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SME Policy Index 2009

SMEPo

licy

Index

2009

Progress in the Implementationof the European Charterfor Small Enterprisesin theWestern Balkans

European Commission


Progress in the Implementationof the European Charterfor Small Enterprisesin the Western Balkans

Prepared by:

the European Commission Directorate General for Enterprise and Industrythe OECD Private Sector Development Divisionthe European Training Foundationand the European Bank for Reconstruction and Development

Undertaken with the financial support of the European Commission DirectorateGeneral for Enterprise and Industry, the OECD Private Sector Development Divisionand the Central European Initiative.

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European Commission, Directorate-General for Enterprise and Industry

DG Enterprise and Industry is tasked with ensuring a well-run internal market for goods and promoting thecompetitiveness of EU enterprise, thereby making major contributions to the implementation of the Lisbon Growthand Jobs Strategy. DG Enterprise and Industry pays particular attention to the needs of manufacturing industries andsmall andmedium-sized enterprises: itmanages programmes to encourage entrepreneurship and innovation and ensurethat Community legislation takes proper account of their concerns.

The DG Enterprise and Industry objectives are:

• to promote the European growth and jobs strategy;• to strengthen the sustainable competitiveness of EU industry (industrial policy);• to increase innovation;• to encourage the growth of small and medium-sized enterprises;• to make sure the single market for goods benefits EU industry and citizens;• to strengthen the space sector and improve security technology.

The DG Enterprise and Industry accomplishes its tasks in several ways. It has developed expertise in economicanalysis. It manages regulation in the commercial sectors for which it is responsible. It has a budget to support specificactions. And it supports the continual scrutiny of Member States’ enterprise policies through the open method of co-ordination.

Organisation for Economic Co-operation and Development, Investment Compact for South East Europe

The Investment Compact for South East Europe (South East Europe Compact for Reform, Investment, Integrityand Growth) is a leading programme designed to improve the investment climate and to encourage private sectordevelopment in South East Europe (SEE). Under the Stability Pact for South Eastern Europe (Working Table II onEconomic Reconstruction,Development and Co-operation) and the OECDDirectorate for Financial and EnterpriseAffairs(www.oecd.org/daf), the programme has its own institutional structure including a Project Team and an AnnualMinisterial Conference.

The Investment Compact supports SEE with practical tools to increase investment, growth and employment, andsupport the European Union (EU) integration process.

The Investment Compact member countries are: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the formerYugoslav Republic of Macedonia, Moldova, Montenegro, Romania and Serbia.The work of the Investment Compact isactively supported and financed by Austria, Flanders (Belgium), the Czech Republic, Ireland, Italy, Japan, Norway,Slovenia, Switzerland, the United States and the European Commission(www.investmentcompact.org).

European Training Foundation

Based inTurin (Italy), the EuropeanTraining Foundation (ETF) is a multi-resourced, international reference pointfor actions, research and policy learning on human capital development for stability and prosperity in transition anddeveloping countries. Its mission is to help transition and developing countries to harness the potential of theirhuman capital through the reform of education, training and labourmarket systems in the context of the EU’s externalrelations policy. The ETF staff group comprises experts from multiple disciplines to handle complex andmultidimensional topics in a team environment, in order to create new knowledge, insight and solutions.

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Organisation Profiles

European Bank for Reconstruction and Development

The European Bank for Reconstruction and Development (EBRD) was established in 1991,when communismwascrumbling, to support and nurture a new private sector in a democratic environment. Today the EBRD uses the toolsof investment to help build market economies and democracies in 29 countries from central Europe to central Asia.

The EBRD supports the economies of its 29 countries of operations by promoting competition, privatisation andentrepreneurship.Taking into account the particular needs of countries at different stages of transition, the Bank focuseson strengthening the financial sector, developing infrastructure, and supporting industry and commerce.

Working in both the public and private sectors, the EBRD encourages co-financing and foreign direct investmentto complement its own investments. The Bank also provides technical co-operation funding to support projectpreparation and institution building.The EBRDworks in close co-operationwith other international financial institutionsand promotes environmentally sound and sustainable development in all of its activities.

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Foreword

We are pleased to present the 2009 Report on Progress in the Implementation of the European Charter for SmallEnterprises in theWestern Balkans (the Charter).The 2009 Report signals the completion of a process started in 2003with the adoption of the Charter by theWestern Balkans and marked by the decision taken in 2006 by the EuropeanCommission, the Organisation for Economic Co-operation and Development (OECD) and the Western Balkangovernments, to launch a regional comparative monitoring process.

A specific monitoring tool, the SME Policy Index,was then developed by the European Commission, the EuropeanTraining Foundation, the European Bank for Reconstruction and Development, and the OECD, together with theNational Charter co-ordinators.The monitoring process has allowed governments to identify strong and weak pointsin policy elaboration and implementation, to compare experiences and performance, to set priorities and to measurethe convergence towards implementation of the policy guidelines promoted by the Charter. A first report on theCharter implementation was published in 2007.

Based on the experience of the last three years,we can conclude that the Chartermonitoring process has fulfilledits objectives and given direction to and helped build momentum in government policy towards the small enterprisesector all across the Western Balkans. The Charter monitoring process (based on a participative approach with theactive contribution of government institutions, private-sector representatives, non-governmental organisations andother SME stakeholders) has enhanced public-private policy dialogue at national level. Co-operation among governmentinstitutions and the national Charter co-ordinators has developed rapidly and they are now joining forces to establisha regional South East Europe Centre for Entrepreneurship Learning located in Zagreb, Croatia.

The 2009 Report comes at a critical moment for theWestern Balkan economies.After a prolonged phase of strongeconomic growth, the Western Balkans have been significantly affected by the global economic and financial crisis.The key drivers that have sustained growth in the previous five years (strong consumer demand underpinned by rapidexpansion of bank credit, increasing foreign direct investment, growing remittances and international capital inflows)have started to falter.There is recognition in the region that the time has come to enhance productivity and performanceat company level.

The current scenario presents new challenges for SME policy in theWestern Balkans. Governments need to adoptamore comprehensive approach, integrating horizontal policies with interventions targeting specific segments of thesmall enterprise population, such as start-ups, export-oriented companies, and innovative and high-growth enterprises.The 2009 Report brings a first contribution to this important policy debate with a special section dedicated to high-growth SMEs.

The European Commission and the OECD, as well as the other partner organisations, greatly value the work thathas been accomplished over the last three years with the Western Balkan governments. We are looking forward tocontinuing this close and effective co-operation.

Carolyn ErvinDirectorDirectorate for Financial and Enterprise AffairsOECD

John FarnellDirector

Co-ordination for CompetitivenessDirectorate General for Enterprise and Industry

European Commission

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Acknowledgements

This report presents the findings of a project that was undertaken by the six Western Balkan partner countriesof the EU and Kosovo under UNSCR 1244/99, the European Commission’s Directorate-General for Enterprise andIndustry (EC DG ENTR), the Organisation for Economic Co-operation and Development’s Private Sector DevelopmentDivision (OECD PSD), the European Training Foundation (ETF), and the European Bank for Reconstruction andDevelopment (EBRD).

The work was led by Antonio Fanelli (OECD PSD), Carmen Raluca Ipate (EC DG ENTR),Anthony Gribben (ETF) andFrancesca Cassano (EBRD), in co-operation with Efka Heder (ETF),Abdelaziz Jaouani (ETF), Simona Rinaldi (ETF), JakobFexer (OECD PSD) and Lise Bruynooghe (EBRD).

