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Small and medium-sized enterprises (SMEs) form the backbone of any market economy and this is especially true of emerging markets. In emerging Europe, between 70 and 95 per cent of all registered companies are classified as SMEs, providing 60-80 per cent of growth in gross domestic product, according to the European Bank for Reconstruction and Development (EBRD).
Despite their outsized role, SMEs in emerging economies struggle to secure finance for growth. Typically, entrepreneurs use their own capital or turn to family or friends. Sometimes it is more arbitrary. In the case of Marneuli Food Factory, a Georgian manufacturer of tomato paste, pickles and sauces, seed capital came from a Swiss tourist.
It happened in 1997 when Thomas Diem, a psychiatrist with an interest in Georgian folk music, visited the rundown facilities of a Soviet-era mineral water producer. Inspired, the company story goes, to do something to help revive a region struggling to shake off the legacy of its Soviet past, he put up $40,000 to get the company back on its feet.
Local investors joined him to create JSC Healthy Water and, later, a holding company that today owns four companies: the water bottler, a distribution company, an agribusiness company and Marneuli Food Factory, or MFF. Few businesses have such luck and Irina Gaprindashvili, director of MFF, says small Georgian businesses struggle to raise finance, in spite of pro-business reforms enacted since the “Rose Revolution” of 2003.
Practical state support for small businesses includes help drafting business plans and training in company administration. But actual financial support is limited: the government provides funding of up to 5,000 lari ($2,065) per small or micro business entrepreneur. Otherwise, with average commercial interest rates to private borrowers north of 20 per cent a year, according to the central bank, ordinary bank lending is out of the reach of most SMEs. “When we were looking for options to expand, the offers we got from the banks were at such high interest rates that we struggled to expand and to be competitive on export markets,” says Ms Gaprindashvili. “Today, a small company that wants to become large has to do it very gradually.”
MFF was founded in 2007 using capital generated by the success of the mineral water business. It has been able to expand quickly since then due in part to loans from the EBRD in 2010 and 2011. It has now secured what it says is the first institutional private equity investment in Georgia, from Swiss GeoCapital.
MFF’s success also owes much, Ms Gaprindashvili says, to the reforms enacted since the 2003 revolution — including more flexible labour laws, and faster customs, licensing and court procedures.
“It was a very big incentive for companies to grow. It was a lot easier for business people to found a company, regulations and taxes were simplified, it was a very liberal approach.”
Georgia’s reformist drive has slowed since president Mikheil Saakashvili, who now advises Ukraine, left office. But Ms Gaprindashvili insists that reforms are permanent. “We know the situation in our neighbouring countries,” she says. “They really admire the changes made here.” Claudio Viezzoli, head of the EBRD’s Small Business Initiative, says development has come most quickly to countries that make life easier for small entrepreneurs. “This is true in Georgia and in other countries that understand that wealth and growth will come as a result of people risking their money in successful ventures,” he says. Conversely, he adds: “Those countries that are stuck in a complex setting of difficult administrative systems are bound to be more prone to corruption. Unfortunately, this is still true in a lot of countries in the region.”
Mr Viezzoli does not name names but Ukraine is an example of a country where corruption and an opaque business environment obstruct entrepreneurship. After two popular uprisings in the past 12 years, it has failed to tackle corruption and institute reforms. A small country, Georgia, perhaps, had it easier than Ukraine because its problems were more manageable. Certainly, Mr Viezzoli says, financial and other support to SMEs can have a greater impact in small countries “due to the demonstration effect”. In Serbia, for example, the EBRD has invested in 10 SMEs — a modest investment that has punched above its weight.
“There has been a real impact on business transparency,” he says. “It has an incredible impact on those companies’ peers because everything is so visible in a small economy.”