.9% in 2010, despite the number of exporters being reduced by 21 ( 73 exporters less in medium-sized enterprises and 15 in small enterprises, whereas the number of micro enterprises increased by 67). At the same time, the value of imports in the SMEE sector recorded a real growth rate of 1.9%, and the number of exporters decreased by 606 in all enterprises regardless of their size (micro enterprises being the majority - 444). Analysed by industries, some 70% of exports and 40% of imports in the non-financial sector is generated by the enterprises of manufacturing industry, majority dealing with manufacture of base metals (22.9% of exports and 21.6% of imports). In the SMEE sector, enterprises mostly export food products (57.4% of SME exports and 24.1% of exports in the manufacture of food products). Products mostly imported are in the area of manufacture of computers, electronic and optical equipment (16.3% of SME imports and 94.4% of imports in this area in total). Analysed by regions: - Vojvodina region (36%) has the biggest share in exports of the non-financial sector, followed by Belgrade (24.6%), Šumadija and West Serbia region (20.3%) and the region of South and Eastern Serbia (19.1%); - Belgrade region has the biggest share in exports of the SMEE sector (36%), followed by Vojvodina (35.2%), Šumadija and West Serbia (19.4%) and South and Eastern Serbia region (9.4%); - Belgrade region records the biggest share in imports of the non-financial sector (47.3%), along with Vojvodina (28.8%), Šumadija and West Serbia (13.3%) and South and Eastern Serbia (10.6%); - Belgrade region has the biggest share in imports of the SMEE sector (62.5%), followed by Vojvodina (20.4%), Šumadija and West Serbia (12.1%) and South and Eastern Serbia (4.9%). 36 Source: MoF, according to the BRA and RSO data

37 In the total volume of foreign trade activity, the biggest surplus of the non-financial sector was generated in West Bačka district, whereas import dependency of Belgrade district is reflected in a high deficit which accounts for 53.3% of trade. The same applies to the enterprises in the SMEE sector. Serbia will have to abandon its domestic demand-based growth model and turn to the creation of conditions where savings and investments will play a more dominant role, in order to change the export structure and increase the share in export of goods with a higher finalisation level. Only enterprises can create the value that can be competitive on the increasingly demanding international market. Level of innovations in enterprises and improvement of their efficiency, productivity and profitability depends on the extent to which business environment is attractive for both domestic and foreign investments, which is also crucial for achieving a higher level of national well-being Comparative analysis of SME development Comparative analysis of business indicators of the SMEE sector considerably lags behind the European average and that of majority of selected countries. Qualitative indicators of the development level are lower than the EU average and most analysed countries (employment per enterprise, turnover, GVA and profit per employee). Above average profitability rate is a result of low starting base, and not of expansion or increased level of internationalisation of this sector. Relatively high share of the SMEE sector in basic business indicators of economy shows a slower dynamics of implementation of structural reforms in Serbia. The world economic crisis has only deepened the existing development problems, primarily of large business systems in the process of restructuring. Compared to 2009, the number of SMEs have increased with a mild boost in business activities, profit and foreign trade. A relatively small number of SMEs per citizens (43.3) is above the EU average; however it is not sufficient to meet the needs of Serbia. Until the beginning of the global economic crisis, the SMEE sector was the most vital part of economy and the main job generator. Due to overall deterioration in conditions for business, employed workforce was considerably reduced and this produced relative improvement in business performances compared to the number of employees. Table: Main business indicators of the SMEE sector in selected EU countries and Serbia in 2010 EU Bulgaria The Check Republic Hungary Poland Romania Slovenia Serbia No. of companies, in , ,8 318,5 No. of employees, in , ,5 814,6 Turnover, in bn. EUR , ,6 45,4 GVA, in bn. EUR , ,3 7,9 Profit, in bn. EUR 977 4, ,7 2,9 No. of SMEs per citizens 41,6 41,4 86,6 53,0 41,0 20,4 50,7 43,0 43,5 No. of employees per company 4,3 3,1 2,8 3,3 3,8 6,0 4,2 2,8 2,6 Turnover per employee in 000 EUR 158,7 62,0 97,8 92,2 71,6 101,8 120,3 53,7 55,7 GVA per employee in 000 EUR 40,3 11,1 19,6 14,1 13,8 14,1 25,9 9,5 9,7 Profit per employee in 000 EUR 10,9 4,2 3,6 0,6 3,2 7,2 2,4 3,1 3,5 Profitability rate 27,0 38,1 19 2,0 23,0 52,0 9,0 32,8 36,1 SHARE OF SMEs IN NON-FINANCIAL SECTOR IN PERCENTS Number of companies 99,8 99,7 99,8 99,8 99,8 99,6 99,7 99,8 99,8 Number of employees 67,4 74,1 67,6 71,1 68,9 63,6 67,0 66,7 66,4 Turnover 57,7 65,1 58,8 58,8 59,2 58,7 63,2 67,8 65,3 GVA 57,7 54,1 54,8 51,9 51,7 42,2 59,8 57,4 55,9 Profit 49,4 45,4 31,5-33,6 34,8 29,1 54,1 51,6 Source: the Ministry of Finance based on data from ЕUROSTAT, DG Enterprise and Industry and the Republic Statistical Office. 37

38

39 III COMPETITIVENESS AND INNOVATION OF THE SMEE SECTOR The recession that has affected world economy has caused lower values in companies production, but not in their liabilities, which resulted in fewer tendencies to invest. In 2009, SMEs accounted for 52.6% in the structure of investments of the non-financial sector, and the share of investments in GVA recorded a slight increase to 33%, primarily due to more substantial investments of small enterprises. There is also a downward trend of investment efficiency, which is expressed in increasingly higher amounts of investments necessary for achievement of GVA growth. A comparative analysis of investments in the neighbouring countries and in EU-27 indicates a considerably lower level of these indicators in Serbia. Business activities of SMEs in the period were marked by positive tendencies of basic indicators of cost competitiveness. High real growth rates were achieved in GVA (10.9%) as well as in average value of labour cost expenses (10.4%) and productivity (4.9%). Growth dynamics was stopped in 2009, a crisis year, and the strongest effect was on micro and small enterprises, that provide a significant contribution to employment, but that also employ less qualified workforce. Unlike small businesses, which recovered in 2010 and focused their activities on other, less risky areas, it was not until this year that medium-sized enterprises, due to their slower adjustment to new circumstances, felt the real impact of the crisis, which has crucially affected the total performance of SMEs. Wages in the SMEE sector account for almost 2/3 of GVA, and there is not much left for the companies to allocate in improvements and modernisation of operational processes. In 2010, the main foreign trade partners of Serbia saw a mild recovery of economic activities, which consequently increased the volume of foreign trade. As a consequence of faster growth of export than that of import among Serbian enterprises, export/import coverage has increased to 58.5%. While foreign trade deficit is getting smaller in the course of years, export/import coverage still remains below 50%. Higher RCA is also the consequence of faster import growth than that of export, however still indicating a low level of competitiveness of the SME manufacturing industry 2010 deficit amounts to 7.3% of trade (surplus achieved in manufacturing industry). In 2010 structure of growing import and export, the share of capital products is slightly growing as well as the share of raw-materials, whereas Serbian products, which require highly qualified work for their manufacture, participate in trade increasingly less: compared to 2009, real drop in export rate of human capitalintensive products is -2.0%, and that of import is -14.3%. In the next period, it will be necessary to maintain faster pace of export than of import and improve export structure in favour of high-tech products. Non-competitiveness of SMEs is also reflected in the insufficient use of modern means of business communication such as the Internet, which is an important indicator of company competitiveness. In Serbia, the Internet is most often used for banking and financial services, while e-business (on-line buying and selling) is still insufficiently used SME competitiveness According to the research of the World Economic Forum, Serbia is among the most uncompetitive countries in Europe with only Bosnia and Herzegovina lagging behind. The causes of uncompetitive Serbian economy lie primarily in its slow modernisation and restructuring. One of the most important characteristics of competitiveness is investment in education, because success and development of both enterprises and economy depends on intellectual potential they own. Despite slowing down the implementation of started reforms, the recession changes conditions for business operations, it creates a space in the market and releases the resources, which creates possibilities for inventive individuals to recognize and use a business opportunity. Insufficiently developed SMEE sector has not managed to adequately adapt to the new circumstances. However, owing to their increased level of mobility and developed internal potentials, small enterprises have managed to stop further decline in their competitiveness. 39

40 Investment competitiveness Investments, as one of the main driving forces of structural changes, are crucial for economic development, technological changes and creation of a competitive economic structure. The majority of investments in Serbia relate to the non-financial sector (83.4%), which increased its share in 2009, although the value of investments is actually lower by 1/5 compared to Cumulatively, in period, large companies allocated 10.9 bn. EUR for investments whereas the SMEE sector allocated 11.6 bn. EUR. Table Investments in Serbia, in bn. EUR TOTAL INVESTMENTS 5.683, , , ,9 Non-financial sector 4.268, , , ,7 - large 2.229, , , ,5 - SMEs 2.039, , , ,3 Source: MoF, according to the RSO data The SMEE sector, which after the initial impact of the crisis in 2008 actually received 20% less investments, in 2009 increased its share in economy investment structure by 5.8pp, and also in the non-financial sector by the same percent. However, this increased share is a consequence of smaller-scale investments of large companies that, as a rule, have a slow response to external impacts, which is why it was not until 2009 that the crisis effects became visible. Thus, the investment value of large companies is actually lower by 26.4%, and of the SMEE sector by 7.6% compared to Chart In 2006, company investments, particularly those of the SMEE sector, were low compared to the value added. Investments were increased in 2007 (40% of GVA) and there was a qualitative change of investments (51.7% of investments were made in equipment). The recession that has affected world economy by the end of 2008, caused lower values in companies production, but not in their liabilities, which resulted in fewer tendencies to invest. In 2009, due to difficult terms for both short-term and long-term borrowing, the value of construction works, production and import of equipment was decreased. Small enterprises were the only ones to earmark more for investments and improve technical structure compared to Micro companies also increased their investments and committed them to construction works. Almost 40% of the SME investments were realised in small enterprises where investments were the highest per employee as well as their share in GVA (47%), whereas investments per enterprise were most substantial in medium-sized enterprises. 40

41 Table Investments and selected indicators by size of enterprises Investments per employee (in thousand dinars) Investments per enterprise (in thousand dinars) Investments in GVA Non-financial sector ,34 0,40 0,39 0,36 Large ,42 0,39 0,51 0,40 SMEs ,29 0,40 0,31 0,33 Medium ,26 0,52 0,35 0,27 Small ,32 0,36 0,31 0,47 Micro ,12 0,29 0,26 0,34 Entrepreneurs ,40 0,37 0,29 0,26 Source: MoF, according to the BRA and RSO data According to the GVA/investment ratio, the SMEE sector is below the non-financial sector average (33% to 36%), and there are significant differences within this sector. The crisis affected medium-sized businesses the most - their investments in 2009 were 27% of GVA (52% in 2007), and they had the biggest real drop rate compared to the previous year (-33.2%). The investments of medium-sized enterprises in equipment were particularly lacking, which is why their share in this segment of technical structure was reduced to only 12% (20% in 2008). Table Annual real growth /fall rate of investments according to the technical structure in 2009 Total Construction works Equipment with installation Other TOTAL INVESTMENTS -19,9-12,5-23,7-37,3 Non-financial sector -17,6-13,2-19,2-31,0 Large -26,4-20,3-27,4-43,6 SMEs -7,6-7,1-8,5-4,2 - medium -33,2-21,8-43,5-29,0 - small 29,8 18,3 38,1 47,7 - micro 2,7 13,7-8,4 10,9 - entrepreneurships -18,3-21,6-13,4-1,9 Source: MoF, according to the BRA and RSO data Small enterprises allocated almost half of GVA (47%) to investment projects, which is well above the allocations in 2008 and above the non-financial sector average, the most part (56.2%) being invested in equipment with installation. Even though micro enterprises have increased their allocations from GVA, their share in technical structure of investments is still below 10%. Entrepreneurships largely invest in construction works and their share in total construction works of non-financial sector is 14.3%. Table Investments in Serbia in 2009 Technical structure Construction Equipment with Total Other Total works installation TOTAL INVESTMENTS 100,0 47,9 45,6 6,5 Structure by size of enterprises Construction Equipment and works installation Non-financial sector 100,0 44,3 49,4 6,4 100,0 100,0 100,0 100,0 Large 100,0 39,6 52,9 7,4 47,4 42,4 50,8 55,4 SME 100,0 48,5 46,1 5,4 52,6 57,6 49,2 44,6 Medium 100,0 50,2 42,4 7,5 14,0 15,9 12,0 16,4 Small 100,0 39,8 56,2 3,9 20,3 18,2 23,1 12,5 Micro 100,0 49,9 43,5 6,5 8,2 9,2 7,2 8,4 Entrepreneurships 100,0 62,1 33,4 4,5 10,2 14,3 6,9 7,3 Source: MoF, according to the BRA and RSO data Other 41

42 In addition to the need to increase investments, it is necessary to boost their efficiency. The analysis of marginal capital coefficient has shown a downward trend in investment efficiency in the last years compared to This is reflected in growing amount of investments necessary to reach GVA growth. The SMEE sector shows the same trend but the efficiency of the entire SMEE sector has exceeded the average of the non-financial sector, save for the entrepreneurships. For promotion of new highly-productive business areas and development of new fast-growing small and medium-sized enterprises, standard funding sources are not sufficient (loans and direct investments). Creditors and investors shy away from investments in risky projects with high initial values and longer return periods. Considering the fact that Serbia needs new models for business operations, investments and employment, it is necessary to initiate and promote such forms of funding and management which encourage the development of entrepreneurship and innovative products. Table Investment efficiency in period compared to 2005 (marginal capital coefficient) Non-financial sector 2,0 2,3 2,5 3,8 Large 3,5 3,3 3,7 4,9 SMEE 1,4 1,8 1,9 3,1 - medium 1,4 1,9 2,0 2,9 - small 1,1 1,4 1,6 2,9 - micro 0,6 1,1 1,3 2,9 - entrepreneurships 2,3 3,8 3,4 4,3 Source: MoF, according to the BRA and RSO data Comparative analysis of investments per employee and per enterprise in the neighbouring countries and in EU -27 indicates considerably lower level of these indicators in Serbia, both in the SMEE sector and overall economy. Having in mind the current position and level of development in Serbia, the intensity of investment activities would have to be on a much higher level in order to boost development and achieve strategic development goals. It is necessary for enterprises, especially micro and small, not to use GVA only to cover wages (63.4% of GVA) and material production costs, but to invest much more (average among Serbian SMEs is only EUR 8,700 per enterprise, and it is the lowest value compared to all EU Member States), catch up with modern business trends and keep pace with modern business operations. Faster economic growth in Serbia requires higher investments in companies doing business in sectors with higher value added, which was a practice in Bulgaria and Romania just before they entered the EU. Table Investments of the non-financial sector of European countries Investments per employee (in thousand EUR) Investments per enterprise (in thousand EUR) Investments and GVA SMEs Total SMEs Total SMEs Total EU ,4 8,5 31,7 54,4 0,19 0, ,7 8,8 33,4 56,7 0,19 0,19 Bulgaria ,2 4,7 23,0 35,5 0,69 0, ,4 4,8 24,2 35,7 0,81 0,65 Hungary ,6 6,6 17,5 29,2 0,39 0, ,4 5,4 14,6 25,1 0,31 0,27 Slovenia ,3 10,0 35,0 63,8 0,32 0, ,4 10,8 39,3 67,1 0,36 0,36 Romania ,5 9,3 39,2 90,9 0,62 0, ,9 12,9 59,2 121,1 0,70 0,61 Serbia ,1 4,5 12,2 20,7 0,40 0, ,0 3,9 9,2 18,2 0,27 0, ,4 5,1 8,7 19,8 0,32 0,41 Source: Eurostat, MoF 42

43 3.1.2.Cost competitiveness The analysis of cost competitiveness includes the following indicators: average labour cost, hourly labour cost, labour productivity and unit labour cost the key indicators for the estimation of the level of competitiveness (shown as the ratio between labour compensation and gross value added). Table: Cost competitiveness of the non-financial sector Average labour costs (thousand of dinars) Non-financial sector 298,6 390,8 488,0 551,4 625,7 672,7 724,9 Large 370,3 472,6 589,8 673,1 776,6 820,0 890,8 SMEs 239,4 333,9 428,6 487,3 552,1 599,1 640,8 Manufacturing industries 286,9 364,1 451,8 507,4 579,8 606,0 647,6 Large 341,5 420,8 540,2 609,6 714,4 750,9 813,1 SMEs 224,2 308,6 378,6 434,0 494,8 517,1 549,6 Hourly labour costs Non-financial sector 143,0 187,1 233,7 264,1 298,5 322,2 347,2 Large 177,4 226,4 282,5 322,4 370,5 392,7 426,6 SMEs 114,6 159,9 205,3 233,4 263,4 286,9 306,9 Manufacturing industries 137,4 174,4 216,4 243,0 276,6 290,2 310,1 Large 163,5 201,6 258,7 292,0 340,9 359,6 389,4 SMEs 107,4 147,8 181,3 207,8 236,1 247,6 263,2 Labour productivity (thousand of dinars) Non-financial sector 500,7 627,5 754,7 892, , , ,6 Large 533,2 702,4 883, , , , ,6 SMEs 473,9 575,6 679,7 793,7 891,3 891, ,5 Manufacturing industries 405,3 517,3 639,1 761,4 879,2 895, ,0 Large 407,1 521,4 683,5 857, , , ,6 SMEs 403,1 513,3 602,3 692,6 780,4 778,9 865,1 Unit labour costs Non-financial sector 0,596 0,623 0,647 0,618 0,617 0,646 0,608 Large 0,694 0,673 0,668 0,623 0,614 0,611 0,570 SMEs 0,505 0,580 0,631 0,614 0,619 0,672 0,639 Manufacturing industries 0,708 0,704 0,707 0,666 0,659 0,677 0,645 Large 0,839 0,807 0,790 0,711 0,690 0,692 0,656 SMEs 0,556 0,601 0,629 0,627 0,634 0,664 0,635 Source: MoF, according to the BRA and RSO data; Note: data for 2009 and 2010 according to the new classification of business activities Business activities of the non-financial sector in the period were marked by positive tendencies in basic indicators of cost competitiveness. More efficient use of available business factors led to a higher competitiveness. High real growth rates were achieved of GVA 7.3% (SMEs 10.9%), of average labour costs 7.4% (SMEs 10.4%), and of productivity 6.8% (SMEs 4.9%). Despite business indicators showing that the nominal growth has been achieved in the last two years, once the inflation effects are included (measured by the average annual percentage change in the consumer price index), results are quite different. In real terms, growth dynamics was stopped in 2009, which produced the strongest effects on enterprises with up to 50 employees, that have less possibilities to influence production and price of products, due to weak economic strength, difficulties in access to finance and insufficient demand in the market. However, in 2010, small and micro enterprises adjusted to the business conditions in the recession period and focused their activities on other, less risky areas, which led to the recovery and improvement of their competitiveness. Unlike small enterprises, for medium-sized enterprises, due to their slower adjustment to new circumstances, it was not until 2010 that they felt the real impact of the crisis, which was crucial for the total performance of the SMEE sector. Lower average labour costs and hourly labour costs in SMEs in relation to the non-financial sector obviously show that micro and small enterprises hire less qualified labour, which cannot be a basis for future development. However, average labour costs in the SMEE sector actually grew in the whole analysed period (although recording a considerably lower rate in the last two years 0.1% and 0.4%), unlike in large companies where, after a negative real annual growth rate in 2009 (-2.6%), a real growth of average labour costs was achieved in 2010 by 2l.0%. In manufacturing industry, average labour costs of the SMEE sector in 2010 again 43