The principal authors of the report are: Antonio Fanelli and Jakob Fexer from OECD PSD; Carmen Raluca Ipatefrom EC DG ENTR; Anthony Gribben, with inputs from Efka Heder, Abdelaziz Jaouani and Simona Rinaldi from ETF;and Francesca Cassano and Lise Bruynooghe from EBRD. In addition, Part II of the report on Policy Measures to SupportHigh-Growth SMEswaswritten by Professor Stephen Roper fromWarwick Business School, University ofWarwick (UK);and the section on Investment-FriendlyTaxation was written by Steven Clark andAna Cebreiro from the OECD CentreforTax Policy andAdministration and Erin Hengel fromOECD PSD.Research assistancewas provided by EdgardoValenciaCruickshank (OECD PSD). Further inputs were provided byAnthony O’Sullivan, Sara Sultan,Milan Konopek andAlistairNolan from OECD PSD and by Edward Tersmette from EC DG ENTR.

In theWestern Balkans, the following national Charter co-ordinators co-ordinated their country’s and Kosovo underUNSCR 1244’s participation in all stages of the project: Gavril Lasku (Albania), Ivica Miodrag (Bosnia and Herzegovina),Dragica Karaic (Croatia), Naser Grajcevci (Kosovo under UNSCR 1244/99), Imerali Baftijari (the formerYugoslav Republicof Macedonia), Zarko Djuranovic (Montenegro) and Igor Brkanovic (Serbia). In particular, the national Charter co-ordinators with their teams led the countries’ self-assessment and co-ordinated the contributions of differentgovernment institutions and national stakeholders.

The independent assessments were conducted with the support of local consultants: Juela Shano (Albania),Jasmina Ahmetbasic (Bosnia and Herzegovina), Slavica Singer (Croatia), Günther Fehlinger (Kosovo under UNSCR1244/99 and Montenegro), Oliver Kosturanov from SPMG (the former Yugoslav Republic of Macedonia) and KosovkaOgnjenovic from the Economic and Social Policy Institute (Serbia). Input to the assessment of the human capitaldimensions was also provided by ETF country managers: Lida Kita, Margareta Nikolovska, Keith Holmes, FrancescoPanzica and Vaclav Klenha.

The final report was prepared for publication by Jakob Fexer (OECD PSD) and Isabel Huber (OECD PSD), withsupport from Antonio Fanelli (OECD PSD) and Carmen Raluca Ipate (EC DG ENTR). The report benefited from thefinancial support of the Central European Initiative.

Table of Contents

KEY FINDINGS AND CONCLUSIONSOverview of the European Charter for Small Enterprises process in theWestern Balkans 14Progress in implementing the Charter 12Progress in the sixWestern Balkan countries and Kosovo under UNSCR 1244/99 15Impact of the global economic crisis on SME policy in theWestern Balkans 18Future policy priorities 19Key findings by policy dimension 19Progress across the Charter dimensions: overall SME Policy Index scores 24

INTRODUCTION AND METHODOLOGYIntroduction 32The Charter process in theWestern Balkans 32The SME Policy Index 34The SME Policy Index methodology 35

Part I POLICY FINDINGS BY CHARTER DIMENSION 39

Dimension 1EDUCATION AND TRAINING FOR ENTREPRENEURSHIP1.1 Introduction 421.2 Assessment framework 421.3 Analysis 441.4 The way forward 48

Dimension 2CHEAPER AND FASTER START-UPS2.1 Introduction 522.2 Assessment framework 522.3 Analysis 532.4 The way forward 60

Dimension 3BETTER LEGISLATION AND REGULATION3.1 Introduction 643.2 Assessment framework 643.3 Analysis 653.4 The way forward 70

Dimension 4AVAILABILITY OF SKILLS4.1 Introduction 744.2 Assessment framework 744.3 Analysis 754.4 The way forward 79

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Dimension 5IMPROVING ON-LINE ACCESS FOR SMEs5.1 Introduction 825.2 Assessment framework 825.3 Analysis 835.4 The way forward 86

Dimension 6GETTING MORE OUT OF THE SINGLE MARKET6.1 Introduction 906.2 Assessment framework 906.3 Analysis 916.4 The way forward 97

Dimension 7TAXATION AND ACCESS TO FINANCETaxation7.1 Introduction 1007.2 Assessment framework 1007.3 Analysis 1027.4 The way forward 111Access to Finance7.5 Introduction 1157.6 Assessment framework 1177.7 Analysis 1187.8 The way forward 121

Dimension 8STRENGTHENING THE TECHNOLOGICAL CAPACITY OF SMALL ENTERPRISES8.1 Introduction 1248.2 Assessment framework 1248.3 Analysis 1258.4 The way forward 131

Dimension 9SUCCESSFUL E-BUSINESS MODELS9.1 Introduction 1349.2 Assessment framework 1349.3 Analysis 1349.4 The way forward 140

Dimension 10DEVELOPING STRONGER AND MORE EFFECTIVE REPRESENTATIONOF SMALL ENTERPRISES’ INTERESTS10.1 Introduction 14410.2 Assessment framework 14410.3 Analysis 14510.4 The way forward 149

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Part II POLICY MEASURES TO SUPPORT HIGH-GROWTH SMEs IN THE WESTERN BALKANS 151

Section 1BACKGROUND AND CONTEXT OF HIGH-GROWTH SMEs1.1 Introduction 1521.2 Defining HGSMEs 1531.3 Targeting support for HGSMEs 154

Section 2POLICY SUPPORT FOR HGSMEs2.1 Levels of policy intervention 1562.2 Enterprise promotion initiatives 1572.3 Promoting business service provision and quality 1582.4 Availability and accessibility of information 1602.5 Finance for HGSMEs 1612.6 Supporting innovative enterprises 164

Section 3POLICY SUPPORT FOR HGSMEs:THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA3.1 Introduction 1743.2 Creating an enabling environment for HGSMEs3.3 Finance for HGSMEs 1753.4 Supporting innovative enterprises 1763.5 Final remarks 178

Section 4POLICY SUPPORT FOR HGSMEs: SERBIA4.1 Introduction 1794.2 Creating an enabling environment for HGSMEs 1794.3 Finance for HGSMEs 1804.4 Supporting innovative enterprises 1814.5 Final remarks 182

Section 5UPGRADING THE SME POLICY PROCESS 183

Part III PROFILES OF THE WESTERN BALKAN COUNTRIESAND KOSOVO UNDER UNSCR 1244/99 189

Introduction 191

ALBANIA1. Overview 1922. SME policy and public-private consultation 1933. Operational environment 1944. Services for SMEs 1975. Human capital 1976. The way forward 198

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BOSNIA AND HERZEGOVINA1. Overview 2002. SME policy and public-private consultation 2013. Operational environment 2024. Services for SMEs 2055. Human capital 2066. The way forward 206

CROATIA1. Overview 2082. SME policy and public-private consultation 2093. Operational environment 2114. Services for SMEs 2135. Human capital 2136. The way forward 214

KOSOVO UNDER UNSCR 1244/991. Overview 2162. SME policy and public-private consultation 2173. Operational environment 2184. Services for SMEs 2195. Human capital 2206. The way forward 221

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA1. Overview 2242. SME policy and public-private consultation 2253. Operational environment 2274. Services for SMEs 2295. Human capital 2316. The way forward 232

MONTENEGRO1. Overview 2342. SME policy and public-private consultation 2353. Operational environment 2374. Services for SMEs 2395. Human capital 2396. The way forward 240