44 recorded a negative real growth rate of -0.2% (-3.6% in 2009), whereas this indicator for large companies is in real terms higher by 1.7% (-3.0% drop in 2009). Contribution of micro and small enterprises to GVA is lower than their contribution to employment, i.e. there is a positive correlation between the labour productivity and the size of company (higher productivity in large companies). In other words, employees in micro and small enterprises generate less value added than in medium-sized and large enterprises. Due to high fixed labour costs, many enterprises of up to 10 employees are less capital-intensive. For the first time in 2009 there was a drop in employment in the SMEE sector (7.2%), which continued in 2010 (-6.6%). After a real drop in 2009, labour productivity is higher in all enterprises, regardless of their size. A positive real growth rate is notably the result of reduction in employees, along with higher GVA medium-sized enterprises and entrepreneurships are the only ones to record a real drop in GVA compared to 2009, which is indicative of the total SMEE sector. Competitiveness indicators in manufacturing industry which was mostly hit by the global crisis are still adverse. Table: Real growth rates of GVA and labour productivity, in % GVA Employment Productivity Non-financial sector 11,4 2,8-11,3 0,8 0,3 1,1-6,5-6,2 11,1 1,7-5,2 7,4 Large 7,8 0,7-7,0 3,6-6,3-3,9-5,0-5,2 14,9 4,8-2,2 9,3 SMEs 14,1 4,2-14,3-1,4 4,1 3,7-7,2-6,6 9,7 0,5-7,7 5,7 Manufacturing industry 8,1 1,5-16,9-2,0-3,4-1,9-11,6-6,9 11,9 3,4-6,0 5,3 Large 4,9-1,8-16,0-2,5-10,9-9,2-13,1-9,0 17,8 8,2-3,3 7,1 SMEs 11,0 4,3-17,8-1,6 2,8 3,4-10,7-5,6 8,0 0,9-7,9 4,3 Source: MoF, according to BRA and RSO data Note: data for 2009 and 2010 according to the new classification of business activities Unit labour costs of the non-financial sector are on the last year s level, but the SMEE sector has made its competitive position worse. A drop in production by the end of 2008 was not followed by appropriate decrease in the number of employees and wages, which is why unit labour costs (ULC) went up in 2009 i.e. competitive position of enterprises got worse. While 2010 saw a recovery and decrease in ULC value, wages in the SMEE sector accounted for almost 2/3 of GVA, and there was not much left for the companies to improve and modernize the operational processes, especially in the recession which causes a lower level of production in companies. Large companies continue to decrease the ULC and in the last three years, according to this indicator, they have been more competitive than SMEs. In the manufacturing industries, SMEs are still in a better position than large companies, but ULC is constantly growing. When these data are compared to the EU average, it is clear that with this GVA structure Serbian companies will not be able to expand their international market share. Table Unit labour costs in 2008, in % SME Large Total EU-27 45,1 48,8 46,7 Bulgaria 39,2 32,8 36,2 Hungary 53,8 40,6 47,4 Romania 31,9 22,2 26,3 Slovenia 60,0 59,0 59,6 Serbia 61,9 61,4 61,7 Source: Еurostat, MoF In order to keep an unchanged level of competitiveness, productivity growth has to be high enough to compensate for both real wages growth and currency appreciation. The non-financial sector is above the balance level, meaning that labour productivity grows much faster than costs of wages and strengthening of competitiveness (only in 2009 there was a decrease in labour costs, but the drop in labour productivity was bigger). In the SMEE sector, a drop in production at the end of 2008 was not followed by appropriate decrease in the number of employees and wages, which is why labour costs went up whereas productivity dropped in 2009 i.e. the competitiveness of the SMEE sector, which is above long-term balance, deteriorated. As mentioned, productivity increased in 2010, however not due to improved production activity but because of reductions in the number of employees and thus, this cannot account for improved competitive capacity of companies. 44

45 Chart: Productivity and wages costs (2006=100) Source: MoF, according to the BRA and RSO data However, productivity growth of enterprises did not compensate for appreciation of the dinar37, with all negative effects on the competitiveness of Serbian economy. Since October 2008, dinar depreciation resulting from the global financial crisis has not only been unfavourable for improved competitiveness but has also caused further decline in economic performances. Sharp drop in national and export demand, decrease in credit activity and increase in illiquidity of companies, with debtors being additionally burdened by dinar depreciation, in the first half of 2009 have caused a sharp drop in production. In the second half, negative trends of economic activities were stopped and Serbian economy slowly started to recover. However, the weakening of the national currency continued and thus, in 2010, productivity growth was above the level of the real effective exchange rate (REER). Chart: Costs of wages, productivity and real effective exchange rate (chain indices) Source: MoF, according to BRA and RSO data Since 2004, real effective exchange rate has been growing which, according to the theory of economics, on a short-term causes a decrease in export competitiveness38. However, further depreciation of the dinar, which started by the end of 2008, brings higher risks for macroeconomic stability, rather than contributing to better competitiveness of Serbian economy. Dinar exchange rate is not of crucial importance for competitiveness of Serbian products in international markets, because it does not solve the problems of high foreign trade deficit and current account deficit. The causes of uncompetitive Serbian economy primarily lie in its slow modernisation and restructuring. Analysis of competitiveness is based on manufacturing industry which accounts for the majority of international trade of products. After a sharp drop in 2009, majority of industries recorded real growth rates in labour productivity in Above average growth rate of productivity of large systems in manufacturing 37 Real exchange rate is the nominal exchange rate multiplied by price index in Serbia and divided by price index of the country of export. In the calculation of effective exchange rate, currencies of 15 main trade partners were used, and weighted using the structure of Serbian exports, in order to estimate the influence of exchange rate on the competitiveness of domestic export. Index growth shows currency appreciation and vice versa. 38 Because of inflation that is higher in Serbia than in other European countries, the real exchange rate appreciates to the disadvantage of exporters which get less money for the same quantity of exported goods. 45

46 industry is not caused by a technical and technological production development, especially in the areas which create higher added value, but solely by the drop in the number of employees and by revitalized production of an industrial giant in the area of base metals manufacture, US Steel Смедерево. In 2010, the non-financial sector achieved the annual real growth rate in labour productivity of manufacturing industry, the highest being in the area of repair and installation of machinery and equipment (31.6%). However, in high-tech areas this rate is negative (-15.4%) due to decreased production activity in the manufacture of basic pharmaceutical products (only medium-sized enterprises recorded real productivity growth in this area), whereas in the manufacture of chemicals and chemical products and manufacture of other transport equipment there was a productivity drop of over 20%, in all enterprises. In high- and medium-high-technology industries, the SMEE sector has shown above average results and achieved real growth rates of labour productivity, the highest being in the manufacture of motor vehicles and trailers 49.4% (small 42.6%) and the manufacture of basic pharmaceutical products and preparations 16.7% (medium 15.4%). On the other hand, in these areas the only negative rate was recorded in the manufacture of other transport equipment -28.3% which, at the same time, accounts for the biggest drop rate in the SMEE sector (productivity of small enterprises in this area is in real terms higher by 70.4%). Table Annual real rates of growth /fall in productivity of manufacturing industry in 2010 Micro Small Medium SMEs Large Total MANUFACTURING INDUSTRY 4,3 5,0 5,4 4,3 7,1 5,3 LOW-TECH 2,1 10,0 1,9 2,9 3,4 1,9 Manufacture of food products -4,9 12,3-6,7-4,0 5,9-2,9 Manufacture of beverages 34,0 25,0 5,1 20,9 4,1 10,8 Manufacture of tobacco products 69,6 304,5-2,8-2,0 8,8 1,8 Manufacture of textiles 23,9 11,9 36,7 27,1 13,1 14,0 Manufacture of clothing 7,7 7,6 5,3 8,1 31,3 15,0 Manufacture of leather and leather products 17,5 4,5 22,3 18,1-1,5 8,6 Wood processing and wood products, except furniture 4,6 16,7 0,1 6,5-60,3 5,4 Manufacture of paper and paper products 8,2-0,5 4,9-1,7 6,3-0,3 Printing and reproduction of audio and video recordings 10,7 2,7 9,9 8,4 87,5 12,0 Manufacture of furniture -6,8-11,4 14,9 3,3-2,7 1,3 Other manufacturing activities 2,2 9,2 13,5 5,6-6,4 3,0 MEDIUM-LOW-TECH 3,2 1,4 11,5 6,3 32,6 17,6 Manufacture of coke and oil derivatives -35,3-102,1-14,9-24,3 0,0-24,3 Manufacture of rubber and plastic products 5,2-1,8 12,3 5,4 23,2 12,8 Manufacture of non-metal mineral products -12,5 3,3 1,0-2,8 15,0 7,0 Manufacture of base metals 14,8 19,0 74,7 47,2 398,3 197,7 Manufacture of metal products, except machinery 6,6 1,5 12,3 7,5 23,1 12,2 Repair and installation of machinery and equipment 77,1 16,4 6,3 42,1 8,5 31,6 MEDIUM-HIGH-TECH 25,9 3,9 2,1 5,6-2,0 2,2 Manufacture of chemicals and chemical products -4,8-12,3 12,6 5,6-76,0-21,0 Manufacture of electrical equipment 3,5-3,7 8,7 2,5 24,4 14,8 Manufacture of machinery and equipment, not mentioned elsewhere 6,0 5,4 6,2 6,7 33,2 17,5 Manufacture of motor vehicles and trailers -154,7 42,6-10,7 49,4 1,8 14,9 Manufacture of other transport equipment -2,4 70,4-43,4-28,3 21,6-23,6 HIGH-TECH 13,6-0,6 27,0 11,1-21,9-5,5 Manufacture of basic pharmaceutical products -16,4-5,5 15,4 16,7-18,0-15,4 Manufacture of computers, electronic and optical products 14,4-0,5 23,0 9,9-52,8 7,0 Source: MoF, according to BRA and RSO data The economic crisis is additionally deserving for the development and improvement of smallenterprise competitiveness. Recession can also be understood as an opportunity for entrepreneurships to gain an advantage over weaker competitors, since it changes people s awareness and makes society more open to change. It also boosts the development of ideas for new products and production methods and inspires entrepreneurs to introduce these ideas to the market. 46

47 Export competitiveness In foreign trade of non-financial sector a deficit was realised of 520,8 billion dinars, which is 1.2% more than in The world economic crisis has influenced a fall in domestic consumption, which was reflected on a much bigger drop in import (-23.6% in real terms) than export (-15.9%) in 2009 i.e. small growth of import (14.4%) than that of export (26.1%) in Until 2008, export/import coverage was constantly below 50%, meaning that the deficit was higher than the total export (the smallest coverage was 35.6% in 2004). In addition to the global economic crisis which led to a drop in international economic activities, decreased Serbian export in 2009 was also affected by a big reduction in prices of basic products on the international market (share of raw materials and products with low value added in Serbian export is above 55%), the drop in industrial production and national spending being the main reason for reduced import. Nevertheless, in this year, for the first time since the beginning of the transition period, export/import coverage is above 50%. In 2010, the majority of countries, which are the main foreign trade partners of Serbia, saw a mild recovery of economic activities, positive GDP growth rates and increased inter-country foreign trade volume. Due to a faster growth of import than that of export in Serbian enterprises, import/export coverage increased in 2010 to 58.5%. Despite foreign trade deficit decreasing in years, the export/import coverage in the SMEE sector is still below 50%. Foreign trade balance, millions of dinars Export/import coverage, % Share of exporters in the total number or enterprises, % Share of importers in the total number of enterprises, % Share of export in trade, % Export per employee, thousands of dinars Table: Indicators of export competitiveness SMEs Large Total SMEs 34,8 36,5 43,9 49,9 Large 70,0 66,1 67,3 68,6 Total 48,2 48,2 53,0 58,5 SMEs 4,3 4,3 3,9 3,9 Large 66,2 64,8 62,9 63,7 Total 4,4 4,4 4,0 4,0 SMEs 7,4 7,5 6,4 6,2 Large 80,6 79,0 75,2 78,6 Total 7,5 7,6 6,6 6,3 SMEs 5,5 5,9 6,3 7,3 Large 14,4 13,8 13,0 15,8 Total 8,4 8,5 8,5 10,2 SMEs 250,1 292,0 315,6 417,2 Large 593,9 706,3 620,6 952,2 Total 368,6 427,8 417,2 597,2 SMEs 719,8 799,7 718,8 835,5 Import per employee, thousands of dinars Large 848, ,0 922, ,2 Total 764,1 888,0 786, ,4 Source: MoF, according to the BRA and RSO data Higher foreign trade activity is evidenced by a higher percent of total trade achieved by export. Share of export in trade is above 10% for the first time, notably due to a higher export of large companies which again record annual growth of this coefficient. Export competitiveness of micro and small enterprises, which are more domestic market-oriented, did not decline in the period of major impact of the crisis, unlike the export of small companies which have a relatively big share of export in trade. In 2010, in all companies, regardless of their size, export share in trade is growing. In the SMEE sector, despite the fact that medium-sized companies have the biggest export share (11.1% of trade in 2010), the increase in share is the smallest (by 0.2 pp), whereas micro enterprises record higher share of export by 1.3 pp (7.7%), and small enterprises by 1.2 pp (6.8%). In 2010, decreased share of exporters and importers in the total number of enterprises continued, despite the increase in foreign trade activities of SMEs: number of enterprises dealing with export and import is smaller by 33 and 608, respectively. This can indicate the recovery of those enterprises which are oriented toward and dependent on foreign supply and demand. 47

48 Value of export and import per employee in 2009 in relation to 2008 was actually dropping by the rate of 10.0% and 18.3%, respectively. In addition, the achieved real drop rate of export per employee in the SMEE sector (-0.3%) was significantly lower than in large enterprises (-28.9%). In 2010, export per employee grew in real terms at the rate of 34.4% (SMEs 24%, large companies 44%), and import per employee went up by 21.9% (SMEs 9%, large companies 41%). Higher figures of the revealed comparative advantage index 39 in 2010 are also a result of faster increase in export than in import. It is very important that in the crisis year, companies in manufacturing industries, the products of which are mostly involved in foreign trade, achieved a foreign trade surplus, which increased in 2010 accounting for 2.7% of trade. A positive RCA was recorded by the high-technology industries, except in the manufacture of computers, electronic and optical equipment and manufacture of motor vehicles and trailers, where deficit was increased accounting for 62.9% and 9.5% of trade, respectively. Table. Revealed comparative advantage index (RCA), in % Total SMEs Large TOTAL -30,7-26,2-39,0-33,4-19,6-18,6 MANUFACTURING INDUSTRY 1,0 2,7-8,9-7,3 9,4 8,9 L Manufacture of food products 29,5 33,3 46,7 45,0 6,9 20,2 L Manufacture of beverages 0,3-6,5-2,0-3,1 0,9-7,3 L Manufacture of tobacco products -38,8-45,4-26,6-34,8-49,3-56,8 L Manufacture of textiles -9,7-23,2-6,5-19,1-30,6-39,4 L Manufacture of clothing 2,1 6,5-6,6-4,1 7,9 13,4 L Processing of leather and leather products 17,1 17,5 16,2 17,4 18,0 17,5 L Processing and products of wood, except furniture -22,5 14,7-24,8 13,5 58,9 63,6 L Manufacture of paper -20,8-19,3-24,8-25,0-6,0-3,4 L Printing and reproduction of audio and video recordings -29,4-36,7-27,9-35,6-73,1-99,8 ML Manufacture of coke and oil derivatives -50,9-41,5-50,9-41,5 0,0 0,0 MH Manufacture of chemicals and chemical products -10,1 7,2-36,9-30,0 9,8 22,2 H Manufacture of pharmaceutical products and preparations -15,7 7,5-73,6-15,1-10,1 9,2 ML Manufacture of rubber and plastic products 11,6 2,1-14,4-23,2 26,2 15,1 ML Manufacture of non-metal mineral products -7,1-1,6-19,3-9,1 14,2 8,5 ML Manufacture of base metals 9,3 5,5 27,5 31,2 8,2 4,3 ML Manufacture of metal products, except machinery 5,3 9,9-6,5-3,2 34,8 42,8 H Manufacture of computers, electronic and optical equipment -60,3-62,9-59,0-62,5-94,8-70,8 MH Manufacture of electrical equipment 8,4 11,8-14,8-16,6 14,4 19,0 MH Manufacture of machinery and equipment, not mentioned elsewhere 9,7 5,1 3,1-1,4 27,0 24,1 MH Manufacture of motor vehicles and trailers -6,4-9,5-41,6 9,1 23,3-12,8 MH Manufacture of other transport equipment 14,1 14,9 16,7-0,8 7,7 31,9 L Manufacture of furniture -3,9 4,1-11,5-2,3 9,5 16,6 L Other manufacturing activities -26,1-21,3-28,4-22,7-21,6-18,7 ML Repair and installation of machinery and equipment -9,3-2,8 17,3-1,4-51,3-6,7 Source: MoF, according to the BRA and RSO data Situation is more unfavourable in the SMEE sector where deficit in 2010 is 7.3% of trade. Only 5 sections of manufacturing industry have made a surplus in trade: in high-technology industries only the manufacture of motor vehicles and trailers (9.1%), whereas the biggest positive value of RCA was recorded in the manufacture of food, beverages and tobacco (45%) Serbian economy still depends on low-technology intensive industries which, compared to the previous year, in 2010 had the fastest growth in foreign trade. Export based on these products cannot provide a respectable competitive position of enterprises in the longer term. Micro enterprises have reduced the trade in medium-hightech products, which is why the total real growth rate is negative. Small enterprises still trade in low-tech products, and the trade volume of high-tech products is actually smaller by 7.6% compared to Conversely, mediumsized enterprises have increased the real growth rate for high-tech products, however achieving a negative real rate in the trade volume of medium-high-tech products, which affected the entire SMEE sector. 39 Revealed Comparative Advantage is the ratio between foreign trade balance and foreign trade volume, in %. Positive value of RCA shows comparative advantages (surplus trade of goods) of the given industry, or subindustry. 48

49 Table: Annual real growth/fall rates in the total volume of foreign trade, in % Total Micro Small Medium SMEs Large MANUFACTURING INDUSTRY 22,3-15,5 20,2 1,7 3,1 38,4 Low-tech 7,5 2,7 27,7-1,1 4,5 11,4 Medium-low-tech 48,3-2,8 26,3 18,1 17,6 62,1 Medium-high-tech 13,8-52,4 15,7-19,2-19,6 38,4 High-tech 11,4 11,7-7,6 23,3 13,8 8,0 Source: MoF, according to the BRA data Unlike comparative advantages, competitive advantages are based on education, entrepreneurial environment, structure and quality of production and infrastructure, which should enable productivity, export and investment growth. Low competitiveness of Serbian exports is shown through unfavourable structure according to factor intensity, where products of lower processing stages are dominating. A slow improvement in foreign trade structure and level of competitiveness of Serbian products in the first years of transition period in favour of products with a higher level of finalisation was stopped in 2008, as a consequence of the global financial crisis. Table: Export and import according to factor intensity, in % Export structure Import structure Products SMEs Total SMEs Total А Primary products 64,0 66,3 67,6 77,5 78,7 79,5 51,1 53,1 51,4 67,3 67,6 69,6 B Resource-intensive 1,8 2,0 2,3 2,5 1,0 1,0 1,7 1,8 1,7 1,0 1,1 1,0 C Labour-intensive 2,4 2,6 2,4 1,1 1,4 1,4 2,8 2,9 2,8 1,7 1,8 1,9 D Technology-intensive 13,5 12,0 12,1 7,9 6,6 8,6 19,7 18,8 23,2 13,1 12,4 14,5 Е Human capital-intensive 18,3 17,1 15,6 11,0 12,2 9,5 24,8 23,0 20,1 16,8 16,9 12,6 Unclassified products 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,4 0,8 0,0 0,3 0,4 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Source: MoF, according to the RSO data Increased investment risk in times of the global crisis reduced capital investments of companies in Due to insufficient investments in research and development, there was a lack in more dynamic development of own technology and thus, Serbian enterprises, particularly the SMEE sector, mostly deploy import technologies. In 2010, in the structure of export and import increase, there is a mild growth in share of capital products as well as in the share of raw materials, whereas Serbian products requiring a highly-qualified labour for their production, have an increasingly small share in international trade: compared to 2009, real drop rate in exports of human capital-intensive products is -2.0%, and in imports -14.3%. Sectoral analysis based on SITC, rev. 4, shows that the enterprises have the biggest share in foreign trade in industries 0 and 2 (69.3% of export and 48.3% of import). These enterprises deal in primary products and their coverage of import was increased and deficit reduced compared to the total foreign trade activity in The same tendencies of these two industries have been recorded in the SMEE sector. However, to achieve a long-term competitive position and sustainable economic growth, it will be important to increase the share of products coming from industries 5, 6 and 7, which are mostly classified as technology-intensive products which require a highly qualified labour. In the SMEE sector, these products have increased their share in export/import structure and more importantly, their coverage level was increased whereas the RCA value was decreased in 2010 compared to the previous year. These products account for more than 30% of export and 45% of import in the SMEE sector. 49

50 Table: Indicators of foreign trade based on SITC rev. 4 in 2010 SITC rev.4 Export structure Import structure Export/import coverage RCA Total SMEs Total SMEs Total SMEs Total SMEs TOTAL 100,0 100,0 100,0 100,0 58,5 49,9-26,2-33,4 0 Food and live animals 27,9 34,8 18,6 18,0 87,9 96,6-6,5-1,7 1 Beverages and tobacco 3,3 2,2 8,6 2,1 22,2 53,9-63,6-29,9 2 Crude materials, except fuel 41,4 21,7 29,7 15,1 81,5 71,8-10,2-16,4 3 Mineral fuels, lubricants 6,9 8,8 12,6 16,1 31,8 27,2-51,8-57,2 4 Animal and vegetable oils, fats 0,0 0,1 0,1 0,2 15,9 15,9-72,5-72,5 5 Chemical and related goods 14,0 19,1 20,4 31,7 40,0 30,2-42,8-53,6 6 Manufactured goods 5,4 10,8 7,2 11,9 43,7 45,1-39,1-37,8 7 Machinery and transport equipment 0,6 1,3 1,8 3,2 19,1 19,6-68,0-67,2 8 Miscellaneous manufactured articles 0,6 1,2 0,5 1,0 63,3 63,5-22,5-22,3 Commodities not mentioned elsewhere in 9 SITC rev. 4. Source: MoF, according to the RSO data 0,0 0,0 0,4 0,8 0,0 0,0-99,9-99,9 According to the coefficient of structural change of export 40, in 2009, the SMEE sector has adapted more rapidly to new circumstances and needs in the market than large companies. Intensity of structural changes in export was the most significant in micro enterprises, that, just like medium-sized enterprises, also managed to increase the nominal export value (by 3.5% and 4.7%, respectively). Inactivity of large companies that have a defining influence on export of the non-financial sector and the lack of ability to adapt to a new situation in a short period of time are reflected in the drop in exports of large companies (by -23% in real terms) and a high value of the coefficient of structural change of export. The year 2010 brought a different situation. Enterprises, SMEs in particular, did not dare to take the risk and more significantly change the structure of goods they sell in the international markets and thus, the coefficient values are extremely high. Recovery of production and increase in exports of large companies have led in 2010 to the reduction of export restructuring coefficient from 0.82 in 2009 to 0.68 in Chart Source: MoF, according to the RSO data A significant change of export structure is necessary towards the growth in share of products with higher level of finalisation, which depends on the inflow of investments (especially FDI), but also on the industry they will enter. In other words, it is necessary to improve a very weak Serbian export offer, which consists of export of metal (steel), raw materials, a small number of industrial products and food. Also, it is necessary to achieve a higher geographical spread of export, because the markets where Serbian products are mostly exported (Montenegro, Macedonia, Croatia, Bosnia) have already reduced a demand for imported products due to the global economic crisis, and export dynamics to these economies as it used to be cannot be expected. 40 It is based on Finger-Kreinin index of structural similarity that is used for different structural comparisons of international trade. In this case, the coefficient of structural change of export is calculated as a sum of the minimum pairs of the same type of exports products according to SITC in 2009 and Lower coefficient value indicates faster changes, i.e. maximum value 1 means totally identical trade structure in analysed years. 50

51 Serbia will have to abandon its domestic demand-based growth model and turn to the creation of conditions where savings and investments will play a more dominant role, in order to change the export structure and increase the share in export of goods with a higher finalisation level. Only enterprises can create the value that can be competitive on the increasingly demanding international market. Level of innovations in enterprises and improvement of their efficiency, productivity and profitability depends on the extent to which business environment is attractive for both domestic and foreign investments, which is also crucial for achieving a higher level of national well-being Use of ICT Dynamic scientific and technological development in modern society (primarily that of information and communications technology - ICT) reflected in fast change of conditions for business, consumers habits and needs, development of new products, services and markets, emergence of new competitors and strengthening of the existing ones, placed the mass use of modern ICT as one of the basic factors for competitive business of a modern company. It is possible to achieve competitive advantage only through constant innovation, introduction and use of a more modern and sophisticated ICT in all business spheres. ICT is developing and changing the past behaviour patterns so fast that the question does not lie in whether the most up-to-date developments in ICT should be used and to what extent but how to make a fast and most productive use of them to gain competitive advantage in the market. Equipment and use of computers in business operations of Serbian SMEs shows that SMEs from Serbia are not behind the EU and neighbouring countries average. Compared to the five countries in the region, EU Member Countries and Croatia, Serbia is on the same level with Slovenia and Croatia, and much better than Romania, Bulgaria and Hungary, being above the EU average. Table: Use of computers, devices and communication systems in business in 2010 % companies using Types of devices and communication systems computers in their Extranet Intranet Wire based LAN Wireless LAN business SMEs Total SMEs Total SMEs Total SMEs Total SMEs Total EU Bulgaria Hungary Romania Slovenia Croatia Serbia Source: EUROSTAT, for Serbia, RSO According to types of devices and communication systems that Serbian SMEs use in business, most frequent are Wire based LAN and Intranet (in the EU, after Wire based LAN, Wireless LAN is most frequently used). In relation to the EU and countries in the region average, Serbian SMEs use Wire based LAN (except for Slovenia), Wireless LAN and Intranet technology (except for Bulgaria), whereas the use of Extranet is below average of the EU and Croatia, Bulgaria and Hungary, and above average of Romania and Slovenia. In the use of the Internet, as well as in types of connections they use to access Internet 41, Serbian SMEs are significantly behind the EU average, as well as behind most countries in the region. Of all the SMEs that use computers in their business, 97% have Internet connection, which is only higher than in case of SMEs in Bulgaria and Romania, but less than SMEs in Slovenia, Croatia and Hungary and the EU average. 41 Data about Internet connections through Broadband, traditional modem (dial-up) and ISDN for 2009 are not available. 51

52 Table: Use of the Internet and types of Internet connections in 2010 % companies using Types of Internet connections the Internet in their Mobile connections business Cable Internet DSL (mobile telephone, GPRS, UMTS,etc.) SMEs Total SMEs Total SMEs Total SMEs Total EU Bulgaria Hungary Romania Slovenia Croatia Serbia Source: EUROSTAT, RSO for Serbia Based on DSL, cable and mobile network access to the Internet, we can conclude that in types of access to the Internet, SMEs from Serbia are behind most SMEs from the countries in the region and the EU average (for DSL and mobile networks). Lagging behind the types of access to the Internet is especially emphasized in case of mobile connections, where Serbian SMEs are significantly behind the EU average, as well as behind Croatia, Slovenia, Hungary, and they are only slightly better than Romanian and Bulgarian SMEs. Serbian SMEs use DSL Internet access more than all selected countries in the region, however considerably lagging behind the EU average. Cable Internet connections Serbian SMEs use more than SMEs from Croatia and Slovenia and EU average, but less than SMEs from Hungary Romania and Bulgaria. Lower level of use of the types of higher quality Internet connections and incomplete legal framework regulating this area has negative effects on the possibilities for companies to use business opportunities provided by the Internet (e-business, electronic trading, electronic payment, market monitoring and analysis, finding potential business partners and cooperation with them, use of е-government, use of promotion and communication advantages of websites, etc.), which directly reduces the competitive and innovative capabilities of Serbian companies, notably that of small and medium-sized enterprises. Table: Use of the Internet in business in 2010 % companies that received on-line % companies that sent on-line orders % companies that use the Internet for orders (minimum 1% of total orders) (minimum 1% of total orders) banking and financial services SMEs Total SMEs SMEs Total SMEs EU Bulgaria Hungary Romania Slovenia Croatia Serbia Source: EUROSTAT, RSO for Serbia Serbian SMEs most often use the Internet for banking and financial services, whereas e-business (online buying and selling) is used less. Compared to the EU average and countries in the region, Serbian SMEs use the Internet for banking and financial services more than SMEs from Bulgaria and Romania, and less than SMEs from Slovenia, Croatia, Hungary and the EU average. On average, Serbian SMEs have more on-line orders than SMEs in the EU and all countries in the region, except for Croatia. On-line purchasing is done more by Serbian SMEs than SMEs from Bulgaria, Romania, Slovenia and Hungary, and less than the EU average and Croatia, which shows extensively unused possibilities to improve supply (e.g. application of just-in-time concept) and reduce purchasing costs. 52

53 3.2. Innovation Innovation Union Scoreboard (IUS) Innovation Union Scoreboard (IUS) is a new instrument of the European Commission for evaluation and comparative analysis of the innovation performance of EU Member States and joined countries and identification of strengths and weaknesses of their research and innovation systems. This instrument is to enable monitoring of the Innovation Union implementation as one of seven most significant initiatives of Europe a European strategy for smart, sustainable and inclusive economy. Innovation Union Scoreboard (IUS) is based largely on the methodology of the previous instrument European Innovation Scoreboard (EIS) and it has 3 main types of indicators and 8 innovation dimensions, thus including 25 different indicators in total. Based on their innovation performance across different indicators and analysis of innovative trend, the countries fall into one of four categories: Innovation Leaders, Innovation followers, Moderate innovators and Catching-up countries. IUS includes innovation indicators and trend analyses for 27 EU Member States as well as joined countries: Croatia, Iceland, Republic of Macedonia, Norway, Serbia, Switzerland and Turkey. Composite index Summary Innovation Index which comprises 25 IUS indicators, is calculated based on aggregate indices of national innovation performance. IUS indictors include: Support indicators: Human resources - high-skilled and educated people; Research system international competitiveness of scientific basis; Finance and support - availability of finance for innovation projects and support of governments for research and innovation activities. Company activities indicators: Company investments - different types of enterprises innovation investments; Linkages and entrepreneurship entrepreneurial efforts for collaboration among enterprises-innovators and also with the public sector; Capacity of intellectual property different types of protection of the Intellectual Property Rights. Indicators of the effects of innovation activities: Innovators the number of enterprises that have introduced innovations in the market (product/service or production process innovations) or within their organizations and marketing; Economic effects economic effects on employment, exports and sales as a result of innovation activities. According to the results of Innovation Union Scoreboard Serbia belongs to the fourth group of countries the Catching-up countries with innovation performance well below the average. If innovation index, as the EU27 average is 51.6 then the value of Summary Innovation Index for Serbia of 23.7 is far below that average. Human resources, research system and effects of innovation activities have relatively good values. Low values are found in capacity of intellectual property and innovators. High growth was achieved in publicprivate publications, trademark and revenues from licenses and patents from abroad. Drastic fall was recorded with business expenditures for research and development, design and sale of new products. Rise in performance of linkages and entrepreneurship, capacity of intellectual property and effects of innovation activities is above the average, whereas, in other dimensions, it is below the average. Compared to the previous period, Serbia, Croatia and Turkey have a growth of innovation performance between 3.5% and 4%, which is well above the EU27 average for the same period. Analysis of innovation performance is a starting point for further research and decisions about possible actions when directing innovation activities in companies in Serbia, especially where support activities from the state are needed in accordance with goals and priorities indicated in strategic documents. 42 Annex Table: Innovation Union Scoreboard 2010, Republic of Serbia 53

54 IV RESULTS OF SME DEVELOPMENT POLICY SME development policy in Serbia Since 2008, the framework for SME development policy has been comprised of the Development Strategy of Competitive and Innovative Small and Medium-Sized Enterprises for the period implemented on the basis of five-year Operational Plan. It defines medium-term priorities and directions of development of entrepreneurship in Serbia. The aim of the Strategy is to develop entrepreneurial economy based on knowledge and innovation which creates a sustainable, competitive and export-oriented SME sector. The preparation of the Strategy took into account real development needs of the SME sector through a consultative process directly including SMEs and their representatives with the aim to focus the anticipated measures on addressing of the most important issues and needs. The Strategy is based on 5 pillars which include: Promotion and support of entrepreneurship and establishment of new enterprises; Human resources for competitive SMEE sector ; Financing and taxation of SMEs; Competitive advantages of SMEs in export markets; Legal, institutional and business environment for Serbian SMEs ; Pillar 1 relates to prospective entrepreneurs, conditions for starting up a business and spurring the development of micro enterprises within the SME sector. Pillars 2-4 define specific types of support to SMEs for growth and development i.e. transformation of micro enterprises toward small and of small towards medium-sized enterprises, whereas the Pillar 5 is focused on the improvement of general business environment, regardless of the company size. Within each pillar, the current situation is shown together with the policy of good international practice and summary of measures. The Strategy is implemented on the basis of five-year Operational Plan, which is elaborated and implemented through annual Action Plans. All relevant institutions are included in the implementation of activities defined in these annual plans. Two annual Action Plans have been successfully implemented so far (for 2009 and 2010), whereas the third plan is in the process of implementation. The Ministry of Economy and Regional Development prepares the Report on the most important results of strategy implementation and submits it to the Government on annual basis, for information purposes. The Strategy is largely in line with the Small Business Act ( SBA), a document which in the European Union represents an official framework of the SME development policy. The Small Business Act replaced the European Charter, and it was officially adopted by the European Council in June The SBA is based on 10 principles which should guide the implementation of policies both at the EU and national level of the Member States. These principles include creating a stimulating environment in which entrepreneurs and family businesses can thrive, ensuring that honest entrepreneurs, who have faced bankruptcy, quickly get a second chance, designing rules according to the Think Small First, making public administration responsive to SMEs needs, facilitating SMEs participation in public procurement and better use of State Aid possibilities for SMEs, facilitating SMEs access to finance and developing a legal and business environment supportive to timely payments, helping SMEs to benefit more from the opportunities offered by the Single Market, upgrading knowledge and skills, innovation, ecoinnovation and supporting SMEs and their entering the growing markets (especially China and India). All principles include the proposal of specific measures and activities, divided into the European Commission s obligations and recommendations for the Member Countries, including four proposals of new legislation to be adopted by the EU Council and European Parliament (the Late Payments Directive, the E-Invoicing Directive, Statute of European Private Company and SME test). In June 2009, at the Ministerial Conference in Brussels, it was decided that the SBA should become the reference framework for SME support policies for Western Balkans countries, and the Republic of Serbia actively participates in the process of monitoring this document and its principles. The first results of this process will be available in the second half of Together with participation in the SBA monitoring process in the Western Balkans, Serbia got involved in the SBA implementation monitoring on the EU level through the participation in the SME Performance Review. This process included the preparation of 2010 reports for 37 countries (SBA Fact Sheet), based on qualitative (results of SME policy) and quantitative indicators according to the SBA dimensions. Within the evaluation of SME policy results, among 10 non-eu members, Serbia was the country that implemented the most measures (33) in the last year. This is particularly important if had in mind that countries such as Norway, Iceland and Israel participated in the evaluation.