SERBIA1. Overview 2422. SME policy and public-private consultation 2443. Operational environment 2454. Services for SMEs 2485. Human capital 2496. The way forward 251

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AnnexesAnnex 1: List of abbreviations 252Annex 2: The SME Policy Index tool 254Annex 3: TheWestern Balkans National Charter Co-ordinators 276

Boxes

Part I POLICY FINDINGS BY CHARTER DIMENSIONBox I.1 The SME Policy Index process 34Box 1.1 Lifelong entrepreneurial learning strategy 45Box 2.1 Good practice: Company registration reform in Albania 54Box 3.1 Regulatory impact analysis in Serbia 66Box 4.1 Using technology to promote access to training 77Box 6.1 Serbia Investment and Export Promotion Agency 92Box 6.2 TheWestern Balkans in the Enterprise Europe Network 95Box 7.1 Risk-taking and symmetric tax treatment of profits/losses 105Box 7.2 Rationale for tax simplification for small businesses 106Box 7.3 Selection of VAT collection threshold 108Box 7.4 Presumptive taxes to replace regular income tax for small business 109Box 8.1 Business Innovation Centre of Croatia – BICRO LTD 126Box 9.1 The Business Advisory Service (BAS) Programme in the former Yugoslav Republic of Macedonia 137Box 10.1 SME Forum 146

Part II POLICY MEASURES TO SUPPORT HIGH-GROWTH SMEs IN THE WESTERN BALKANSBox 1 Developing entrepreneurial graduates 158Box 2 Growth Firm Service, Finland 159Box 3 The Prowess Flagship Award, United Kingdom 159Box 4 The Access to Finance Programme, London 162Box 5 Ready for Growth Programme, United Kingdom, Spain and Greece 163Box 6 The Dutch Innovation Voucher scheme 166Box 7 The Tekes Serve – Innovative Services Technology Programme, Finland 166Box 8 Changing models of university business engagements 167Box 9 Competence Research Centres: Linking research and innovation 168Box 10 UK Knowledge Transfer Partnerships 169Box 11 Oxford Innovation, United Kingdom 170Box 12 Incubation and light-touch mentoring, Jyväskylä Science Park, Finland 171Box 13 VIVACE Programme of the Hungary Patent Office 172Box 14 Vinnova: Simulating linkages, focusing international innovation 176

Tables

Part I POLICY FINDINGS BY CHARTER DIMENSIONTable 1 Key SME policy reform initiatives launched in theWestern Balkans since the 2007 SME Policy

Index Report 17Table 2 Progress in scores per country (and Kosovo under UNSCR 1244/99) per dimension since the 2007

SME Policy Index Report 19Table 1.1 Scores in dimension 1: Education and training for entrepreneurship (2009) 47Table 2.1 The company registration process in figures 54Table 2.2 Scores for sub-dimensions 2.1: Issuing of company registration certificate 55Table 2.3 The notification process in figures 55Table 2.4 Scores for sub-dimension 2.1: Company identification numbers 56Table 2.5 Scores for sub-dimension 2.3: Crafts registration 56Table 2.6 Overall business establishment process in figures 58Table 2.7 Scores for sub-dimension 2.1: Completion of the overall registration process 58Table 2.8 Status of online registration 59Table 2.9 Scores for sub-dimension 2.2: Increase in online access for registration 59Table 3.1 Scores within sub-dimension 3.1: Review of the current legislation 65Table 3.2 Scores in sub-dimension 3.1: Regulatory impact analysis (RIA) 66Table 3.3 Scores for sub-dimension 3.2: Silence is consent 67Table 3.4 Overview of inter-ministerial co-ordination 68Table 3.5 Comparison between the executive agencies from the region 69Table 3.6 Scores for sub-dimension 3.3: Institutional framework 69Table 4.1 Scores for dimension 4: TNA and enterprise training 78Table 5.1 Scores for sub-dimension 5.1: Interaction with government services 84Table 5.2 Main SME-related government websites 84Table 5.3 Scores for sub-dimension 5.2: Information 85Table 6.1 Export promotion agencies in SEE countries 93Table 6.2 Scores for sub-dimension 6.1: Export promotion programmes 93Table 6.3 Scores for sub-dimension 6.2: SME Competitiveness 95Table 6.4 Scores for sub-dimension 6.3: National SME promotion events (2009) 96Table 7.1 Scores for sub-dimension 7.1: TaxationTable 7.2 Banking reform and interest rate liberalisation (scores ranging from 1 to 4.33) 115Table 7.3 Real growth in credit to the private sector (%) 116Table 7.4 Domestic credit to the private sector as a share of GDP, official data (%) 116Table 7.5 Sources of finance for small firms (%) 117Table 7.6 Bankruptcy legislation indicators 119Table 7.7 Scores for sub-dimension 7.2: Access to finance 120Table 8.1 Scores for sub-dimension 8.1: Promote technology dissemination 126Table 8.2 Scores for sub-dimension 8.2: Foster technology co-operation 129Table 8.3 Scores for sub-dimension 8.3: Develop inter-firm clusters 130Table 9.1 Scores for sub-dimension 9.1: SMEs support facilities and services 138Table 9.2 Scores for sub-dimension 9.2: information for SMEs 138Table 9.3 Scores for sub-dimension 9.1: SMEs support facilities and services 139Table 10.1 Scores for sub-dimension 10.1: SME networks 145Table 10.2 Public-private consultation in theWest Balkan countries and Kosovo under UNSCR 1244/99 147Table 10.3 Scores for sub-dimension 10.2: Public-private consultations 148

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Part II POLICY MEASURES TO SUPPORT HIGH-GROWTH SMEs IN THE WESTERN BALKANSTable 1 Policy areas and programmes for HGSMEs 152

Figures

KEY FINDINGS AND CONCLUSIONSProgress across the Charter dimensions: Overall SME Policy Index scoresDimension 1: Entrepreneurship education and training 24Dimension 2: Cheaper and faster start-up 24Dimension 3: Better legislation and regulation 25Dimension 4: Availability of skills 25Dimension 5: Improving online access 26Dimension 6: Getting more out of the Single Market 26Dimension 7a: Taxation 27Dimension 7b: Access to finance 27Dimension 8: Strengthening the technological capacity 28Dimension 9: Successful e-business models 28Dimension 10: Develop stronger representation 29Overall cumulative changes in scores since 2007 SME Policy Index in theWestern Balkans 29

Part I POLICY FINDINGS BY CHARTER DIMENSIONFigure I.1 Breakdown of the SME Policy Index structure 36Figure 1.1 Assessment framework for dimension 1 44Figure 1.2 Overall scores for dimension 1 48Figure 2.1 Assessment framework for dimension 2 53Figure 2.2 Dimension 2 scores by sub-dimension 60Figure 2.3 Overall scores for dimension 2 60Figure 3.1 Assessment framework for dimension 3 64Figure 3.2 Dimension 3 scores by sub-dimension 70Figure 3.3 Overall scores for dimension 3 70Figure 4.1 Assessment framework for dimension 4 75Figure 4.2 Overall scores for dimension 4 78Figure 5.1 Assessment framework for dimension 5 83Figure 5.2 Dimension 5 scores by sub-dimension 86Figure 5.3 Overall scores for dimension 5 86Figure 6.1 Assessment framework for dimension 6 91Figure 6.2 Dimension 6 scores by sub-dimension 95Figure 6.3 Overall scores for dimension 6 96Figure 7.1 Assessment framework for dimension 7a: Taxation 101Figure 7.2 Overall scores for dimension 7: Taxation 111Figure 7.3 Assessment framework for dimension 7b: Access to finance 118Figure 7.4 Overall scores for dimension 7: Access fo finance 120Figure 8.1 Assessment framework for dimension 8 125Figure 8.2 Dimension 8 scores by sub-dimension 130Figure 8.3 Overall scores for dimension 8 131Figure 9.1 Assessment framework for dimension 9 134Figure 9.2 Dimension 9 scores by sub-dimension 139Figure 9.3 Overall scores for dimension 9 140Figure 10.1 Assessment framework for dimension 10 145