55 Unfortunately, since quantitative scores were largely based on indicators from statistical research implemented in previous years on the EU level, where Serbia did not participate, the data for Serbia for 2010 are not complete, which is also the case for other countries outside the EU that participated in the process. This is why this type of evaluation was possible only for 5 dimensions. The report for Serbia can be downloaded at: Report on the implementation of the Strategy of Competitiveness and Innovation of SMEs The implementation and monitoring of the Strategy is based on the annual Action Plans. Within the section V, Monitoring and Evaluation of the Strategy, it is anticipated that the Ministry of Economy and Regional Development prepares the Report on the implementation of the Strategy and Operational Plan and submits it to the Government on annual basis in order to provide information and present the achieved results. Monitoring of the 2010 Action Plan was carried out based on the detailed quarterly reports on the implemented activities, obtained from the relevant institutions, the most important results being laid out in the Annual Report. 29 institutions are involved in the implementation and reporting about the Action Plan, and good cooperation is established with them. The notes covering relevant pillars of the Strategy also include activities that were not planned by the Action Plan, but their implementation certainly contributed to achieving the goals from the Strategy. The most important results of the Strategy of Competitiveness and Innovation of SMEs in Pillar 1 Promotion and support to entrepreneurship and establishment of new enterprises 1) Credit support and subsidies for new SMEs Through the Serbian Development Fund, the Ministry of Economy and Regional Development implemented the Programme for Distribution and Use of Funds for start-up loans. Within the Programme, 1,373 loan applications were accepted with the value of 2,261.9 million dinars. The National Employment Service granted self-employment subsidies to 2,217 persons, with the total value of million dinars and subsidies for job creation to 4,745 persons, with the total value of 547,6 million dinars. 2) Non-financial support to SME development The National Agency for Regional Development, with the Republic network of regional agencies and centres, implemented 171 trainings for 2,794 participants within the three-day training programme for potential entrepreneurs (including potential users of start-up loans). The National Agency for Regional Development, together with the network of regional agencies and centres, implemented a pilot project within the project Institutionalisation of Mentoring as a Service to SMEs, funded by the Government of Japan. Within this three-year project ( ), aimed at standardization of mentoring, 31 persons completed the training for mentors in After successfully completed project Development of Youth Entrepreneurship in Serbia, jointly implemented by the Ministry of Economy and Regional Development and the National Agency for Regional Development, with the aim to help young people, through five-day trainings, to start up their own business, some 160 attendants started their own businesses in 2010 (out of 746 who received the training). Completed Training Program for Entrepreneurship in High Schools, implemented by the National Agency for Regional Development with the support from local authorities and the Norwegian organisation BIP, which included 15 schools and more than 300 pupils who formed youth enterprises. In addition, three fairs of student entrepreneurship were held. The National Employment Service, together with the network of entrepreneurial centres, implemented the trainings for unemployed persons interested in starting their own business. Monitoring of Distribution and Use of Start-Up Loans granted by the Development Fund. Monitoring is carried out jointly by the Development Fund, the National Agency for Regional Development, the Business Registers Agency and the National Employment Service. Invitation for submission of required documents were sent to start-up loan beneficiaries to which loans were granted in 2008 and After reviewing the documents, it was found that business entities used the funds for designated purposes while misappropriation of funds was established with 56 business entities. The National Employment Service received cases for further, on-site inspection. Promotion of entrepreneurship Majority of promotional activities were included in the campaign European Week of Small and Medium- Sized Enterprises (SME Week) within which 11 events took place in

56 The National Agency for Regional Development organised the 9 th International Entrepreneurship Fair Business Base 2010 with a motto the Key to Success. In 2010, for the first time, the Ministry of Economy and Regional Development joined the competition for the best idea in the entrepreneurship (ЕЕА) and proposed two candidates to the European Commission in two categories: investment in knowledge and skills and support to the internationalisation of business management. 3) Note to the Pillar 1 The National Employment Service, with the network of entrepreneurial centres, implemented the total of 71 one-day specialist trainings for attendants for the purpose of acquiring special entrepreneurial knowledge and skills in the area of business planning, legal regulations, management, innovations, marketing etc. In addition, in the same period, the mentoring program was implemented which included 282 entrepreneurs, for the purpose of boosting a start-up through diagnosing business condition, professional advice and information. Pillar 2 Human resources for competitive SME sector By the end of 2010, the Memorandum of Understanding regarding the development and implementation of policies for lifelong entrepreneurial education was signed between the Ministry of Economy and Regional Development and the Ministry of Education, based on which the Protocol on Cooperation of Partners in the Development of Lifelong Entrepreneurial Education was signed where in addition to the above mentioned, nine more partner institutions and organisations were included. The Protocol signatories have agreed to jointly work on the drafting and implementation of the National Strategy for Lifelong Entrepreneurial Learning. 15 secondary schools in Serbia were included in the project Development of Entrepreneurship as the Key Competence in General Secondary Education. 30 teachers, 15 principals and 15 representatives of school administrations were trained. With the support of the SEECEL project, the Ministry of Education prepared the material for the implementation of the model for entrepreneurial primary school (for four primary schools) and the model for entrepreneurial universities (at two universities), the implementation of which is expected in September Based on the 2010 Programme for the Support to Competitiveness, the National Agency for Regional Development granted the subsidies for co-financing of the projects to 320 SMEs in the total amount of dinars. The majority of accepted applications related to quality certifications (72.5%) and the project for business improvement (22.2%). Within the Programme of Support to the Associations of Entrepreneurs for 2010, 11 million dinars were granted for the support of 36 associations of entrepreneurs. Through this programme, the National Agency for Regional Development (co)finances the implementation of the project aimed at the improvement of work and strengthening of association capacities and at the promotion of entrepreneurial associations. The majority of funds were granted for the training of management and employees of the association members (47%) and for promotional activities (35%). In the previous year, 205 secondary vocational schools from Serbia were included in the training programmes within the European Project Modernisation of the Vocational Education Training System in Serbia -VET (former experimental entrepreneurial programmes are introduced to 158 schools in Serbia) and the Reform of Vocational Schools in the Field of Economies (teachers from 47 Serbian schools received the trainings in the area of economy). Pillar 3 Financing and taxation of SMEs The Strategy for Development of Tax Administration for the period from 2010 to 2015 was prepared with the aim to reform tax administration toward the creation of a modern, client-oriented tax administration. The implementation of the project for creation of conditions for e-business, which will include all taxpayers, has started with the selected IT company. It was planned to set up an electronic submission of VAT applications for annual income tax. The project is expected be implemented on 1 June Within the Project Tax Accounting System, it is planned to create a unique taxpayer account and collect different important information relating to the liabilities and payments of a taxpayer. The Project implementation started in mid-2010 and is implemented with the support of German organisation for technical cooperation GTZ. The implementation of activities necessary for identification of present condition of the data processing system relating to tax accounting is underway. The Export Credit and Insurance Agency (AOFI) realised factoring transactions with small and medium-sized enterprises. The value of agreed factoring is 19.2 million EUR. The AOFI and the Factoring section within the Belgrade Chamber of Commerce have started the initiative for the draft Law on Factoring which would regulate this area of finance. The AOFI sent to the factoring companies the questionnaire with the aim to quantify the factoring operations in Serbia. Compiled results of the questionnaire are expected in March

57 Notes to the Pillar 3: The Ministry of Economy and Regional Development, through the Fund for Development of the Republic of Serbia, implemented the Programme for Encouragement of Even Regional Development, within which there are three special Programmes: the Programme for encouragement and development of enterprises and entrepreneurships in underdeveloped municipalities in the Republic of Serbia for 2010 implemented million dinars (earmarked funds from the budget and funds from the collected annuities) for 150 beneficiaries which planned to employ new employees, for the Programme for encouragement of production and employment in devastated areas million dinars were allocated from the budget, through the Programme for investments in labour-intensive manufacturing industries in underdeveloped municipalities funds in the amount of 800 million dinars were spent. The Fund for Development of the Republic of Serbia realised long-term investment loans in the amount of million dinars. Since November 2009, Apex Loans for Small and Medium-Sized Enterprises had been implemented and were fully realised by the end of In 2010, from revolving funds, in accordance with previously approved credit line of the Government of the Republic of Italy, small and medium-sized enterprises obtained loans amounting to 1.4 million EUR. The beginning of a new credit line for financing SMEs in the amount of 30 million EUR was expected in 2010, however it has still not become operational. The novelty introduced is that public utility companies will also be able to use these funds. In the last year, according to the Programme for the Local Economic Development in the Balkans (LEDIB), small and medium-sized enterprises from Nisava district received loans in the total amount of 440 thousand EUR. Pillar 4 Competitive advantages of SMEs on export markets The MoERD, with the support of the NARR, continued to implement the Project for Encouragement of Enterprises for Investments and Strengthening of Innovations. Funds in the amount of 37.1 million EUR were refunded for the total number of 91 beneficiaries. The project supports two groups of activities: nontechnological and technological innovations in SMEs. The Ministry of Science and Technological Development made public invitations within the programme in the area of technological development ( ) and out of 326 applied projects, 276 will be funded. At the competition for the best technological innovation in the Ministry of Science and Technological Development, there were competitors which applied with 284 innovations in 3 categories: implemented innovations, innovative ideas and high-school teams. The total prize fund was dinars. The Ministry of Science and Technological Development, within the 2010 Programme for Innovation Activity, has implemented the Programme for financing innovation projects, Programme for development of organisations registered for innovation activities and infrastructural support to innovation activities, Programme for encouragement of cooperation between registered entities for innovation activities and bearers of innovation activities from underdeveloped areas and Programme for financing projects with activities relating to the implementation of results of innovation activities of natural persons registered entities of innovation activities. Out of the total number of 220 applied projects, 61 projects were granted the budget funds. The National Agency for Regional Development has continued to implement the project the Enterprise Europe Network (ЕЕN), with the goal to provide information for the development of business operations, assist in finding business partners and facilitate the flow of subsidies from the EU funds (CIP and FP7 programmes) into the SMEE sector, leading to the access to new markets, new technologies and product development. Within the CIP programme, the project European Network of Female Entrepreneurship Ambassadors was approved and is implemented by the consortium comprised of the National Agency for Regional Development, Serbian Chamber of Commerce, Association of Business Women in Serbia and SIEPA. General goal of the project is to boost the development of the SMEE sector in Serbia through encouragement and support to the entrepreneurial potentials and talents of women and expand their total involvement in entrepreneurship. In 2010, a considerable progress was made in the area of standards and conformity. The project Technical Assistance to Key Institutions of Quality Infrastructure in Serbia was implemented. Two laws were adopted ( the Law on Accreditation and the Law on Metrology) as well as several by-laws. The Institute for Standardisation of Serbia was transformed in accordance with the new Memorandum of Association and the process of standard adoption was considerably accelerated. By December 2010, the Institute for Standardisation adopted ЕN standards in total, which is more than 50 % of the total number of European standards. A new portal of the Institute for Standardisation was built and put into operation 57

58 together with the standard management software. With the aim to raise entrepreneurs awareness of the importance of standardization and application of standards, 25 seminars were held in regional chambers of commerce. As the first step towards possible signing of the agreement on mutual recognition of certificates of conformity, the agreement on cooperation was signed between the Accreditation Body of Serbia and the Accreditation Agency of Bosnia and Herzegovina. In 2009, the Ministry of Economy and Regional Development, with the support of the National Agency for Regional Development, implemented the Programme for distribution and use of funds for support to cluster development for The total of 17 million dinars were implemented for 3 existing and 5 new clusters (Agro-industry cluster, fashion and clothing industry cluster, Association of Serbian Food Manufacturers Polux, Sumadijski cvet, Business Association Vojvodina ICT cluster). In mid-2010, Improved SME Competitiveness and Innovation project was initiated. The implementation of the project will last until the end of 2012, and its total value is 3 million EUR is financed by IPA 08. The main project components are the services of business support and innovations for competitiveness. Two business meetings Meet the buyer were organized in 2010 by the EU Project for Support to Enterprise Competitiveness and Export Promotion (SECEP) in cooperation with the MoERD and the NARR as a support to Serbian SMEs in becoming a part of the international chain of suppliers. In the second half of 2010, the implementation of the EU project Technical Support to Development of Entrepreneurship and Innovation (EPI) was completed. The aim was to provide support to the SMEE sector in the area of developing competitive advantages at the international level. Serbian Investment and Export Promotion Agency (SIEPA) implemented five programmes for internationalisation of business entities through which it granted almost 56 million dinars to 184 eligible enterprises. SIEPA organised joint appearance of SMEs at 11 international fairs and conducted additional activities on the promotion of and support to exports. To support innovation activities through the new Law, the Ministry of Science and Technological Development started the activities for establishment of the Fund for Innovation Activity to improve publicprivate partnership between direct and indirect budget beneficiaries, public companies, international financial institutions, banks and others. The Export Credit and Insurance Agency implemented 135 loans in the total value of 30.1 million EUR for funding the exports of small and medium-sized enterprises and insured 615 buyers to the value of 61.2 million EUR. Pillar 5 Legal, institutional and business environment of SMEs in Serbia The Comprehensive Regulatory Reform Unit (CRR) monitors the implementation of 223 recommendations relating to abolishing or amending particular regulations which affect the economy or legal regulations of certain economic areas, and which were adopted by the Government at its session held on 29 December 2009 (I package) and 66 recommendations adopted by the Government at the session held on 24 November 2010 (II package). By the end of 2010, 89 recommendations were implemented, 139 were in the process of implementation and 73 recommendations are still not implemented. Activities carried out within the Council for Regulatory Reform and CRR Unit, as temporary Government bodies, in future will be within the competence of the Office for the Regulatory Reform and Regulatory Impact Analysis, as permanent Government Service established by the Decree adopted at the Session of the Government of the Republic of Serbia on 18 November The Ministry of Economy and Regional Development, supported by the Association of Entrepreneurs, in 2010 held the public debate on the Pre-draft Law on Craftsmanship in 9 Serbian towns. In addition, by the end of 2010, the MoERD, supported by the Cooperative Unions of Serbia, began a public debate on the Draft Law on Cooperatives. By the end of 2010, at the 11th session, SME Council was reorganised by including in its work the new members as representatives of ministries and the SMEE sector. The data in the separate information systems were integrated in the new information system i.e. the Central Register of Mortgages in the Real Estate Cadastre was established for the whole territory of Serbia and the users will be able to search, copy and print the data from the Register via the Internet. The Serbian Chamber of Commerce continued to organise the award ceremony for corporate responsibility of large companies and small and medium-sized companies. The selection of enterprises and receiving of awards for 2010 will be organised in the first quarter of Meeting between the delegation of the SME Forum within the Serbian Chamber of Commerce was held in the Office of the President of the Serbian Government with the aim to improve business environment for growth and development of the SMEE sector. The SME Forum delegation presented the problems faced by the SMEE sector and way to address them. Readiness was shown for a continuous dialogue between the Serbian Government representatives and the SMEE sector. The National Agency for Regional Development conducted a sample survey of the SMEE sector with the aim to get an actual insight into the conditions, problems and needs and changes of the SMEE sector, 58

59 and compare them to the previous year. The survey was carried out on the sample of SMEs in cooperation with the Republic Statistical Office. The research results were laid out in the 2009 Report on Small and Medium-Sized Enterprises and Entrepreneurships prepared by the MoERD, NARD and the Republic Development Bureau. For the purpose of decentralisation of activities and closer focus of government administration on the needs of citizens and economy, the head office of the NARD was moved from Belgrade to Zajecar, the head office of the Fund was moved to Nis, of the National Employment Service to Kragujevac and the Export Credit and Insurance Agency was moved to Uzice. Notes to the Pillar 5: In the Ministry of Economy and Regional Development a meeting was held between the public sector representatives and almost 100 businessmen which jointly comprise the SME Business Council, with the aim to establish direct communication with the SME sector for the purpose of joint identification of measures and activities which can contribute to addressing of problems they face in their business. 59

60 60

61 V RESEARCH 5.1. Conditions, needs and problems of SMEs Notes on methodology The Survey of small and medium-sized enterprises and entrepreneurs was conducted by the Republic Statistical Office for the needs of the National Agency for Regional Development. The data are for The survey was carried out in the field, in the period between 14 th March and 4 th April, 2011.The survey was conducted on a sample of 3,500 report units, while the total sample realization was 88.5% (3,096). Surveyed units are economically active small and medium-sized enterprises and entrepreneurs, that is, business entities that submitted annual financial reports for 2010, as well as the entrepreneurs that are included in the VAT system. Surveyed business entities are classified by size in the following categories: Micro enterprises up to 9 employees; Small enterprises 10 to 49 employees; Medium-sized enterprises 50 to 249 employees; Entrepreneurs / sole traders (regardless the number of employees) The Questionnaire consists of eight parts and includes questions which cover all the relevant aspects of business operations: general characteristics of business entity, business operations, technical and technological aspect, innovation, financial indicators, market related business aspects, demand for non-financial services, human resources. Selected results of the research General characteristics The most common choice of legal form of business is Limited liability company (Ltd 86% of the surveyed enterprises). Three quarters of the surveyed enterprises have been in business more than 6 years, and 42% of them more than 11 years. Most of the owners are of mature age 67% of the respondents are between 36 and 55 years of age, while only 13% are younger than 35%. Younger employers are present in businesses of less volume and lower level of complexity (in sole traders and micro enterprises), whereas the older ones prevail in small and medium-sized enterprises. One out of five surveyed enterprises has a woman at the top of ownership/management hierarchy, mostly in small enterprises engaged in health care and beauty and recreation salons. In Belgrade Region every fourth enterprise is headed by a woman, while in Sumadija and West Serbia Region, women entrepreneurs lead only every seventh enterprise. Finance External sources of investments finance were used by 44% of the respondents which is by 11% more than in External sources of working assets finance were used by 24% of the respondents which is by 3% more than in External sources of finance for doing business include, on the national level, mostly using loans of commercial banks (28% of respondents), whereas relatively less importance is given to loans from state funds, friends or partners, leasing, foreign loans, guarantees and finally donors support. It is obvious that there is a decrease in the share of domestic loans as sources of external finance related to 2009, when, according to the survey, it was 40%. It is visible that there is an increase in the share of users of loans provided by state funds and institutions from 10% in the 2009 survey to 16% in the 2011 survey, which can be explained by the offer of the Government s support programmes. Commercial banks offer is still not stimulatory enough and unreachable for the majority of this sector. This is also shown by the intensity of obstacles for a larger use of loans: high interest rates, difficulties in providing collateral for loans, bank commissions, limited amount for loans and long procedures for approving loans. 61

62 Investments The need to invest in technical and technological business conditions was realised by 63% of surveyed enterprises, through investments over the past three years. Judging by this year survey results, it can be concluded that investment activities have been revived to an extent, since the share of enterprises with investment activities is higher by 16 index points as compared to the previous year. Investment optimism is present in the majority of surveyed SMEs with increased intensity compared to the previous year. The share of respondents that plan new investments in the following three years (62.5%), in the total number of surveyed enterprises is higher by ten percentage points compared to the last year and by two points compared to The positive fact is that, in the structure of investments prevails the share of the purchasing equipment (61%) compared to investments in business premises (34%) and very modest share of investments in industrial property right (5%). The Survey results indicate that in the following three years, the most of SMEs investments are to be expected in the areas of health care, graphic activities, information technologies, transport services and motor vehicles repair services. Market related business aspects Share of the local market in the total placement of products and services of surveyed enterprises is still dominant (70%), but reduced compared to last year (by 7 percentage points). Export made by entrepreneurs which account for 30% share in the total placements structure, are by seven index points higher than last year. Majority of export activities are still in the manufacturing industry, since 51.5% of surveyed enterprises from this industry sells their products on foreign markets, of which 19% to the neighbouring countries, and 20% to the countries in a broader region. More significant share of exporters is in transport services (31%) and information technology (35%), wholesale trade and graphic activities (30% each). Dominant focus of SMEs on the local market is also evident in the purchasing of raw materials, but it is evident that there has been an increase in the number of importers among the surveyed enterprises, from a 22% share last year to 33% this year. Respondents ranked the limiting level of certain factors for a larger presence in the market: large competition is on the top of the limitation scale, immediately followed by low demand and unfair competition. It is then followed by monopolistic behavior of large companies, own limited capacities, impossibility to participate in public procurement, and in the end, by the insufficient level of information about market potentials. The research confirmed that entrepreneurs use the possibility to overcome market limitations through associations and business networking insufficiently. The reasonable need for association of small enterprises is recognised by only 15% of the surveyed enterprises that belong to different business associations. There is a relatively better situation in medium-sized enterprises, of which every fifth enterprise belongs to an association. Technical and technological aspect Every second respondent owns medium generation equipment between 5-9 years old, and almost every third owns equipment older than 10 years, while almost every fifth is equipped with modern equipment. Also, the largest part of equipment of older generation is found in medium-sized enterprises and enterprises doing business in graphical, manufacturing and transport industries. On the other hand, new generation equipment is present in intellectual services, beauty and recreation salons and information technologies. It is characteristic that age of equipment by region among the surveyed SMEs shows significant discrepancy in technological equipment depending on the territory. Modern equipment is used by 43% of respondents from Belgrade Region, and only 11% from South and East Serbia Region, which (conditionally) can be an indicator of discrepancy in the level of competitiveness between the two regions. Quality standards Every fourth respondent owns certificates for introduced quality standards. Certification included mostly enterprises from the manufacturing industry. There is a strong regional lack of balance among companies owning certain certificates of quality standards. In the City of Belgrade and South Backa District every third enterprise, and in Morava District every fourth surveyed enterprise has certificates for some of the quality standards, and in the most underdeveloped districts only one in ten enterprises have implemented the certification procedure. The majority of respondents do not think about introducing the quality standards in the following period, and these are mostly sole traders and micro enterprises in certain industries, including retail trade, beauty and recreation salons, real estate activities, education and the like. 62

63 Innovation Every seventh enterprise performs innovative activities, and one out of fourteen has innovation cooperation with other business entities or institutions. Nevertheless, one in four medium-sized enterprises responded that they implement their own innovations, and one in eight that they have a more permanent cooperation with institutions or other organizations. Effects of the implemented innovations in 54% of cases were related to saving of raw materials and energy, and in 46% to the reduced labour costs. Only 22% of surveyed enterprises protected some of the intellectual property types, even though it should be noted that this share is higher by six percentage points than in the previous year and by eleven percentage points than in Trademark was protected by 62% of respondents, 21% protected industrial design while only 8% belongs to patents. External professional support External professional support was used by 62% of surveyed enterprises. In terms of external professional assistance, surveyed entrepreneurs still mostly rely on their bookkeepers or business partners or colleagues from the same business type. Hiring professional consultants from the institutional network or private agencies is still not a regular habit among local entrepreneurs. Entrepreneurs mostly used legal, financial and other types of business consulting when needed, and then, trainings, IT support and support when introducing quality standards. Other support was related to informing on technologies, promotion of enterprises, market research and business matchmaking. Obstacles and problems in doing business The largest obstacles in doing business are related to the lack of favourable sources of finance and legislative environment. The problem of lack of employees of adequate qualifications is also prominent. It is followed by non-harmonised business operations with quality standards and lack of information about market, as well as technologies. Examinees were free to specify other problems they encounter in doing business, at their own choice. The responses primarily included difficult collection of outstanding debts, unfair competition, monopolistic behaviour of large enterprises, public procurement and corruption. Within legal regulation and administrative procedures, surveyed entrepreneurs expressed the biggest dissatisfaction with long and expensive procedures when obtaining building permits, requirements for real estate registration as well as tax regulations and procedures. Loss of time and money due to long waiting and excessive documentation, when providing different authorisations or certificates, were usually mentioned in the respondents comments. Concerning the tax policy, the problem of unadjusted dynamics of VAT payments is emphasized, including excessive administration and rigid approach of the tax administration. Also, the amounts of local taxes and fees and discrepancy of their amounts in municipalities were emphasized. Furthermore, the urgency of regulating debt collection was mentioned. Difficult debt collection is one of the most frequently mentioned problems in the financial sphere of SMEs business. Of all surveyed enterprises 59% settle their liabilities with suppliers in a period shorter than 30 days (and 90% in a period shorter than 60 days), while as much as 35% of them manage to collect outstanding debts within the same period of time (66% in less than 60 days). Chart: Period of payment to suppliers/period of debt collection (in %) 63

64 Economic crisis According to this year s survey, 60% of respondents are coping with challenges of the current economic crisis, among which there is a small number of enterprises that do not feel the effect of the crisis (14%), which is an improvement by 11 percentage points as related to the results of 2010 survey, and 8 percentage points compared to There are 21% of respondents faced with decisions on dismissal of employees, and as much as 19% of them are faced with uncertain perspective in terms of further survival. Share of surveyed enterprises that feel stronger impact of the economic crises is smaller compared to the findings of the surveys in the previous years (40% compared to 51% in 2010, and 48% in 2009). Chart: Impact of the economic crisis in 2009, 2010 and 2011 (in %) Impact of the economic crisis is mostly felt in the activities related to real estate, construction, private schools and preschool institutions, IT and catering, as opposed to health services and motor vehicle repair services. There are evident oscillations related to impact of the crises by the regions. Around 45% of respondents from South and East Serbia Region are facing harder effects of the crisis, compared to 31% of enterprises from Belgrade Region. The economic crisis hits many aspects of the respondents current business operations, but above all, it gave rise to worsening of chronic problem of difficult debt collection and reduced demand for goods and services from the local market, where the majority of the SMEE sector is anyway oriented. Furthermore, there are problems of settling of loan payments timely and adverse effect of movement of the exchange rate. The order of the two most intensive factors do not show significant changes in relation to the 2010 and 2009 survey results, but there is an obvious strengthening of the impact of changes in exchange rate and settling of loan payments. Business plans Most of the surveyed enterprises intend to continue to work with the increased (44%) or the same scope of business activities (48%) in the following three years. Negative outcome was considered by 8% of respondents, where 4% is related to reducing business activities, 3% to closing the business and 1% to transferring the business to somebody else. Table: Business plans Business expansion The same workload Reduced workload Closing the business Transfer business to others Micro 32,2% 55,6% 6,1% 4,7% 1,5% Small 45,9% 47,2% 3,8% 2,0% 1,1% Medium 58,7% 37,6% 2,4% 0,9% 0,5% Entrepreneurs 29,1% 59,1% 4,6% 5,3% 2,0% SME 43,6% 48,5% 3,8% 2,9% 1,2% 64

65 Chart: Business plans: 2009, 2010 and 2011 (in %) In the similar survey conducted in 2006, there was much more enthusiasm among entrepreneurs: 66% of respondents intended to expand their business, and 26% planned to keep the existing level. Only 1% of SMEs announced the closure of business. According to their own estimate, most respondents are in the zone of the averagely successful business operation (61% as opposed to 57% according to the 2010 Survey). One of seven respondents considers that their business is very successful, and one out of twenty estimated their business as unsuccessful. As to conditions for the enhancement of operations, the respondents mentioned high expectations from the state (in terms of higher support and reduction of obstacles) and increasing expectations from the local governments. Also, higher support of commercial banks would (definitely) be beneficial. Respondents noticed that external factors i.e. the factors acting outside business entities determine their business success. Chart: How to enhance business operations (in %) 5.2. Innovative activities of small and medium-sized business entities for the period Serbian Statistical Office conducted a research on innovative activities of small and medium-sized business entities for the period (where 2010 is the reference year), with the aim to grasp a true relation between the business policy of business entity and innovative activities, in order to determine the type, scope and quality of these activities in business entities. This research provided data about business entities activities on innovation of products/services, process innovation, innovation in the business entity organisation 65

66 and innovation in marketing. Most questions are related to new or significantly improved products or services, use of new or significantly improved processes, logistics or distribution methods. Survey on innovation of SMEs was conducted based on a representative sample, in two stages. The sample was allocated in the territory of the Republic of Serbia up to the regional level, proportional to the number of SMEs. The sample included 3,500 small and medium-sized business entities. The results obtained were weighted and calculated on the level of the business entities population. Survey of small and medium-sized business entities was conducted on a sample stratified by size of business entities (small: between 10 and 49 employees, and medium-sized: between 50 and 249 employees) and industries (groups of industries according to the Classification of industries CI 08). Around 15% of the selected business entities were blocked or in bankruptcy, while 14% of business entities did not respond to the survey. Realised sample is 71.37% Share of business entities by size (based on the number of employees) Territory Total Small Medium-sized The Republic of Serbia 100,00 19,31 80,69 SERBIA - NORTH 100,00 18,62 81,38 Belgrade Region 100,00 19,19 80,81 Vojvodina Region 100,00 17,85 82,15 SERBIA - SOUTH 100,00 20,60 79,40 Sumadija and West Serbia Region 100,00 19,44 80,56 South and East Serbia Region 100,00 22,59 77, Share of business entities by territory and size Territory Total Small Medium-sized The Republic of Serbia 100,00 100,00 100,00 SERBIA - NORTH 64,97 62,63 65,53 Belgrade Region 37,06 36,84 37,11 Vojvodina Region 27,91 25,79 28,42 SERBIA - SOUTH 35,03 37,37 34,47 Sumadija and West Serbia Region 22,16 22,31 22,12 South and East Serbia Region 12,88 15,06 12,36 The biggest number of business entities is in Belgrade Region % Innovative activities of business entities An innovation is the implementation of new or significantly improved product, service or process, a new marketing method, or a new organizational method in business practices, workplace organisation or external relations (OECD, Oslo Manual, 3rd ed., 2005). A business entity can have several types of innovative activities in the defined period. A business entity is seen as a unit, and type of innovation activity as an aspect (multiplied number). 66

67 2.1. Share of types of innovation by territory and size of business entity Business entities - innovators Territory Product / service innovation Business process innovation Abandoned / in progress innovations Organisatonal innovation Marketing innovation Noninnovators THE REPUBLIC OF SERBIA 26,49 27,25 14,46 31,27 28,50 53,19 Medium-sized 33,30 36,30 21,10 40,32 37,51 42,78 Small 24,86 25,09 12,87 29,10 26,34 55,68 SERBIA - NORTH 26,06 27,35 13,67 29,58 27,69 54,27 Medium-sized 32,33 35,26 22,98 39,97 38,83 43,11 Small 24,62 25,53 11,54 27,20 25,14 56,82 Belgrade Region 29,14 28,91 13,84 30,61 29,54 51,29 Medium-sized 33,37 35,68 19,42 39,68 40,90 41,87 Small 28,13 27,30 12,51 28,45 26,84 53,53 Vojvodina Region 21,96 25,27 13,45 28,21 25,24 58,18 Medium-sized 30,85 34,66 28,08 40,38 35,88 44,89 Small 20,03 23,23 10,28 25,56 22,93 61,07 SERBIA - SOUTH 27,33 27,06 15,92 34,40 29,99 51,21 Medium-sized 34,93 37,92 17,94 40,91 35,29 42,22 Small 25,36 24,24 15,39 32,71 28,62 53,54 Sumadija and West Serbia Region 28,13 27,23 14,34 35,41 29,49 50,45 Medium-sized 35,07 39,68 18,24 40,88 33,67 41,48 Small 26,45 24,23 13,39 34,09 28,48 52,61 South and East Serbia Region 25,94 26,68 18,63 32,64 30,83 52,48 Medium-sized 34,72 35,31 17,51 40,95 37,69 43,32 Small 23,38 24,16 18,96 30,22 28,83 55,15 Share of implementation of a certain type of innovation by size of a business entity innovator, shows the biggest share of innovation in business entities as follows: total 31.27%, in small 29.10% and in mediumsized business entities 40.32%. 67

68 2.2. Business entities by share in the industries Total number of business entities Total number of business entities innovators Total number of business entities without innovations TOTAL 100,00 100,00 100,00 A:AGRICULTURE, FORESTRY AND FISHING 4,31 3,85 4,69 B: MINING 0,41 0,35 4,69 C: MANUFACTURING INDUSTRY 30,21 36,46 20,50 D: ELECTRICITY, GAS AND STEAM SUPPLY 0,52 0,37 0,65 E: WATER SUPPLY AND WASTE WATERS MANAGEMENT 2,01 1,60 2,37 F: CONSTRUCTION 10,04 7,80 12,01 G: WHOLESALE AND RETAIL TRADE AND REPAIR OF MOTOR VEHICLES 28,04 25,98 29,83 H: TRAFFIC AND STORAGE 5,70 4,37 6,87 I: ACCOMODATION AND FOOD SERVICES 3,36 2,71 3,91 J: INFORMATION AND COMMUNICATION 4,09 4,89 3,39 K: FINANCE INDUSTRY AND INSURANCE 0,73 0,87 0,62 L: REAL ESTATE ACTIVITIES 0,31 0,26 0,37 M: PROFESSIONAL, SCIENTIFIC, INNOVATIVE AND ENGINEERING ACTIVITIES 7,98 8,67 7,39 N: ADMINISTRATION AND SUPPORTING RETAIL SERVICES 2,30 1,83 2,73 The biggest share among innovators belongs to business entities in the manufacturing industry 36.46%. 3. Characteristics of business entities Business entities that implemented a product/service innovation or business process innovation (including unrealized innovations as well as those still in progress) are considered to be technological innovators. Other innovators are those business entities that implemented organizational or marketing innovations. Noninnovators are those business entities that did not implement any type of innovation. When looking at markets where business entities-innovators sold their products/services, 30.74% of business entities - technological innovators responded that they were selling on the local markets in Serbia, 33.7% of other innovators and 45.41% of business entities without innovations. As a response to the question which market was most used, they mentioned local, regional market Markets in which business entities sold their products/services Market Business entities that introduced technological innovations Business entities that introduced other innovations Business entities without innovations Local, regional market 30,74 33,74 45,41 National market 24,04 26,14 27,12 EU, EFTA countries 12,40 12,18 8,32 Other countries 10,43 10,01 7, Share of employees with higher education by type of innovation and size of business entities All business entities Business entities - innovators Business entities technological innovators Business entities other innovators Business entities without innovations Total 12,48 8,29 6,68 7,41 33,58 Small 12,24 7,11 5,68 6,09 41,91 Mediumsized 12,70 9,34 7,58 8,59 26,43 68

69 12.48% of the employees received higher education Average age of equipment in business entities Total Small Medium-sized Older than 10 years 33,12 30,67 38,01 Between 5 and 10 years 24,50 25,82 21,89 Between 3 and 5 years 22,49 23,86 19,77 Between 1 and 3 years 15,51 15,68 15,19 Less than 1 year 4,38 3,97 5,14 Equipment of 10 years and older has the highest share 33.12%. 4. Product / service and business process innovation Product / service innovation is launching a new product or service in the market with new or significantly improved characteristics or possibilities of use. This includes significant improvement of technical characteristics, components and materials, built-in software, user orientation or other functional characteristics. Innovation should be new for the business entity, and it does not necessarily have to be new for the market. Innovation can be developed in the surveyed business entity or elsewhere. Business process innovation is implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment or software Technological innovators by type of innovative activities Size of business entities Product / service innovation Business process innovation Abandoned or suspended innovations Innovations in progress Total 28,67 36,20 4,20 13,97 Small 24,86 31,15 3,64 10,51 Medium-sized 33,30 43,54 3,80 8, Structure of technological innovators by type of the implemented innovation Product / service innovation Business process innovation New New support Production Size of business Product Service purchasing/ activities method entities innovation innovation delivery for business innovation method processes Total Small Medium-sized Who developed the product/service or business process? Size Business entity itself or group it belongs to Business entity in cooperation with other business entities or institutions Business entity through adaptation and alteration of the product developed by other entity Other business entity or institution Product innovation Total Small Medium-sized Service innovation Total Small Medium-sized Business process innovation Total Small Medium-sized

70 When asked who developed the newly introduced products/services, more than 60% of business entities-innovators responded that it was mainly themselves or the group they belonged to, and as for business process development, about 43% were developed by business entities. As a response to question whether the product/service innovation was new in the market or new to the business entity only, 36.46% of business entities-innovators replied that they were new in the market, while 63.54% of business entities-innovators responded that the product/service was new to the business entity only Innovation activities of technological innovators and expenditures for innovation activities Activities Share of business entities Value Internal research and development External research and development Acquisition of machinery, equipment and software Acquisition of other types of knowledge Education and innovation training Innovation implementation in the market All types of design Other The biggest share is in purchasing machinery, equipment and software 75.81% of the total expenditures for innovation activities of business entities. Share of business entities that received some kind of financial support is around 10% of the total number of business entities with local government support of 2.79%, state funds support of 5.78%, EU support of 1.03% and EU7 support accounts for 0.17%. 5. Sources of information and cooperation for innovation activities Business entities-innovators were asked which sources of information they used and about their importance for the development of new innovation projects or implementation of the existing projects. The most frequent response named information from within the business entity or group that the business entity belongs to 32.25% Business entities (technological innovators) that reported high importance of the source of innovation information Sources Total Small Medium-sized Internal Within the business entity or group it belongs to Suppliers Clients or customers Market Competitors or other business entities in the industry Consultants, business research agencies or IR Universities/higher education institutions Institutional State or Public Scientific Institutes Conferences, trade fairs, exhibitions Other Scientific magazines and technical publications Professional and industry associations Cooperation on innovations includes joint work with other business entities, universities, scientific institutes on research and development, as well as other innovation projects. The biggest share belongs to suppliers 78.69% and buyers 73.39% as the most important partners Type of partner for cooperation (the respondents who reported arranged cooperation) Total Small Mediumsized Other business entity within the group Suppliers Clients or customers Competitors or business entities from the industry Consultants, IR agencies Universities/higher education institutions State or Public Scientific Institutes