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Figure 10.2 Dimension 10 scores by sub-dimension 138Figure 10.3 Overall scores for dimension 10 148

Part II POLICY MEASURES TO SUPPORT HIGH-GROWTH SMEs IN THE WESTERN BALKANSFigure 1 Share of high-growth enterprises (turnover definition), 2005 155Figure 2 GEM indicators of high-expectation and high-growth entrepreneurs as a percentage

of the adult population 154Figure 3 Life-cycle stages of innovation-driven growth and the HGSME policy domain 155Figure 4 Life-cycle stages of innovation-driven growth and the HGSME policy domain 156

Part III PROFILES OF THE WESTERN BALKAN COUNTRIES AND KOSOVO UNDER UNSCR 1244/99SME Policy Index scores for Albania per Charter dimension (2009) 192SME Policy Index scores for Bosnia and Herzegovina per Charter dimension (2009) 207SME Policy Index scores for Croatia per Charter dimension (2009) 215SME Policy Index scores for Kosovo under UNSCR 1244/99 per Charter dimension (2009) 222SME Policy Index scores for the former Yugoslav Republic of Macedonia per Charter dimension (2009) 232SME Policy Index scores for Montenegro per Charter dimension (2009) 241SME Policy Index scores for Serbia per Charter dimension (2009) 251

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Overview of the European Charter forSmall Enterprises process in the WesternBalkans

This report presents an assessment of the quality andthe level of implementation of small and medium-sizedenterprise (SME) policy in theWestern Balkans, comparingresults with a previous assessment conducted in 2006and published in 2007.The report covers Albania, Bosniaand Herzegovina, Croatia, the former Yugoslav Republicof Macedonia, Montenegro, Serbia and Kosovo underUNSCR 1244/99.

The assessment framework is based on the EuropeanCharter for Small Enterprises (the Charter), a set of policyguidelines endorsed by the European Union MemberStates and a key component of the EuropeanUnion LisbonAgenda.TheWestern Balkans governments adopted theCharter in 2003 and in 2006 launched a three-yearassessment process for theWestern Balkan region,whichwas completed at the end of 2008.

In June 2008 the European Commission adopted theSmall BusinessAct, a new framework policy document forSME policy including policy guidelines as well as targetedactions to support SMEs.The document was endorsed bythe European Council in December 2008. The WesternBalkans countries and Kosovo under UNSCR 1244/99 areexpected tomove towards implementation of the policiesidentified in the Small Business Act.

This report assesses the implementation of theEuropean Charter for Small Enterprises in the WesternBalkans and has been jointly elaborated by the EuropeanCommission (EC), the EuropeanTraining Foundation (ETF),the European Bank for Reconstruction and Development(EBRD) and the Organisation for Economic Co-operationand Development (OECD). It is based on data andinformation collected over a six-month process, with acut-off date of 15 November 2008. As in the case of the2007 report, the report presents a synthesis of two parallelassessment processes: a self-evaluation conducted bythe Western Balkan governments and co-ordinated bythe national Charter co-ordinators; and an independentevaluation conducted by the four partner organisations,with inputs from the private sector and other SMEstakeholders.

The report covers the ten policy dimensionsincluded in the Charter. It applies a methodology knownas the SME Policy Index, which makes it possible toquantify and compare qualitative policy features. Eachdimension has been broken down into a set of sub-dimensions and into a number of analytical policyindicators. Each indicator is based on a five-step policydevelopment path ranging from a level 1 (lack of policyinitiative) to a level 5 (implementation close to the goodpractices from the EU Member States collected in theCharter and in the OECD SME Bologna Process). The setof analytical indicators used in the 2009 report is notsignificantly different from the set used in the 2007 report,with the only exception of the sub-dimension on taxpolicy, securing a good level of comparability between thetwo assessments.

The report is organised in three parts. Part I coversa review of progress by policy dimension. Part II, elaboratedby Professor Stephen Roper from Warwick BusinessSchool, University of Warwick (UK), focuses on policiessupporting high-growth SMEs.The intention is to providea comprehensive review of good practices, introducecountry assessment methods through two case studies(the former Yugoslav Republic of Macedonia and Serbia)and open a debate onwhat is likely to be a key componentof the SME agenda for the next few years. Part III includesstock taking and progress reviews for each of the sevenWestern Balkan economies.

Key findings on progress in policyelaboration and implementation at thelevel of the Western Balkan region

The key finding of the 2009 report is that over the lasttwo years there has been good progress in elaboratingand implementing policies supporting small enterprisesall across the Western Balkans and there is clearconvergence towards the adoption of the policy guidelinesset in the Charter. However, progress has been unevenacross the ten dimensions and the seven economiescovered by the report.

In particular, theWestern Balkan governments havemade generally good progress in the policy areas thatdirectly affect the operational environment for small

Key Findings and Conclusions

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enterprises. For instance, the company registration processhas significantly improved in terms of time, costs andsteps required across theWestern Balkans, with the onlyexception of Bosnia and Herzegovina. A wide range ofregulatory reform programmes have been launched andare currently implemented inmost of theWestern Balkaneconomies. The credit environment and the range offinancial products available to SMEs have also improved.

On the other hand, most of the Western Balkangovernments are at a relatively early stage in introducingtargeted policies for relevant types of SMEs, such as start-ups, export-oriented and high-growth companies. Forinstance, few governments have introduced measurestargeting start-ups (positive examples are Croatia andSerbia), targeting innovative enterprises, or supportingtechnological or non-technological innovation.

Even in the cases where policies have beenformulated and specific measures have been introduced,as in the cases of Croatia, Serbia and to a lesser extent theformerYugoslav Republic of Macedonia and Albania, theamount of available resources is still a fraction of what isavailable for instance in the new EUMember States.Mostof the programmes launched in the areas of technologicalexport promotion or competitiveness either do not reachthe critical level to have a positive impact on companybehaviour, or are structured in away that fails to generatepositive synergies with other measures.

The contribution of human capital to enterpriseperformance remains a particular constraint to theeconomies of the region.More effort is required to ensurethat education and training is strategically knitted into thewider competitiveness drive within each country.Enterprises, in partnership with the public sector, willneed to assume more responsibility in defining trainingrequirements and ensuring that these are systematicallyarticulated to the training market. Further, betterrecognition of EU recommendations for promotion ofentrepreneurship at all levels of education is required,with particular emphasis on entrepreneurship promotionin early education.

The Charter assessment cycle completed over thelast two years (2007-2009) offers a good picture of thechallenges faced by policy makers in engineering andsteering reforms in the SME policy area. It also points tosome of the key elements that are underpinning policyreform. The 2009 report shows that a two-year policyhorizon can be sufficient for elaborating and implementingpolicy reforms with clearly defined objectives that can be

monitored. These reforms should have relatively limitedstate-budget implications and involve few institutionaland legislative changes. Implementation can be delegatedto executive agencies and approaches can be modelledon existing good practices.

However, reforms take place only if governmentprovides strong political backing, secures the consensusof the stakeholders, ensures good planning and effectivelymanages external technical assistance.

Good examples in the region are the successfulrestructuring of the company registration process inAlbania, which has introduced a state-of-the-artregistration system in less than two years, and thelaunching of the one-stop system in the formerYugoslavRepublic of Macedonia.A negative example for the samearea is the stalling of company registration reform inBosnia and Herzegovina, under consideration since 2003.

Othermore complex reforms that call for institutionbuilding, extensive inter-ministerial co-ordination andlegislative changes (and havewider budget implications),such as those related to human capital development andregulatory reform, require longer elaboration andimplementation time, hence a five-year horizon is morecommon. Policy development moves along the pathdefined in the assessment framework, starting oftenwithpilot projects as a first response to perceived policy needs,beforemoving to the elaboration of a policy strategy.Thenthere are changes in the institutional and legal framework,the establishment of new policy institutions and finally,the beginning of the implementation phase.

A tool such as the SME Policy Index assistsgovernments in identifying key policy priorities andbuilding consensus around policy reform.

Progress at country level

The 2007 report divided the Western Balkaneconomies according to the level reached in terms ofpolicy performance.

A first group, made up of Albania, Bosnia andHerzegovina, and Kosovo under UNSCR 1244/99, wascharacterised by a level of performance across the tendimensions around level 2, denoting an institutional andlegal framework underpinning SME policy still largelyreliant on ad hoc intervention and pilot projects, and inneed of further concretisation.

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A second group, made up of the former YugoslavRepublic of Macedonia,Montenegro and Serbia, describedcountries that had largely completed the legislative andinstitutional framework supporting SME policy and hadjust entered into the phase of policy implementation.Their performance level was between level 2 and level 3in most dimensions. Finally, Croatia was highlighted asthe most advanced country in terms of SME policy.

The 2009 report confirms Croatia as the region’smostadvanced country in terms of SME policy elaboration andimplementation in the Western Balkans. In each policy,excluding the human capital dimensions and tax policy,Croatia has recorded a performance well above level 3.Three policy dimensions (Getting more out of the SingleMarket, Successful e-business models and top-classbusiness support, and Improving online access) indicatethat a sound policy framework is in place and the countryis moving ahead particularly well with policyimplementation. Looking at the analytical indicators,policy improvements seemwidespread, but incremental.No major policy initiatives have been launched over thelast two years, as the country has been focusing on theimplementation of existing policies and on the completionof the EU accession process.

The 2009 report shows that there have beensignificant changes in the dynamic and the compositionof the second group. There have been significant policydevelopments in Serbia across a wide range ofdimensions. The country has moved rapidly from thephase of policy elaboration and definition of strategyobjectives to policy implementation in areas such assupport to innovative companies, start-ups, provision ofbusiness services and information dissemination throughonline services. It has significantly improved its record onpublic-private policy dialogue. In addition, Serbia hasimproved its performance, in an incremental way, in anumber of areas where it already had a positiveimplementation record, as in company registration andexport promotion.

There have been limited improvements in the overallperformance of the former Yugoslav Republic ofMacedonia and Montenegro: few policy initiatives havebeen launched over the last two years. Both countrieshave made significant progress on two dimensionsrelating to human capital development and, to a lesserextent, on the provisions of business support services.However, they are relatively weak in the key areas ofsupporting SME competitiveness and technologicalcapacity, as well as in the export promotion area.

Albania’s policy performance over the last two yearshas been remarkable and has allowed the country to jointhe second group. Albania’s record of policyimplementation has improved in all ten dimensions; inparticular, in all the policy areas linked to the generaloperational environment (such as company registration,regulatory reform, access to finance and exportpromotion). The weak points in Albania’s performanceremain human capital development and technologicalcapacity of SMEs.

The 2009 report shows that there are two economiesin the region that, for a variety of reasons, are still in aphase of completing the basic institutional, legal andregulatory requirements underpinning SME policy: Kosovounder UNSCR 1244/99, and Bosnia and Herzegovina.However,while the former has shown significant progressover the last two years, SME policy implementation inBosnia and Herzegovina has largely stagnated. InsideBosnia and Herzegovina, there have been differences inperformance across the two entities (the Federation ofBosnia and Herzegovina, and the Republika Srpska) andthe District of Brcko. Progress has been more marked inthe Republika Srpska, which is engaged in acomprehensive regulatory reform and has an active policytowards the small enterprise sector conducted throughthe entity SME Development Agency, and in the Districtof Brcko.

In Kosovo under UNSCR 1244/99, there has beenprogress on the institutional front,with the establishmentof an SME Development Agency, the assignment of theexport promotion task to the Investment PromotionAgency, and the improvement of the legal and regulatoryframework related to access to finance. The provision ofservices to SMEs is still performedmostly through donor-funded projects, as the newly established SME SupportAgency is still building capacity and developing its owntools. Kosovo under UNSCR 1244/99 has additionallydeveloped a good lifelong entrepreneurial learningstrategy with a range of institutional partners havingsigned up to its implementation.

In Bosnia and Herzegovina there is still room forprogress in the SME policy area at state level. Policyelaboration and implementation is highly decentralised,with the two entities and the district of Brcko having directresponsibility for most of the ten policy dimensionscovered by the Charter. In addition, the ten cantons in theFederation of Bosnia andHerzegovina have legislative andregulatory powers in SME policy areas,while the five localdevelopment agencies play a stronger role in SME support.

Table 1

Key SME policy reform initiatives launched in the Western Balkans since the 2007SME Policy Index Report

ALB

Over the last two years, Albania has radically reformed the company registration process, with the financial and technical support of the US-sponsored Millennium Challenge Corporation, and co-ordinated by the Ministry of Energy, Economy and Trade. The reform is remarkable forits scope, its speedy implementation and the quality of the results. The starting point of the reform process was the passing in May 2007 ofthe Law on National Registration Centre (NRC) that transferred competence over company registration from the Tirana court to a new dedicatedpublic agency. In the year after the establishment of the NRC, there has been a significant surge of new company registrations, surpassing thethreshold of 15 000 new applications.The centre is also updating the records of existing companies, including those records in the new electronicregister. It is processing the large backlog of company record modifications accumulated under the previous system.

BIH

The definition of collateral is encouragingly flexible in Bosnia and Herzegovina and micro-loans can be extended in the absence of collateral.USAID sponsored a project to set up a registry for movable assets, which became operational three years ago, on a state-wide basis and regulatedby a state-level law. In this registry anyone who is in Bosnia and Herzegovina can enter information about pledged movable assets. A creditregistry exists and is well functioning, although individuals’ access to their own credit data is not guaranteed by law.

HRV

Croatia has been the first Western Balkan country to rigorously tackle competitiveness issues amongst SMEs. BICRO, the Business InnovationCentre of Croatia, plays a central role in supporting innovative SMEs: it runs a number of programmes, ranging from R&D support to equityfinancing. The Koncro programme strengthens the technical and managerial skills of innovative SMEs, through the co-funding of consultancyservices.Meanwhile, the institutional support for promoting entrepreneurship key competence by the National Curriculum Council and educationauthorities provides an important basis for mainstreaming entrepreneurship promotion in formal education. Finally, the Croat-led project toestablish a South East European Centre for Entrepreneurial Learning demonstrates good initiative and further commitment to regional co-operation.