71 Type of partner for cooperation related to the total number of business entities shows the following share: other business entity within the group 7.50%, suppliers 5.90%, clients or customers 5.50%, competitors or business entities from the industry 4.38%, consultants, IR agencies 4.34%, universities/higher education institutions 4.02% and state or public scientific institutes 3.05% Partners for cooperation by location Serbia Europe USA China/India Other countries Effects of innovations for period and hindering factors for innovation When asked about importance of each of the listed effects of product/service or business process innovation, introduced in the given period, improved quality of product or service was ranked as the most important (28.82%) by business entities Hindering factors for innovation activities 6.1. Effects of the introduced technological innovations ranked as very important for business entities Effects Total Small Mediumsized Increased range of products and services 23,64 21,77 29,69 Replacement of obsolete products or processes 19,51 18,95 21,33 Entered new markets and increased market share 14,99 13,11 21,09 Improved quality of products and services 28,82 28,17 30,94 Improved flexibility of production or services 17,19 17,60 15,86 Increased production capacities / volume of service 18,07 16,32 23,75 Reduced labour cost per unit output 14,94 13,98 18,05 Reduced material and energy cost per unit output 11,21 10,31 14,14 Reduced environmental impact 13,61 12,50 17,19 Improved health and safety of employees 16,63 15,38 20,70 Business entities technological innovators Mediumsized Total Small Factors Lack of financial funds in business entity 36,60 37,17 34,77 Cost Lack of funds from external sources 26,04 26,57 24,30 Factors High cost of direct innovation 30,09 30,34 29,30 Lack of professional staff 5,66 6,08 0,00 Knowledge Lack of information on technology 3,32 3,62 2,34 factors Lack of information on markets 3,87 3,64 4,61 Difficulties in finding a partner for cooperation 11,51 12,62 7,89 Market factors Cost Factors Markets dominated by positioned business entities 14,27 13,98 15,23 Uncertain demand of innovated products or services 13,92 14,48 12,11 Business entities that did not innovate Knowledge factors Market factors Reasons not to innovate Lack of financial funds in business entity 13,67 13,53 14,42 Lack of funds from external sources 17,61 17,51 18,18 High cost of direct innovation 19,38 19,64 17,97 Lack of professional staff 27,61 28,65 21,94 Lack of information on technology 25,39 26,02 21,94 Lack of information on markets 19,69 19,89 0,19 Difficulties in finding a partner for cooperation 21,91 22,25 20,06 Markets dominated by positioned business entities 21,38 20,85 24,24 Uncertain demand of innovated products or services 27,30 27,48 26,33 No need, due to earlier innovations 22,64 23,42 18,39 No need, due to no demand for innovations 24,57 25,04 22,05 71

72 7. Organisational and marketing innovations Organisational innovation in business entities is implementation of new or significantly changed structure or management methods, aimed to improving use of knowledge, quality of products/services, or increasing the efficiency of work flows (OECD, Oslo Manual, 3rd ed., 2005). A marketing innovation is the implementation of a new marketing method involving significant changes in product design, packaging, product placement, product promotion or pricing (OECD, Oslo Manual, 3rd ed., 2005) Business entities that introduced organizational and marketing innovations Business entities total Business entities technological innovators Introduced organizational innovations Introduced marketing innovations Introduced organizational innovations Introduced marketing innovations Total 31,27 28,50 43,33 43,57 Small 29,10 26,34 41,01 40,90 Medium-sized 40,32 37,51 53,02 54,72 Share of business entities that introduced innovations is as follows: organizational innovations account for 31.27% and marketing innovations 28.50% of total number of business entities. Share of business entities that are technological innovators at the same time is: organizational innovations make 43.33%, and marketing innovations 43.57% Type of introduced organizational innovation Total New business practice Work responsibility and decision making Change in relations with other business entities Total 31,27 21,31 26,47 14,43 Small 29,10 18,95 24,44 13,15 Medium-sized 37,51 31,16 34,96 19, Factors ranked as important for organizational innovations of a business entity Factors Total Small Mediumsized Reduced time to respond to customer needs 11,27 10,67 13,81 Better capability for new product/service development 6,53 5,87 9,30 Improved quality of products and services 12,53 11,53 16,72 Reduced costs per unit output 5,31 4,80 7,42 Improved communication within the business entity, with other entities and institutes 5,31 10,53 10, Implementation of methods for introduced marketing innovations Methods Total Small Mediumsized Changes to the design or packaging of products / service 11,65 10,33 17,17 New methods and techniques for product promotion 15,31 13,26 23,87 New or changed distribution methods 8,87 7,65 13,99 New methods of pricing products 20,14 18,79 25, Important factors for business entities that introduced marketing innovations Factors Total Small Mediumsized Increase or maintain market share 7,93 6,39 14,39 Introduce products to new customer groups 6,57 5,73 10,06 Introduce products to new markets 3,45 2,59 7,06 72

73 8. Creativity and employees skills Responds to the question whether a business entity employed and/or hired external associates or individuals who possess certain skills (period ) Business entities, innovators that employed or hired external associates Skills Employees External associates Total Small Mediumsized Total Small Mediumsized Graphic arts, advertising 16,69 15,64 20,08 29,78 28,92 32,58 Objects / services design 28,18 28,02 28,67 16,52 15,54 19,69 Multimedia 11,95 12,17 11,25 19,42 16,41 29,14 Web design 18,33 16,78 0,23 38,21 37,61 40,16 Software development 17,37 15,06 24,84 41,66 40,84 44,30 Market research 36,14 34,78 40,55 16,34 14,10 23,59 Engineering / applied sciences 19,14 18,56 21,02 10,22 8,74 15,00 Mathematics, statistics, database management 23,86 20,66 34,22 11,62 11,44 12, Business entities, non-innovators that employed or hired external associates Employees External associates Skills Total Small Total Small Graphic arts, advertising 4,16 4,21 3,87 6,72 6,42 8,36 Objects / services design 8,70 8,88 7,73 3,47 2,82 7,00 Multimedia 3,41 3,67 0,02 3,47 2,86 6,79 Web design 4,95 4,78 5,85 8,52 7,99 11,39 Software development 4,22 3,80 0,06 11,18 10,57 14,52 Market research 9,11 8,69 11,39 4,51 4,25 5,96 Engineering / applied sciences 5,60 5,19 7,84 1,85 1,90 1,57 Mathematics, statistics, database management 5,08 4,46 8,46 1,56 1,38 2,51 73

74 74

75 VI ANALYSIS OF KEY PROBLEMS AND BARRIERS TO SME DEVELOPMENT AND RECOMMENDATIONS FOR FUTURE IMPROVEMENTS OF THE SUPPORT MEASURES 6.1 Legal and administrative barriers The analysis of problems and barriers to development and recommendations for future improvements related to legal and administrative barriers was carried out by NALED. Entrepreneurs in Serbia identify legal, regulatory and administrative barriers as the biggest weaknesses. One of the researches carried out in 2008 within the Municipal Support Programme showed that some 50% interviewed entrepreneurs felt that administrative barriers were the ones impeding investments in Serbia Administrative barriers Administrative barriers relate to slow administration, arbitrariness, inconsistency and insufficient transparency. A) Administrative barriers are mostly identified in the following areas: 1. Land and property management Until recent adoption of the new Law on Planning and Construction, the local government was the manager but not the owner of land. Since 2010, building land managed by local governments has become their property and thus, they are allowed to sell it. To dispose, equip and sell the land transparently, it is necessary to firstly make a complete property register. Thus, the key problems relate to: registration/inventory of property and establishment of ownership; categorisation of property and definition of main parameters (area, equipment and occupancy degree, purpose, etc.) and property management (defining the land disposal policy). After passing of the new Law on Planning and Construction under which the local government is allowed to sell the building land, the land disposal policy has become even more important element of management. 2. Planning and development control building permits Business operations of entrepreneurs are again impeded in connection with land, but this time they are related to the issue of building permits. One of the conditions preceding the disposal of land is spatial planning and urban development. The practice has shown that in the phase of preparation and drawing up of urban development plans there are several elements directly influencing this process, which cause the following problems: lack of updated cadastral plans and topographic maps and lack of cadastre of underground and aboveground infrastructural lines and structures; lack of socio-economic conditions and inadequate participation of citizens and businesses in the process of plan design (perusal of plan is not sufficient); slow response of the Government and local administration often turns into a so-called administrative silence and is present at all levels and in almost all structures; disinterest and lack of motivation of the Government and local institutions which are officially in charge of setting conditions for urban development; general lack of funds for collection of data and documents in the preparation of the plan turns the plan into a dead letter, a random graphic expression; vision of urban development in ten, fifteen or twenty years; impossible to implement, except to a lesser extent and never completely, or the plan is implemented in the way that in each subsequent period new plans are prepared and wrongly made investments are reallocated; 75

76 inadequate personnel and technical equipment of institutions dealing with preparation and drawing up of plans reduces efficiency in the design and implementation of plans of all categories; lack of service in charge of monitoring the plan implementation and regularly preparing reports on changes thereof supplements to the existing plans or design of new plans, which is one more limitation for the efficient preparation of plans. 3. Local fiscal system and taxes Local taxes, duties and fees take a considerable share in the expenses of entrepreneurs. At the same time, manner of defining the amounts and rates of fees must be made available to entrepreneurs. A large number of local governments have, in years, dramatically changed the amount of fees or duties. One of many examples is a communal tax on business signs which is, for example, in particular municipalities of South Serbia ten times higher than in Belgrade. The reform of fiscal system includes detailed analysis of revenues from economy and subsequent creation of a more transparent taxation system. An entrepreneur should have a minimum possibility to download from the website all municipal decisions. However, even when such decisions are posted on the website, entrepreneurs often encounter the following problems: decisions are hard to find on the website (for example, decisions are listed by the date of issue and not by areas or topics); a large number of decisions are changed main document was issued ten years ago whereas on the website there is no revised version. Instead, one needs to read dozens of different documents to obtain a complete information for example, only amendments to the decisions can be found which contain new coefficients, score points and the like); decisions are unnecessarily complicated and cumbersome - (for example, the amount of communal tax differs for each of one thousand and four hundred and twenty seven business activities). 4. Pricing and collection of utility bills Reform of the system for collection of utility bills is one of the problems which notably relates to the pricing method and transparency of the system. In 2009, a research was conducted among entrepreneurs 43 who provided the data on the number and type of taxes, duties and utility bills they pay to the local government. The irregularity of the system can be seen on the example of the three enterprises surveyed in one municipality in Serbia. Case of the first enterprise Due to a large area of the office building, expenses for garbage collection were very high, which is why the enterprise cancelled the services of public utility company and now they dispose of the garbage by themselves. Their proposal is to pay this service per dumpster i.e. per m 3. Case of the second enterprise: The area of the office building is 587 m 2. Land area on which the building is constructed is 786 m 2. Garbage disposal is paid for the area of 300 m 2. Case of the third enterprise: Land area is m 2, area of the building is m m 2 extra zone, trade activity. Garbage collection is paid for the area of 25 m 2. Should the owners of these three enterprises ever have the chance to discuss the manner of collection of utility bills, they will completely lose trust in the local government. B) Improvement of efficiency and transparency possible solutions 1. Municipal Service Centres (MSC) One of the mechanisms to streamline the procedure and reduce bureaucracy is to set up municipal service centres. Municipal service centres represent counter services which make municipal services available to the beneficiaries. They perform their services transparently, citizens and entrepreneurs have easier access to information and do not have to wait in hallways in front of the locked offices, whereas the majority of required activities are completed in the counter service and not in the offices of municipal administration. Municipal service centres have been widely popularised in Serbia in the last years and today they are present in most municipalities. Municipal service centres in Subotica and Novi Beograd are but a few of good examples. Municipal service centres offer to their customers: services provided in a transparent and efficient manner without cumbersome procedures and unnecessary waiting in lines; information about competences and procedures of municipal administration so that they could better 43 NALED Cost of doing business in Serbia, 2009/

77 understand their legal rights; two-way communication so that the municipal management can plan the operations of the administration according to their needs and requirements; principle of an open and accessible customer-oriented instead of self-oriented administration. On the other hand, municipal service centres relieve the employees in municipal administration of client pressure, whereas clients no longer have to wonder down the corridors looking for the person in charge to help them exercise their rights or obtain documents. 2. Call centre and City stat City stat, Call centre, System 48 (or 96) are the names of the same concept which is tailored to the needs of different local governments. System 48 is the control system of public companies which helps citizens and entrepreneurs to resolve communal issues within 48 hours. System 48 is also used for better control of budget allocations to indirect budget beneficiaries - public utility companies. Owing to such control, municipalities significantly reduce the funds used for subsidising public companies and have a precise insight into the utilisation of these funds. System 48 primarily enables the service beneficiaries (citizens and entrepreneurs) to manage the quality and speed of services rendered. Indjija municipality in Serbia represents a good example of System 48 ( and there is a similar system in Paracin, as well. The towns of Loznica and Kragujevac introduced System 48 or similar system (System 96 in Loznica and Call Centre in Kragujevac) in One-stop shop permit centre Number of permits and approvals that enterprises are required to obtain and time necessary for their issue is not only an expense but can also discourage the entrepreneurs from starting or expanding their business in local community. The programme for streamlining costs and administration which follows the permit issue procedure can improve the economic image of any community. One of the main objections put forward by the enterprises relates to complicated process for issuing building permits which largely consists of cumbersome documents, long waiting period and constant going door-to-door. A single counter for issuing of permits can largely improve the efficiency of this process and make an entrepreneur feel better when encountering municipal administration. A good example of one-stop shop is in Subotica. Services provided by Permit Centre 44 Department Services Beneficiaries Urban planning and utility services - Permit Centre Issue of building permits: * Excerpt from urban development plan * Conditions for urban development * Approval of public companies * Building permits * Certificates of occupancy Acceptance and handling of requests for allotments Acceptance and handling of requests for alterations and additions to the urban development plan Acceptance and handling of requests for legalisation of construction Allocation of street number Issue of permits for works in the streets and other public areas Information of residential and office buildings Citizens and enterprises 4. Fact Sheet on how to obtain building permit One-stop shop for issue of building permits is not the only way to improve the procedure. More importantly, the procedure should be explained to a businessman /entrepreneur in the simplest possible terms. Despite the evident need for fact sheets on the procedures for obtaining building permits, municipalities mostly do not have brief, simple and clearly written brochures. In September 2009, a new Law on Planning and Construction was enacted, which is expected to encourage towns / municipalities to prepare the fact sheets. The new Law introduced the institute of building location permit, made the procedures of allotment and reallotment easier (which are no more considered by the commissions for planning) and launched a simpler procedure for issue of building permits for buildings the area of which does not exceed 400m 2. Under the new Law, the application of provisions 44 Situational Analysis Report: Municipal Service Centres and Permit Centers in Municipalities within the programme Municipal Economic Growth Activity; 77

78 on obtainment of location permits, building permits and certificates of occupancy will highly differ in practice among municipalities because the duration and complexity of this procedure will depend on the numerous factors (for example, whether there is a general i.e. detailed regulation plan for the specified area). 5. Improved communication between local government and enterprises One form of fighting bureaucracy is to establish communication between businesses and public administration. Proposals coming from businesses for improvement of communication include: Surveys and visits to entrepreneurs, Preparation of fact sheets, brochures and journals, Constant communication via s, SMS messaging, Organising round tables and conferences, Meetings of economic council, Info-days for economy, Joint appearance at fairs and other joint activities. Good communication ensures better knowledge of entrepreneurs, their better adjustment to changes and more substantive utilisation of public resources they have available Legislation In 2010, Serbia did not make much progress in relation to public reforms. By the end of 2010, the number of implemented recommendations of the Comprehensive Regulatory Reform Unit, which also contained initiatives of the Chamber of Commerce, NALED, AmCham and FIC for change in regulations, and which were adopted by the Government of the Republic of Serbia on 29 December 2009, did not significantly increase. According to the analysis carried out for the purposes of the NALED Gray Book, by the end of 2010, only 6 Gray Book recommendations were fully implemented, whereas 10 out of 75 recommendations were partly implemented (or are in the process of implementation). In the first quarter of 2011, a particular progress was recorded, notably due to a better communication between the Business Registers Agency and the Tax Administration Office and thus, the problem related to the winding up of a business entity was resolved as the BRA now automatically informs the Tax Administration thereof and also, after the allocation of the Tax Identification Number (TIN) there is no need to go to Tax Administration and submit other documents while only decision of TIN allocation can be obtained there. The total number of resolved issues increased by 3, whereas the number of recommendations the implementation of which is pending or which are partly implemented was increased by 5. Out of the number of recommendations that are currently being implemented, it is clear that the most significant savings will be achieved by simplified communication between users and the Tax Administration Office. The Tax Administration Office has announced that by the end of the year, all taxpayers will be able to register and pay their taxes electronically, to control their tax balance and payment of contributions and get the confirmation that they have paid their tax liabilities. Previously, the deadline for enabling electronic applications was envisaged for the first half of It remains to be seen whether the Tax Administration will be able to fulfil its promise within the postponed deadline. Status of recommendations from the Gray Book 78 Chart: 2010, 31 December

79 In the last 3 years, only 10% of recommendations identified in NALED Gray Book were implemented. Comprehensive regulatory reform summary of results The Comprehensive Regulatory Reform has been implemented in Serbia since 2009 with the main goals to reduce administration expenses and improve international rating of the Republic of Serbia regarding the quality of business environment, particularly in the studies Doing Business by the World Bank and the World Economic Forum. However, the most valuable result of this reform is that through initiatives made for change in regulations and equal dialogue with regulatory bodies, in the regulatory process in Serbia, for the first time, business, citizens and non-governmental sector are actively involved. Although, at first sight, the projected savings of this reform seem like the most significant news, it is far more important to sustain once established mechanism that provides permanent and equal dialogue in-between the state and the private sector in creating business environment, where a specific role in future is reserved for the Office for the Regulatory Reform and regulatory impact analysis. The concept of the Reform was that the initiative for amending regulations that hinder business starts from those who are involved in administrative procedures, and therefore are very well informed about procedures that complicate business. These are, on the one hand, the bodies and institutions which implement these procedures and, on the other, business entities to which these procedures and regulations apply. Thus, the scope of the reform was limited by the readiness of administration to stop unnecessary administering and by the readiness of every entrepreneur to believe that he/she is able to change the Government in accordance to his/her reasonable needs. Only 600 initiatives that came from business and administration in the period from April to November 2009, for amending regulations, pointed at the fact that the biggest part of business still does not believe that State is ready for sincere dialogue and that administration is not interested in debureaucratization. The only exception to this were some larger companies and business associations (e.g. the Association of Leasing Companies in Serbia), whereas the Business Registers Agency was the only one to take a more serious part in this initiative. This makes the Government even more responsible to implement in practice the reasonable initiatives transformed into recommendations. The Foreign Investors Council, NALED and the American Chamber of Commerce have made a considerable contribution to the reform and even formed a Working Group, making a set of good initiatives for the change in regulations. In analysing the regulations and considering initiatives, the CRR Unit identified 196 regulations which should be abolished as unnecessary, and out of 600 initiatives for amending regulations, 463 were identified as legitimate and together with the additional 200 they were transformed into 340 recommendations. Out of 196 recommendations to abolish unnecessary regulations, 192 recommendations were implemented and ineffective were made: 15 decrees, 11 decisions and 166 other by-laws. Out of 340 recommendations for amendments to regulations which unnecessarily complicate business operations, 36 recommendations were abandoned. Of remaining 304 recommendations, 30.6% i.e. 93 recommendations have been implemented in practice, whereas 137 recommendations are currently being implemented out of which the majority is in the form of draft laws and their adoption in the Parliament is pending. Thus, it is certain that very soon the CRR will result in 67% of implemented recommendations for change in regulations. On a positive note, these recommendations, according to the estimation of the CRR Unit, will account for over 80% of calculated savings. By the end of 2010, the recommendations were implemented through preparations and subsequent adoption (in the beginning of 2011) of the new Company Law and amendments to the Law on Financial Leasing and the Road Transport Law. A large number of recommendations (84) were related to the Company Law. Having in mind that the Draft Company Law was adopted by the Government, a considerable increase in the total number of implemented recommendations is expected from the moment of its adoption in the Parliament, which is likely to happen in This Law will introduce numerous novelties in economy which will have positive effects on business operations. Some of these novelties are: disabling avoidance to accept documents, eliminating dilemmas regarding the authorisations of company representatives, eliminating restrictions regarding the bodies a company is allowed to have, enabling fast replacements of company representatives and simplifying convention of company general meeting. The requirement of having seals is removed as a surpassed formalism which creates additional legal uncertainty. In addition, on the one hand, the responsibilities of shareholding companies management are increased and, on the other, the opportunities for shareholders to abuse their rights are narrowed, including the right to information. Information about 79

80 status issues is available with minimum costs by the possibility to be obtained on the webpage of the Business Registers Agency. Draft Law on Amendments to the Law on Financial Leasing, which is expected to be adopted by the Parliament soon, will enable the purchase of immovable property on financial leasing. This will enable in Serbia, although much later than in other European countries, to use this facility alternative to traditional instalment loans for acquisition of immovables. This change is the result of numerous and long-term initiatives of the Association of Leasing Companies in Serbia and intensive negotiations with regulatory bodies in the course of the CRR implementation. Final agreement of the National Bank of Serbia with this initiative coincides with the appointment of the new Governor of the NBS. 45 Despite the fact that a sharper drop in prices of immovable property is likely to be in favour of their purchase on loan, potentials of this alternative financial facility are evident. A condition for its functioning is the adoption of change in tax regulations which would eliminate VAT on leasing instalment (because VAT is not even paid on the instalment of the housing loan). It is also necessary to appropriately regulate the payment of absolute rights transfer tax and property tax during the term of the contract. When the Parliament adopts the Draft Law on Amendments to the Road Transport Law, which was proposed on 21 January 2011, the recommendations for elimination of unnecessary administrative obligations which created large costs will be actually implemented. This law will remove the obligation of pro forma signing of roadworthiness control on the travel order since the Road Traffic Safety Law prescribes the obligation of roadworthiness in the road traffic. In addition, this will remove the obligation of business entities to keep in their passenger vehicles the travel order not older than seven days verified by the authorised person. Legal entities will also no longer be obliged to write their business names on their passenger vehicles. It is a fact that a large number of legal entities have not met this obligation in practice, however this has created legal uncertainty in relation to the treatment of this offence by the relevant authorities and created favourable conditions for corruption among such bodies. In cooperation with the IFC, a detailed analysis of recommendations with largest savings was performed, after which the CRR Unit s conservative assessment on expenditure cuts stayed at approximately same level, and results showed that implementation of recommendations could make savings to Serbian economy of up to 170 and 180 million EUR annually. Establishing of the office for regulatory reform and regulatory impact analysis The Office for the Regulatory Reform and Regulatory Impact Analysis (hereinafter: Office) was established by the Decree on forming the Office for the Regulatory Reform and Regulatory Impact Analysis (Official Gazette of RS, Nº 89, of November 29, 2010). Office domain was expanded in comparison with the Regulatory Reform Council domain from which that office takes over the data in the field of Serbian legal system reform. The Office is designed as a steady expert service in the Government, unlike Regulatory Reform Council, established as a temporary political body. Within the Office domain is to implement regulatory reform and regulation effects analysis proposed by the Ministries and special organizations. Particular attention should be paid to one of the competencies assigned by the regulation of RS Government, and that is: collection and procession of initiatives from business and legal entities and citizens for amending inefficient regulations on the national level and submitting of initiative to competent proponent for regulation for amending inefficient regulations. This competency of the Office should provide continuous involving of business and citizens in regulatory process, since that office was established as Office window of the Government for taking initiatives for amending damaging regulations. In this sense, through the Office, continuous improvement of existing legal system, which implies constant monitoring of regulation effects and interventions in accordance with legitimate business initiatives, is introduced to our legal system. 45 The importance of this novelty for the economic growth is also evidenced by the data from the LEASEUROPE (the European Federation of Leasing Company Associations) оn the 2009 value of leasing transactions in the EU countries at the annual level. For example, the volume of transactions expressed in mil. EUR amounted to: in Italy (80.000,00), in Germany (49.000,00); France (35.423,00) Spain (13.225,55) Austria (12.145,24), Poland (1.775,35), Slovenia (2.060,39) the Check Republic (1.804,43), Hungary (1.055,90) Romania (688,91) Slovakia (408,00) Bulgaria (228,92). 80

81 New regulations of business importance In February of 2011 the Government of the Republic of Serbia passed the Decree on Amendments and Addenda on Decree on fee for using data of survey and cadastre and providing services of the Republic Geodetic Authority. By this Decree, heading 17 was changed and fees for registration of mortgages were limited to the maximum sum of points ( RSD), and for modifying already registered, up to 80 points (800RSD). In this way, a very damaging regulation was eliminated that in March 2010, in the midst of implementation of the CRR, was introduced to our legal system through the Decree by which the fee for registration of mortgage was changed to RSD, increase of 0.2% of value of mortgage without limit. For example, for registration of mortgage supplying 10 million EUR, the Republic Geodetic Authority collected fee of EUR in RSD and 3000 RSD of additional fee. This damaging regulation affected the increase in price of mortgage establishment, and thus made credit much more expensive and even unaffordable to some business entities. Аmcham, NALED, and business banks insisted on amendments and the CRR implementation Unit pointed out, on several occasions, that regulation as an example of tendency is contrary to reforms. The Government reacted on those initiatives and changed the Decree. However, the Government omitted to delete controversial article 8a, introduced in the Decree with the controversial amendment from 2010, which prescribes a double fee for resolution of claims opposite to determined sequence. The question which imposes itself on us: is the fee collected by the Republic Geodetic Authority that low as not to enable prompt treatment of the Cadastre, and therefore double fee is collected although arguable from the aspect of constitutionality (let us remind you that in the past, identical attempt of some courts to increase fee of land registration was rated as unconstitutional). When we take the fee into consideration, we should bear in mind that the Business Registers Agency, which is self-financing Republic agency, for almost identical registration, registration in the Pledge Register, charges a fee ranging from to RSD and does it in few days time. Thereat, that data is available on the Internet, with no charge, which is not the case with the Republic Geodetic Authority. Since the Government decides upon fees of the Republic Geodetic Authority and fees of the Business Registers Agency, it is obvious that those two republic institutions, rather than Government itself, dictate diametrically different fees for their services. In February 2011, into Parliamentary procedure entered the Proposal on Notary Public Law by which traditional heritage of the European Law was introduced to our legal system. There is no dilemma on shifting state competencies to private sector wherever possible. However, the question which imposes itself on us is: is it legitimate to deprive citizens and businesses of alternative possibility of referring to state body that performs the same work and is it necessary to introduce certification obligation where it has not been before. The need for this reform is authorized by the increase of legal security, which, by words of its proponents, is priceless. Still, the price is going to be paid by citizens and businesses, and the questions imposed is whether it was necessary to make them buy that service or to leave them a choice when to buy or pay for legal security. This regulation obliges joint-stock companies to engage a notary on their assemblies, which they are not obliged now, and buyers and sellers of real estate to have contracts compiled by notaries, although by now they only paid a signature certification. Fortunately, series of broad public notary competencies had been given up from. Dilemma is also a future price and quality of services we would pay for. Particularly, time will tell whether envisaged number of public notaries (one per citizens, which is less than in surrounding countries) would ensure competitiveness and development of this profession as a citizen s service or it would establish a monopolistic position of public notary offices which would not be in need of improving their services since their customers, even if they want to, will not have anyone to replace them with. According to this estimation, the majority of municipalities in Serbia is going to have one or two public notary offices, and the biggest municipality of Novi Beograd eight. When it comes to towns, Novi Sad is going to have fourteen public notaries, Nis ten, Subotica, Zrenjanin and Krusevac five each, Kragujevac, Kraljevo Cacak and Sabac four each, Valjevo, Uzice, Vranje and Novi Pazar three each, and Zajecar, Pozarevac and Jagodina two public notaries alike. Since the competency of public notaries would be territorially limited, way of forming service prices would be of great importance. 81

82 Measures of improvement of competitiveness summary of results On the proposal of the National Competitiveness Council, on January 21, 2010, the Government adopted the measures for improvement of Serbia s competitiveness in In total 38 measures were envisaged in the field of infrastructure, energy efficiency, commodity market efficiency, labour market efficiency, development of human capital and innovations and public administration reform. Those are the measures for removing administrative obstacles and providing more effective implementation of law by creating missing by-laws or strengthening transparency of state institutions. 46 First report on implementation of measures was adopted by the Government on November 4, Based on the analysis of the above mentioned report, out of 36 measures, 6 were implemented, 11 were in the process of implementation and 5 of them were partially implemented. For 9 recommendations, competent ministries did not submit report, whereas in the case of 7 measures, activities concerning their implementation have not been started yet Conclusion Apart from the fact that in the next period a number of recommendations will be adopted and applied in practice, the implementation of regulatory reforms is increasingly in delay. In many cases, there was no valid cause, while the following can be stated as a possible excuse: Too ambitious deadlines for implementation of certain recommendations (at certain recommendations it was necessary to perform series of activities, and because of objective circumstances, in particular cases deadlines could not be met); Amendment of certain regulations in accordance with recommendations was not in accordance with legal activity plan of certain regulatory bodies, so that regulatory bodies were not ready to make changes in regulations in accordance with the adopted recommendations, but postponed amendments of the same regulations until the end of this year. Still, it does not change the fact that to a large degree, at the beginning of 2011, above all, because of minor legal activity, a chance to accelerate process of regulatory reforms was missed. 46 Detailed measures are available on the website of the National Competitiveness Council 82

83 6.2. Brief overview of available resources of financial support The analysis of problems and barriers to development and recommendations for future improvements related to legal and administrative barriers was carried out by EPI project. Foreword This is the extract from the Report prepared by the EU funded Technical Support to Enterprise Policy and Innovation Project. 1. Background to SME finance in Serbia There are many issues and challenges for owner-managers of small and medium-sized enterprises in achieving growth and competitiveness: management and marketing skills, ensuring and improving the quality of products and/or services, constant improvement to the skills of the work-force, cost control and efficiency, complying with regulatory requirements and access to and management of finance. Indeed, finance features as one of the major priority issues for SMEs. The Small Business Act (SBA) for Europe is among the many sources to stress that finding the right kind of finance can be a major difficulty for SMEs. In fact, the SBA states that Europe s SMEs place access to finance in second place, only to administrative burdens, on their list of concerns. There are also references in the SBA regarding some reluctance on the part of banks in relation to early stage SME funding, improving SME access to risk capital and micro-finance and better education for SMEs on the advantages and disadvantages of different forms of finance. These issues are also present in Serbia and almost certainly to a greater extent than in many European countries. Finance for start-ups and young enterprises The traditional sources of finance for new start-up enterprises are very often informal, for example: Personal capital of entrepreneur acquired through savings and, perhaps, inheritance; Financial support from relatives and friends. New businesses funded in this manner are likely to be small local enterprises operating in the services sector and requiring a low outlay of capital. In some cases, the owner s investment may be supplemented by a bank loan. Such loans might be available on the basis of a personal track record with the bank e.g. deposit account and the ability to provide adequate collateral. The circumstances of many start-up entrepreneurs are such that they are not in a position to avail of bank facilities. The reality regarding banks is that they rely first and foremost on customer deposits for their resource base. As custodians of these deposits, banks are obliged to conduct prudent lending. Mature and profitable enterprises are better risks for banks than untried start-ups. For new enterprises that are one or two years old, the situation regarding access to bank finance is hardly more encouraging. In the case of enterprises with growth potential in newer technology sectors, substantial finance may be required for research and may be simply unavailable. In countries such as Serbia, which have only recently achieved market economy status, the situation regarding finance for start-ups is relatively more difficult. Moreover, the difficulties that face new enterprises in obtaining bank finance internationally are compounded in Serbia and other new market economies due to a lack of bank experience in lending to small businesses and issues such as a developed infrastructure ranging from sufficient ability to prepare credible business plans to confidence in security arrangements. Finance for existing enterprises In the case of an established SME, finance for expansion may come from retained profits, additional investment by the owners and/or bank credit. One of the main issues for existing SMEs is good financial management in order to provide higher levels of profits, which could fund further development. Most enterprises that have been trading for some years will fund their expansion projects through a combination of retained earnings and bank term loans. In most countries, SMEs are an important category of bank customers. Although the situation is improving, there is much more scope for bank lending to SMEs. 83

84 External finance other than banks Although banks are the main source of external finance for SMEs, there are others. In addition to a new entrepreneur s own contribution and contributions from friends and relatives, there are more formal sources, which include venture capital, business angels, micro-finance from non-banking entities and state support. Most of these sources are less developed than they should be in Serbia, as set out later in this report. In Serbia s case, there is also the potential offered by a substantial Diaspora as a source of funding for SMEs. This matter is addressed in Section 6 Serbia s emigrants as a source of SME finance. 2. The role of commercial banks in SME finance Until quite recently, Serbia s banks showed little interest in SME lending. This was partly due to a culture of lending to large enterprises, a lack of knowledge of SMEs and their potential for profitable lending, inadequate loan assessment skills and indeed, the inability of SMEs to prepare and present business plans of quality. During the last three or four years, much has changed. The positive developments include: Growing foreign participation in Serbia s banks is providing impetus towards SME lending; Many bank web-sites promote lending to SMEs, a reflection that SMEs are now viewed as an important component of the customer base; The presences of ProCredit and Opportunity in Serbia as SME focused micro-credit institutions and their extensive branch networks; have not only resulted in increased credit possibilities for SMEs but have also raised the profile of SME lending; There is improved information on bank facilities for SMEs. For example, the National Bank of Serbia (Central Bank), at regular intervals, publishes a list of the facilities that are available for SMEs from each major commercial bank: type of credit (loan); term; interest rates and conditions (security). Although there have been positive developments, there are still issues that require further progress: The banks are still more focused on lending to the consumer sector rather than SMEs; Loans to SMEs tend to be short-term and usually do not exceed one year; Much of bank term-lending (more than one year) to SMEs is funded through external credit lines e.g. EBRD, rather than from bank own resources; Collateral requirements for SMEs in Serbia are high. One donor project has commented Banks in Serbia often request per cent collateral for loans in the range, which is a major obstacle for many SMEs. (Source: UNDP Development and Transition Project); In practice, banks usually require a mortgage on property and/or land holdings as collateral but many of these, particularly outside Belgrade, are still not registered in the land cadastre, so that title of ownership cannot be used as a guarantee. Even when property is accepted as collateral, banks often put a low value on it; There are perceptions that businesses are sometimes intimidated by loan application requirements and procedures and do not know how to prepare appropriate business plans. There are also communications issues between banks and SMEs. A further issue, which could become a problem, is that in previous years, due to lower interest rates, some SMEs took out loans in foreign currencies rather than in RSD, thus enhancing their foreign currency exposure against a background of a falling dinar. Loans by Serbian banks in dinars, however, are also usually granted subject to a condition, which imposes an obligation on the borrower to repay the euro loan equivalent. In fact, approximately 75% of all dinar loans, whether consumer or business, have a foreign currency clause (Source: National Bank of Serbia). In the future, it seems that Serbian banks, with the exception of very-welcome credit lines from institutions such as EBRD, will have to depend exclusively on their deposits as resources for lending. It is unlikely that funds will be available from foreign banks. Access to deposits will depend on the performance of Serbia s economy, employment and disposable income, and personal savings ratios. 3. Venture capital and Business angels Risk capital from private sources This section looks at the role and potential of private risk capital in SME funding, which comes from two main sources: Venture capital (Companies that invest in start-ups or business expansion) Business angels (High net worth individuals who invest in start-up enterprises) 84