XK

Kosovo under UNSCR 1244/99 has established the SME Support Agency, which is the responsible institution for the elaboration of SME policyand its implementation. The agency’s responsibilities include:

• Developing a policy framework supportive for SMEs• Initiating legislation concerning SMEs and giving recommendations on pieces of legislation that influence the business environment• Proposing and compiling plans for better co-ordination and co-operation between the existing domestic and foreign organisationsworking for the development of SMEs

• Implementing programmes related to the creation and development of SMEs.In 2008 the agency had 12 employees and a budget to allocate to different projects of approximately EUR 2.3 million. Although the agencydoes not include in this budget the donor’s support, this is rather significant for Kosovo under UNSCR 1244/99. Meanwhile, a good lifelongentrepreneurial learning strategy provides a solid basis for the range of partners to move forward with lifelong entrepreneurial learningdevelopments. This will require a more concerted commitment by the parties to enable further outcomes from the partnership arrangementalready in place.

MK

Since the entry into force of the Law on One Stop-Shop System in 2006 and the maintenance of the trade register and the register of otherlegal entities, the former Yugoslav Republic of Macedonia has further improved the efficiency of its company registration system and reducedcompany registration fees. The Central Registry is currently able to process a company registration application in less than one day, down fromfive days in 2006 for a fee of approximately EUR 57. As typical of a one-stop shop system, the Central Registry issues the unique companyregistration number and obtains, on behalf of the new company the tax registration number, normally in a matter of a few hours. In order tofurther reduce start-up costs the former Yugoslav Republic of Macedonia has recently waived the minimum capital requirement for limitedliability companies.

MNE

Montenegro has made particular strides to develop entrepreneurship education with an intensive piloting exercise within one municipality (Berane)in the country’s least developed northern region.The strategic piloting effort follows the elaboration of a lifelong entrepreneurial learning strategyand action plan which captures the key lines of the Charter’s indicators for entrepreneurship education and training.The challenge for the educationand training authorities in co-operation with the world of enterprise is to move forward with the strategy and actions foreseen and to build onthe policy learning and momentum developed through the ‘Berane process’.

SRB

The Serbian government has made significant progress in taking action to promote competitiveness and support the technological capacityof SMEs. In January 2008 the government formally established the National Competitiveness Council. Its membership includes all key economicministries, the Central Bank, the main private-sector associations, leading academics and business leaders. Its mandate is to conduct analysison competitiveness issues, elaborate policy proposals, monitor policy development and foster programme co-operation it is expected tobecome a key policy forum.

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The result is a fragmented and often uncoordinated policyframework in which a relatively large number of projectsand initiatives are launched.While these respond to localneeds, they lack mechanisms for policy co-ordination,development of synergies among projects, and aproductive exchange of experience among policy makersand stakeholders.The failure to fully implement companyregistration reform on a nationwide basis, and lack ofcommon SME strategy and policy co-ordinationinstitutions (already highlighted in the previous report)demonstrate how the situation has stalled. On the otherhand, the country has made good progress on access tofinance, an area less subject to policy fragmentation.

The impact of the global economic crisison SME policy in the Western Balkans

The assessment was completed just when the firstindications of the impact of the growing global economiccrisis on theWestern Balkan economies were emerging.Over the last eight years, theWestern Balkan economiesrecorded a long and sustained phase of economicexpansion, with most of the economies recording grossdomestic product (GDP) growth rates in excess of 5% overseveral years, increasingmacro-economic stability, limitedinflation and contained budget deficits (although growingcurrent account deficits).The SME sector both contributedto and benefitted from sustained economic growth. Thenumber of newly established SMEs increased significantly.Governments have been able to focusmore on SME policy,as they have largely completed privatisation and therestructuring of the state-owned sector, and havechannelled more resources to support SME policies.

Preliminary data for the last quarter of 2008 and thefirst quarter of 2009 show a sharp drop in external tradeand industrial production, a contraction on foreign directinvestment (FDI) inflows and a freeze on credit expansionaccompanied by a significant slowdown in economicgrowth across the region.All this indicates that the globaleconomic crisis is having an increasing impact on theWestern Balkan economies. The key drivers that haveunderpinned growth in the region (domesticconsumption, credit expansion and increasing capitalinflows such as FDI and remittances) are losing strengthand actions are needed to rebalance the large tradedeficits that are common to all the Western Balkaneconomies.

The sudden and marked change in the macro-economic framework has significant implications for SME

policy: it heralds a review of policy priorities and anassessment of the policy tools available to respondeffectively to the consequences of the crisis, and it maylead to a reduction of resources available to support SMEpolicy.

Given that the crisis is not endogenous, but largelyimported, and that the main transmission channels aretrade, foreign direct investment and access to finance, itis likely that the crisis will affect segments of the SMEpopulation in different ways.At the time of writing theseconclusions, data capturing the impact of the crisis oncompany behaviour and particularly on SMEs in theWestern Balkan economies are not available. However itis possible to infer that the crisis will affect in the firstinstance companies that are more export-oriented, thathave operations integrated into pan-European andinternational value chains (such as automotive andmechanical component producers) and that have maderecent capital investments, either in expandingproduction facilities or in developing new products andmarkets. These companies are more vulnerable to thedrop of external demand and to reductions in access tofinance. Structural characteristics of Western Balkancompanies may amplify the impact of the crisis. SMEs inthe region tend to have a limited export marketdiversification, to rely largely on supplier credit for inputfinancing, to depend largely on short-term revolvingcommercial bank credit (both for working capital and forinvestment) and to have limited access to equityfinancing.

While export, investment-oriented and innovativeSMEs represent a small percentage of the total SMEpopulation, they contribute most to economic growthand employment generation, as highlighted in the sectionof this report dedicated to policies supporting high-growthSMEs (Part II).A sharp increase in business failures amongthose high-growth enterprises (due to external factors)may significantly reduce future economic growth.

On the other hand, the 2009 report shows that therelative weakness of SME policy in the Western Balkanslies specifically in the areasmost relevant for high-growthenterprises, such as the provision of sophisticatedbusiness services, and the launching of programmesenhancing the technological capacity of SMEs.Governments also have limited experience in targetedSME policy, having given priority so far to horizontalmeasures.

Table 2

Progress in scores per country (and Kosovo under UNSCR 1244/99) per dimensionsince the 2007 SME Policy Index Report*

ALB BiH HRV XK MK MNE SRB REGION

Dimension 1: Entrepreneurshipeducation and Training **

Change N/A N/A N/A N/A N/A N/A N/A N/A

Dimension 2: Cheaper and fasterstart-ups

Change +2.00 +0.50 +0.75 +0.25 +1.00 +0.25 +0.50 +0.75

Dimension 3: Better legislationand regulations

Change +1.25 +0.25 +0.50 -0.25 +1.50 +1.00 +0.25 +0.75

Dimension 4: Availability of skills ** Change N/A N/A N/A N/A N/A N/A N/A N/A

Dimension 5: Improving on-line access Change +1.50 0.00 +0.25 +0.75 +0.25 0.00 +1.00 +0.50

Dimension 6: Getting more out ofthe Single Market

Change +0.75 0.00 0.00 +0.25 +0.50 -0.25 +1.25 +0.25

Dimension 7a: Taxation ** Change N/A N/A N/A N/A N/A N/A N/A N/A

Dimension 7b: Access to Finance Change +0.75 +1.50 -0.25 +0.50 -0.25 +0.25 +0.75 +0.50