85 Strictly speaking, business angels are also venture capitalists but they tend to operate on a smaller scale than formal venture capital companies and probably concentrate more on start-ups than expansion of enterprises. The average business angel investment is usually smaller than that of a venture capital company. For these reasons venture capital companies and business angels are usually regarded as separate categories. In contrast to bank finance, venture capital companies and business angels do not seek scheduled repayment, but for a minority stake in the share capital of a company in return for cash. The venture capitalists will typically look to realise their investment in five years, either through floatation on a public market, a trade sale or for their stake to be bought out by the company. There is a very basic and important consideration. If venture capital companies and business angels are to function, they require investment opportunities. At present, there is not information regarding such opportunities in Serbia. Venture capital Venture Capital is capital provided by full-time, professional firms (venture capitalists) that invest in ambitious, fast-growing companies with the potential to develop into significant businesses. In addition to injecting cash into a company, the venture capitalist is likely to add considerably to the credibility of the company and to supply management expertise, support and access to their contacts. As part of mentoring and monitoring of their investment, they are likely to seek management board membership. Again, many venture capital funds prefer to invest in established high-potential enterprises rather than in much higher risk start-ups. Sometimes a distinction is made between pure venture capital for start-up, also known as seed capital, and development capital for the expansion of existing enterprises. Venture capital is quite well developed in North America and Western Europe. Although funded mainly by the private sector, there are examples, particularly in Europe of state initiatives designed to leverage private sector investment in venture capital. There are no Serbian registered venture capital funds nor is there full legislation to facilitate the establishment of such funds. The OECD report Progress in the Implementation of the European Charter for Small Enterprises in the Western Balkans: 2009 SME Policy Index states that several foreign private equity funds are now operating in Serbia but no domestic fund has been registered so far. It also seems that these foreign-based funds confine their investments to the acquisitions of stakes in larger Serbian enterprises. The Serbian Law on Investment Funds provides for: Open- (on the lines of US mutual funds and European UCITS) and closed-ended investment funds, which are designed to pool savings of small investors for investment in tradable securities e.g. government bonds and shares traded on stock exchanges. Private investment funds, which have more flexibility as to where they will invest. An investor in a private fund must invest a minimum of This law does not provide for venture capital funds or for state participation in such funds but venture capital funds could probably be formed under the provisions of the Law on Investment Funds (Private investment funds). Business angels Business Angels, also known as informal private investors, are individuals who invest capital in companies during their early stage of development. In addition, they contribute their know-how or experience in company management and can offer valuable expertise and guidance. Angels usually seek active participation in the company in which they invest. They can be a substitute for bank financing or venture capital which can be difficult to attract at the early stage of a company s life. Business angels are primarily motivated by return on investment. There is no evidence of business angels in Serbia and, of course, there is no representative association. It does not seem as if any work has been done on proposals for establishing a business angels network in Serbia or on ways for identifying potential investment opportunities. In the end of 2009, the first network of business angels was established in Serbia, called Serbian Business Angels Network (SBAN). SBAN provides an opportunity for entrepreneurs, through the web portal that serves as a type of matchmaking platform, place their business ideas and projects for which they need an investment. Investors, business angels, members of the network, can see all the projects. They can browse through projects according to their field of interest or value of capital needed as investment. 85

86 4. Micro-finance The European Commission generally defines a micro-credit as a loan of up to to new or existing enterprises. Micro-loans are often an important mechanism for providing small loans in a relatively informal way to facilitate start-ups and development of very small enterprises. In most countries, micro-credits are provided by both banks and non-banking entities, such as NGOs. In fact, non-banking entities play a major role as providers of micro-credits and they are generally recognised under the collective title of micro-finance institution or MFI. Advocates of micro-finance claim that MFIs: Increase the overall pool of credit, thus facilitating economic growth; Mitigate the difficulties that new entrepreneurs face in achieving access to finance; Enable access to credit for lower income, who are not of interest to commercial banks; Assist in addressing issues such as combating rural poverty through providing credits for self-employment and micro-enterprise start-ups. There are two micro-finance banks in Serbia ProCredit and Opportunity International. Although the legal environment is not favourable, there are three substantial Micro-finance institutions (MFIs) operating in Serbia. These MFIs receive funding support from international donors including Austrian Development Agency, Danida, Netherlands Embassy, ICRC, SIDA, UNHCR and World Vision. The three Serbian MFIs are: Agroinvest Agroinvest is associated with World Vision and has been operating in Serbia for a decade. It provides micro-credits to or so clients in Serbia and Montenegro. The main focus of Agroinvest, which is registered as a trade society, is on improving the lives of the rural poor. Micro-Development Fund (MDF) MDF was registered in January 2001 as a not-for-profit organization, formally organized as associations of citizens. The Fund headquarters are in Belgrade and there is a network of nine regional and local offices. From the inception of its micro-loan programme until the end of 2008, MDF supported small scale businesses with aggregate loans of 18 million. Microfins MicroFinS was originally registered in 2000 as a not-for-profit organisation i.e. association of citizens, with the aim of providing micro-finance. In October 2007, MicroFinS DBS was incorporated as a limited company with the main objective of providing micro-loans to entrepreneurs, who would not be eligible for loans from commercial banks due to the small size of their businesses. A further objective is to provide the vulnerable categories of society with micro-loans for housing. In the absence of a legislative framework for their operations, Serbia s MFIs work on the basis of cooperation and commission contracts between MFIs and commercial banks. Under this arrangement, a credit approved by the MFI is disbursed as a loan by the contracting bank in its own name but the NGO takes full responsibility for default and pays the bank a commission fee. There is a view among Serbian MFIs and their advocates that more international support would be available if Serbia had appropriate MFI legislation, which would allow MFIs to disburse loans directly. The National Bank of Serbia has consistently opposed proposals for any legislation designed to address this issue. A number of advocacy and lobbying attempts, going back as far as 2001, have been made to achieve an enabling legal environment for MFIs, without success. In 2003, for example, the Serbian Micro-credit Policy Working Group produced a draft law on micro-credit organizations, as a solution for Serbia, and an explanatory report. The membership of this group included UNHCR, Oxfam, SIDA, USAID and several major international charity and humanitarian organizations. In April 2010, a new working group was formed with a view to achieving change in the current situation through the enactment of legislation to provide a legal framework for MFIs in Serbia. Membership is drawn from a wide range of stakeholders: Agroinvest, EBRD, USAID, World Bank and others. At present, this group is preparing a strategy for achievement of legislative change that would enable MFIs in Serbia to operate independently of the commercial banks. 5. State financial support for SMEs In recent years, Serbia has developed a range of publicly-funded financial supports for SMEs, including the allocation of credits. Many institutions are involved. 86

87 Development Fund of Republic of Serbia As far as state-funded credit is concerned, the Development Fund of the Republic of Serbia is the principal channel. It is a state-owned institution established with the goal of providing (subsidized) financing for programmes related to economic, regional and SME development, increasing competitiveness and related activities. The credits disbursed may be provided by another institution to the Fund on a commission basis or from the Fund s own resources. An example of commission operation is loans for tourism, which are funded by the Ministry of Economy and Regional Development. This Fund has a number of credit products including: 1. Long term credits up to five years at an annual interest rate of one per cent, funded by the Ministry of Economy and Regional Development; 2. Short-term credits (6 months), with annual interest rate of 3.5% from Fund own resources; 3. Long-term credits of up to five years at 4.5% annual interest and with a grace period of one year 4. Credits for financing development of production trades (craftwork) and services entrepreneurial credits (4 years) with 1-year grace period and annual interest rate of 1-3%; 5. Guarantees issued with annual interest rate of 2.5%. Other activities include programmes aimed to stimulating development in less developed areas and implementation of certain funding projects (credits for unemployed, micro credits, etc.). In the first half of 2010, the Fund approved loans in the total amount of 62.5 million. In addition to the various supports mentioned above, there are two other schemes worth mentioning: Guarantee Fund The Guarantee Fund of the Republic of Serbia was established in 2003 with the objective of making it much easier for SMEs to obtain bank loans. The basic function of the Fund was to secure guarantees for approved loans to SMEs, both legal entities and sole traders, by commercial banks, in order to reduce the risk of banks operations and accordingly the level of collateral required from SMEs. The original intention was that the Fund would issue guarantees as collateral for credits for SMEs with commercial banks for up to 50% of their value. The Guarantee Fund never achieved a significant level of activity and was acquired by the Serbian Development Fund in The basic details are: - Transferred capital of the Guarantee Fund amounted to RSD ( 18.2 million). - The total value of guarantees issued in 2009 was RSD ( 3.86 million) There is not information on the number of guarantees. It seems that current guarantees provide cover for 30% of collateral rather than 50% originally envisaged. Subsidized business loans In 2009, the Ministry of Economy and Regional Development initiated a scheme, through the Serbian Development Fund in cooperation with the commercial banks, which enables subsidized loans for business covering investments, liquidity maintenance, financing of long-term working capital, export activities, and financial leasing. A number of banks have signed agreements to participate in this scheme. Operation of Development Fund With the exceptions of loan guarantees and subsidized loans provided since 2009 through the commercial banks, the Development Fund of the Republic of Serbia operates on a highly centralized basis. There are no regional offices and very little client contact. At regular intervals, the Fund publishes calls for proposals and allocates credits on the basis of applications received. The results are that there is no assessment based on a meeting with the client or a visit to his/her place of business and no monitoring of performance in relation to a loan, which has been approved and disbursed. The approach of the Fund to its clients is in considerable contrast to that of commercial banks. In the case of ProCredit, for example, a loan officer visits each applicant as part of the credit assessment process and there is post-disbursement follow-up. The Fund could achieve a similar situation by using the Regional Development Agencies as its local representatives. Financial support issues Governments have a strategic interest in encouraging business start-ups and the development of SMEs, particularly in those sectors that produce goods and services that are capable of being exported and 87

88 operate financial support schemes to support new and young enterprises. One example of justification for state financial support to SMEs is provided by the German Federal Ministry of Economics and Technology which states The imperfections encountered on capital markets can present obstacles that are hard to overcome for start-up entrepreneurs and for SMEs. The German government is therefore supporting start-up entrepreneurs and SMEs with a set of financing-assistance instruments tailored to their needs. Serbia is no exception. The range and value of financial support programmes for SMEs in Serbia are substantial. These schemes were introduced at different times and in response to a specific identified need e.g. start-ups, export development, clusters. It might be useful to undertake an overall review of these programme s to assess their effectiveness and value-for-money, establish whether priorities should be adjusted and recommend reallocations and new programmes, if appropriate. Pending such a review, it seems that some publicly funded resources could be allocated or reallocated as follows: Seed and development capital for technologically-based start-ups and developing enterprises, mainly micro-enterprises; Loan guarantees for young high potential enterprises; A specific allocation by the Republic Development Fund for higher potential and young growth enterprises; Initiate a venture capital fund targeted at innovative start-ups, which brings together public and private investors. 6. Serbia s emigrants as a potential source of SME finance The Serbian Unity Congress, a US-based Diaspora organisation states that 3.2 million people are estimated to constitute the Serbian Diaspora. This is equal to about 45% of Serbia s population and a third of the number of Serbs in the territories of former Yugoslavia. The Diaspora is concentrated in Europe and North America. It is estimated that about 1.1 million 1.2 million of the Serb Diaspora is in North America and about 1.9 in Europe. Relations and links with the Diaspora are clearly of importance to the Serbian government. There is a Ministry for the Diaspora, which has a Department for Economic Affairs. This department seeks through enhanced cooperation to achieve Diaspora support for Serbia s economic development. In the view of the Department for Economic Development, Serbians working abroad have assisted in securing foreign direct investment for Serbia. The major economic contribution, however, of Serbians working abroad is through billions of euros annually by way of emigrants remittances. It would be useful to look at the potential of these remittances and at the Diaspora in general with a view to examining their potential for contributing to SME finance through: Increasing the resources of Serbia s banks; Participating in venture capital; Providing a pool of business angels. 88

89 6.3. Brief overview of implemented SME support programmes The analysis of problems and barriers to development and recommendations for future improvements related to legal and administrative barriers was carried out by ICIP project. In preparation of the brochure on SME support programmes ICIP has identified more than 40 programmes. Those programmes are implemented by different institutions. Among several state institutions that implement instruments for support of SMEs, the majority of those programmes relates to subsidies. This chapter will focus on the programmes that SMEs evaluated as the most useful for their development and competitiveness. Most of these programs are implemented by three crucial institutions for support of SMEs Ministry of Economy and Regional Development (MoERD), National Agency for Regional Development (NARD) and Serbia Investment and Export Promotion Agency (SIEPA). Given the wide range of support that these institutions provide two types of support can be distinguished - financial and so called non financial support. Among financial support programmes that are implemented by MoERD, NARD and SIEPA are: MoERD implements programmes of support to strengthening innovation and support to clusters, NARD implements programmes of support to competitiveness and associations of entrepreneurs, SIEPA provides support to export oriented enterprises through the programme for encouraging competitiveness and internationalization, as well as for investors in Serbia through the programme to attract direct investments. Most of these financial programmes contained in the brochure are based on the assessment of SME needs. Financial programmes are generally time-limited or they last until the funds are spent. This year MoERD prepared two support measures that are well adjusted to the SME needs and monitor trends and developments of the Serbian economy, which adapts more and more to business conditions in the EU and the international market. MoERD s measures are implemented in cooperation with NARD. Since one of the most important tasks of the Serbian economy is to increase export, SIEPA implements several support measures that should help export oriented companies to present themselves at the international market. The institutions mentioned above also implement different types of so-called non-financial support such as consulting, training for start-up, mentoring, business incubators, organization of appearances at international fairs, business meetings, study visits, databases and other activities. According to previous experience this type of support could be even more important for enterprises than direct financing. Through trainings, consulting and mentoring, that are provided mostly by NARD, SMEs learn how to do business from the very beginning and also how to develop and improve their own capacities and competitiveness. Results of two programmes regarding SME innovation and competitiveness The National Agency for Regional Development (NARD) implements the Programme for Support of SME Competitiveness, and the Ministry of Economy and Regional Development (MoERD) the Programme for Strengthening Innovation. A brief analysis was conducted for both programmes implemented in The main purpose of the Competitiveness Programme is to increase the competitiveness of SMEs and entrepreneurs. The total budget to support enterprises in 2010 was app. 570,000 Euro. The main purpose of the Innovation Programme is to increase SME and entrepreneurs investment in innovation. The total budget for enterprises in 2010 was app. 380,000 Euro. The analysis undertaken focused on the following aspects: - Promotion and awareness of the programmes among enterprises - Size and type of companies involved in both programmes - Type of support requested and provided Promotion and awareness of the programmes among enterprises Both programmes are well promoted throughout the country by advertisements in national newspapers, websites of NARD, MoERD and business support organisations. A sample survey with SMEs undertaken by ICIP project indicates that information via NARD s webpage and word-of-mouth information are the most successful channels to promote the programmes. This is confirmed by the relatively high number of applications for the Competitiveness Programmes. It might be mentioned that not all SME support programmes are well promoted. The above-mentioned sample 89

90 survey of ICIP found that only ca. 20% of enterprises are aware of support programmes (e.g. EEN, FP7) provided by the European Union in Serbia. Size and type of companies involved in both programmes Percentage of success in relation to size of enterprise The higher percentage of success for the companies with 50+ employees could be explained by the fact that those companies have the structure, experience in preparing proposals (more than 70% of those companies had previous experiences in preparing similar proposals), sufficient qualified staff for preparing proposals etc. The lower percentage of success for the companies with 1-4 employees could be explained by the fact that many of those companies have simple bookkeeping which is not eligible according to the rules of the current Call for the proposal. Further, those companies do not have enough qualified staff for preparing proposals, as well as, lack of experience in preparing proposals. Character of companies by turnover The application rate for both programmes is different when turnover is the evaluation criteria. While the application for the Competitiveness Programmes with main assistance in quality certification is requested by 51% of SMEs with turnover in the range between 10, ,000 Euro, the application to the Innovation Programme is highest from companies with turnover above 100,000 Euro (89%). One reason might be that innovation requires more of a company s own resources than the introduction of quality standards and certifications. Other success factors The statistics available for the Competitiveness Programme 2010 indicate that the majority of applications are received from limited liability companies (86%); applications received from sole traders were (10%) and from stock companies (4%). The analysis of the companies by sector (production, trade, services) was done according to the registration code, previous experience with and knowledge of the enterprise, and estimated value if more than one sector is represented by the company. The number of eligible applications for the Competitiveness Programme 2010 was 169 SMEs dealing primarily with production (53%) and 151 SMEs dealing primarily with services or trade (47%). Type of support requested, and provided Type of activity supported by the Competitiveness Programme The majority of support provided by this programme was related to the harmonization of business with the quality standard requirements (232 approved activities or 72.5% of accepted requests). Most of the support was for various kinds of certification (HACCP, ISO, C Mark etc) or for preparing activities for certification. Other activities supported business development and improvement (71), education and training programmes (11) and safety at work (6). Type of activity supported by the Innovation Programme The following types of support were mainly provided: developing new or improving existing products 90

91 or services (23 approved activities), developing and testing prototypes and new product and packaging designs (7), introducing and testing new production processes (7), and information technology application and development (28) which represents about 67% of the total support. The other activities supported are improvement of the organisational structure of enterprises (23) and marketing of innovation (9). The purchasing of patent rights or protection of IP was not requested. Summarising Results Collaboration between research and enterprises Both programmes had positive impact on collaboration of enterprises with external partners and new partnerships between SMEs and R & D institutions or strengthening of existing collaboration. According to the results of the sample assessment of companies participating in both programmes, 69% of enterprises plan to develop new innovation projects with their partner through development of new or improvement of existing products / services. Readiness of SMEs for investing in innovation It is encouraging that most respondent enterprises claim that they have their own resources to invest in innovation activity. Regarding future plans the sample group of enterprises plan to continue to invest in innovation activity for which they have received grants; 91% companies indicated that they plan to invest in the future in innovation activities. Programme Management which might require adaptations - Within the Competitiveness Programme about EUR ( RSD) could not be implemented in 2010; awarded support was not recalled by companies, but the Programme cycle planning and implementation time was too short to repeat the call for grant schemes in Profiling of grant schemes should be sharpened; some services are overlapping within the existing Programmes which leads to confusion by applicants. - Access to programmes might be made easier. The interviewed companies mention that the selection of innovation activities is too narrow (50%) meaning that only some of the needed support activities is possible; the application procedure is too complicated (22%); access to competent collaboration partners for innovation is difficult (19%) (i.e. MOERD should provide a database of all eligible R&D institutions, consulting companies, laboratories which have competencies to cooperate with the SME sector). 91