Dimension 8: Strengthening theTechnol Capacity

Change +0.00 +0.50 +0.25 +0.25 -0.25 0.00 +0.75 +0.25

Dimension 9: Successful E-BusinessModels

Change +1.00 +0.25 +0.25 +0.75 +0.25 0.00 +1.00 +0.50

Dimension 10: Develop StrongerRepresentation

Change +0.50 -0.50 +0.25 +0.25 -0.25 0.00 +1.50 +0.25

Notes: *The progress in scores has been rounded up or down to the nearest 0.25.**For dimension 1, 4 and 7a comparison to the scores of 2007 has not been possible because the indicators within these dimensions havebeen significantly altered in the 2009 report

Key findings by policy dimension

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Future policy priorities

The crisis, therefore, implies a policy shift. It will bemore feasible for governments that have already put inplace schemes and facilities for targeted groups ofenterprises.These include credit guarantee schemes, cost-sharing schemes, cost-recoverable schemes forinnovation, and standard and business developmentactivities, such those found in Croatia and Serbia and (toa lesser extent) Albania and the formerYugoslav Republicof Macedonia. Those schemes and facilities could beexpanded and adapted to the needs arising from thecrisis. They can be used as complementary supportmeasures to resources channelled by the internationalfinancial institutions with the support of the EuropeanCommission, through the banking and financial sector.

For the remaining economies, the crisis should actas a stimulus to accelerate the pace of SME policy

development. For these economies an increase in donorsupport (both in terms of technical assistance transferringknowledge and the provision of advanced services tosmall enterprises) and financial assistance to expandpilot project schemes will be extremely important in thisphase.

However, work should continue on theimplementation of horizontal measures to improve thebusiness and investment operational environment.Whileareas such as company registration are now less of apriority formostWestern Balkan governments, regulatoryreform, e-business and online services, building aregulatory and operational environment for the provisionof financing schemes for SMEs (including equity funds andbusiness angels) remain high priorities, as well as humancapital development through entrepreneurship educationand skill development.

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Dimension 1 - Entrepreneurship education and training

The contribution of education to competitiveness isgenerating new policy interest in the potential ofentrepreneurship education and training for improvingproductivity, innovation and economic growth. TheCharter assessment focused particularly on policy in thearea of entrepreneurship education and training as adriver for overall reforms. There have been clearmovements by most countries to bring forward policyand strategy building in the area of entrepreneurshipeducation and training. Several countries have alreadyelaborated perspectives for lifelong entrepreneuriallearning. However, there is a need for more systematicmonitoring and evaluation of the range of activities in thisarea to ensure better efficiency of overall effort.

While non-formal entrepreneurship education andtraining (activities outside the school curriculum) is welldeveloped, more efforts at building synergy with formaleducation could be considered in the bid to maximisethe overall value of the various players contributing to thefield. Although the Charter encourages more systematicco-operation among the players involved inentrepreneurship education and training, informationand know-how exchange is generally confined to loosenetworks with little ambition amongst practitioners tomake their achievements known. More developednetworks could inspire confidence and trust amongstpractitioners to publicise their work, allowing others toborrow on tried-and-tested ventures.

The assessment concludes with recommendationsformore structured co-operation among education policymakers to step up lifelong entrepreneurship educationand training. It also calls formore focused efforts to raiseunderstanding of the entrepreneurship key competenceamongst the education communities in terms ofcurriculum, teacher training, school governance andmanagement.

Dimension 2 – Cheaper and faster start-up

The 2009 report shows that there has been significantprogress across the region in promoting faster andcheaper start-up. Progress has been more impressive inthe registration phase. Today, new entrepreneurs cancomplete average registration procedures with companyregisters (specialised agency or commercial court) in lessthan five days from the time of application in all theWestern Balkan countries, excluding Bosnia andHerzegovina. In most countries, it takes a day to obtain

the company registration certificate from the time ofapplication, for a fee less than EUR 60.The pre-applicationsteps have also been streamlined. Progress in thenotification phase has been less marked. Two countries(Croatia, the formerYugoslav Republic of Macedonia) aremoving towards the one-stop-shop model. Progress hasbeen patchy and slow in the compliance phase, withintervention focusing on the elimination or reduction ofminimum capital requirements for start-ups (the formerYugoslav Republic ofMacedonia and Kosovo under UNSCR1244/99). Over the last two years,Albania and Serbia werethe most successful reformers in this dimension, whileBosnia and Herzegovina lagged further behind theregional average. Overall, the priorities set out in the 2007report were only partially tackled and therefore remainlargely valid for the near future. Governments need tofind the right balance between the need to conduct checksand thorough inspections, and secure compliance withlaws and regulations concerning health, security andenvironmental risks; and the desire not to put excessiveburden on new business ventures. In the previous report,it was also suggested as a medium-term objective totransform the company registration body into a centre ofcollection and dissemination of company data for thepublic administration (tax administration, office ofstatistics and employment office) and the private sector,within the limits set by confidentiality rules andregulations. This would require the establishment of anelectronic data bank covering the entire population ofregistered enterprises (not only the latest entries) andthe integration of a number of new functions.

Dimension 3 - Better legislation and regulation

Dimension 3 assesses three important elements fora stable and clear regulatory environment, namelyregulatory reform, institutional framework and regulatoryimpact analysis. The countries’ situation under thisdimension has further improved over the previous report.The overall average for theWestern Balkans has increasedsignificantly. Currently all but two (Bosnia andHerzegovina and Kosovo under UNSCR 1244/99), are abovelevel 3, considered a threshold at which a solid legaland/or institutional framework is in place.While the twoleast advanced economies still have to adopt theirstrategic framework and start implementing it, the otherfive economies should put further efforts in theimplementation of the action plans of the strategiesmentioned above.

In the field of ‘Better regulatory environment’ goodprogress has been registered in Albania, Croatia, the

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formerYugoslav Republic of Macedonia,Montenegro andSerbia, both in terms of simplification of the existinglegislation and gradual introduction of the regulatoryimpact analysis (RIA). As the process of reviewing thelegislation has been completed in most of the countries,further effort should be putted in eliminating theredundant legislation and the systematic use of RIA.

Dimension 4 - Availability of skills

With increased recognition being afforded to humancapital in the wider bid formore competitive enterprises,the Charter assessment considered training availability,with particular emphasis on training for new ventures andexpanding businesses. Overall, there is a lack ofcomprehensive data on enterprise training, includingtraining for start-ups and growing enterprises.What dataare available are invariably spread across differentorganisations and serving different purposes,making thetask of quantitative assessment difficult. Nonetheless,there is evidence of a growing recognition of theimportance of reliable data for more targeteddevelopments in enterprise-based human capital. Aregional proposal for countries (includingTurkey) to gatherinformation on enterprise skills provides an opportunityfor the region to overcome the constraints of weak data.

Data aside, the assessment identified considerableeffort to promote training in all countries through goodnetworks of training providers (for the most part publictraining services), although the extent to which thistraining is directly accessible by enterprises is not clear.Similarly, information on private training providers isgenerally not readily available, suggesting an under-developed trainingmarket.The assessment points to theneed for more developments in the area of qualityassurance in training; this will generate confidence in, anddemand for, training by enterprises.

The assessment concludes with recommendationsfor more systemic developments in enterprise trainingintelligence as well as measures to promote a moredeveloped training market.

Dimension 5 - Improving online access

E-government services for SMEs have emerged inthe Western Balkans, but only Croatia holds a clear e-government strategy. Albania, Montenegro and Serbiahavemade great strides in rendering government servicesmore accessible online (including the provision of relevantonline business information and the introduction of

online services for filing tax returns or social security).Thekey weakness within this dimension remains the lack ofSME-dedicated online portals, which would makesearching for information less cumbersome by bundlingSME-relevant information and links (that are regularlyupdated), and allowing for interaction between SMEs andthe administration.

Dimension 6 – Getting more out of the Single Market

Progress on the two indicators related to exportpromotion and enhancing SME competitiveness has beenlimited across the region. Only Albania and Serbia haverecorded significant improvement in their performanceon both indicators and only three countries (Albania,Croatia and Serbia) have a structured export supportscheme, covering export promotion, export insuranceand export financing.

The global economic crisis is having a significantimpact, especially on companies that rely on exports tothe EU market and on those that operate in networkindustries (such as the automotive, electronic andmechanical sectors) and supply components tomanufacturers based in EU countries. SMEs in theWesternBalkans have to deal with a drop in the external demand,a shortage of supplier and buyer credit, and sudden shiftsin their competitive position due to the sharp currencymovement across East and South East Europe. In thissituation, governments in the Western Balkans have toaddress simultaneously contingent and structural issues.On export support, the priority in this phase is to provideexport insurance and export credit to companies affectedby the increase in commercial risk in export market andthe drying up of liquidity. On export promotion, priorityshould be given to market diversification, for instance,pursuing market opportunities arising from theimplementation of the 2006 Central European FreeTradeAgreement. On enhancing competitiveness, countriesthat have already launched support programmes (suchAlbania, Croatia, the former Yugoslav Republic ofMacedonia and Serbia) should closelymonitor the impactof those programmes and adapt the range of supportingtools to the differentiated needs of SMEs. Given thesignificant contribution of donor-funded programmes inthese areas, all theWestern Balkan countries need donor-supported programmes that are integrated andco-ordinated into a governmentmedium-term strategy forcompetitiveness and support to high-growth enterprises.It is also essential that lessons learned across variousbusiness support programmes are reviewed andcompared, then integrated into the government action.

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Dimension 7a – Taxation

The assessment in this dimension aims to score sevencountries in the Western Balkans on the basis of roughmeasures of progress to date in implementing variousframeworks and in exploring anumber of aspects of the taxtreatment of small businesses, given policy interest inassessments of the tax burden on small businesses and inunderstanding possible tax effects on the cost of funds, taxarbitrage behaviour and risk-taking, and tax compliancecosts.While all countries forecast main tax revenues, andcan generate rough estimates of effects of broad-based taxchanges onaggregate revenues,no economy in theWesternBalkan region has yet implemented micro-simulationmodels capable of estimating disaggregate revenue effects,and simulating the tax revenue consequences of detailedfine-tuning of their tax systems.However, the Federation ofBosnia andHerzegovina, the Republika Srpska1, the formerYugoslavRepublic ofMacedonia andMontenegro are takingsteps to implement such models. Croatia and the formerYugoslav Republic of Macedonia recently participated inan OECD tax modelling workshop, aimed at assistingcountries in pursuing micro-simulation frameworks.Limited analysis has beenundertaken of effects on the costof capital of small business of double taxation of profits ofincorporated firms through the region, although in Kosovounder UNSCR 1244/99 and Montenegro studies have beenundertaken to examinepotential effects of double taxationon equity financing, and alternative integration systemshave been examined.Throughout theWestern Balkans, noeconomy has yet to systematically carry out studies of taxarbitrage by small business owners.A reviewof income taxrates on self-employedbusiness income,dividends, interestand capital gains suggests that carehas been taken inmanyeconomies to limit tax planning opportunities ofowner/workers of closely held companies. Yet significantrate differences are observed in some cases, in particularwhenaccount is takenof social security contributions leviedon wage income. Additional analysis and sharing ofexperience across the regionwould bewelcome. InAlbania,the Federation of Bosnia and Herzegovina, the RepublikaSrpska, Croatia and the former Yugoslav Republic ofMacedonia,detailed analyses havenot yet been carried outto assess implications of alternative loss treatment oninvestment in small firmswith relatively high-risk businessventures, and on scope for tax-avoidance.Montenegro hasanalysed thepotential for its business loss-offset provisionsto influence risky investment in small businesses. KosovounderUNSCR1244/99hasalso recently assessed its businessloss-offset rules. Finally, a number of Western Balkancountries (Albania, Croatia, the Federation of Bosnia andHerzegovina, the Republika Srpska) as well Kosovo under

UNSCR1244/99,havemade significant strides in addressingtax compliance costs, arguably the most importantimpediment to address.

Dimension 7b – Access to finance

The Access to finance dimension of Dimension 7 ismade up of 2 subdimensions: credit environment andfinancial products for SMEs. Across the region, there hasbeen substantial progress in improving the creditenvironment. Two news indicators have been included inthe SME Policy Index 2009 assessment for thissubdimension: registration systems formovable assets andcredit information services are in place in most of thecountries (with exception of Kosovo under UNSCR 1244/99for both indicators and the former Yugoslav Republic ofMacedonia for credit information services). The Asset-backedbank lending is themain sourceof external financingfor enterprises. Since the last assessment, asset-backedbank lendinghas increased in importancewhile the relianceon internal funds and retained earnings has decreased.Allcountries have established credit guarantee schemes.However, until assessment cut-off date, only the formerYugoslav Republic of Macedonia followed EBRD’s previousrecommendation that credit guarantee schemebeprivatelymanaged in order to achieve the most efficient allocationof resources. Credit information services are in place in allcountries, however, not yet fully developed. Collateralrequirements remain very high in most of the countrieswith the exception ofAlbania andBosnia andHerzegovina.The global financial downturn furthermore encouragesbanks’ conservative lending policies. Access to (andreliability of) information fromcadastres is still limited andhas not improved since last assessment. Microfinancefacilities are also well developed in a most countries, withthe presence of international microfinance institutions.Access to capital markets for SMEs is still problematic andthe availability of risk capital is very limited. The venturecapital industry is developing, although for the momentthe only exit possibility is direct sale.The leasing industryis already an important channel of finance for the SMEsector.Relevant legislation in is place everywhere except forKosovo under UNSCR 1244/99 and leasing companies areoperating. Finally laws and procedures on distressedcompanies, receivership and bankruptcy are formally inplace,but legislation is at an early stage of implementationfor Albania, Croatia and the former Yugoslav Republic ofMacedonia. All countries are well developed in terms ofaccess to financial products for SMEs (here specificallyassessed: the leasing industry and venture capital funds),but there is still scope for improvements. Most of themechanisms conducive to a good credit environment are

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formally in place (with the exception of Kosovo underUNSCR 1244/99), but the level of implementation variesacross the indicators and countries. There is a need toincrease efforts throughout all categories and countriesand to sustain efforts where significant progress has beenmade (credit guarantee schemes in the former YugoslavRepublic of Macedonia, collateral requirements in Bosnia,leasing industry in Serbia).

Dimension 8 – Strengthening the technological capacityof small enterprises

All across the region, government policies directed atstrengthening the technological capacities of SMEs are atan early stage of development.Croatia is themost advancedin the three areas of technology dissemination, technologyco-operation, and research and development of inter-firmclusters. It has launched a comprehensive technologicaldevelopment programme (BICRO). In a number of othercountries (Bosnia and Herzegovina, the former YugoslavRepublic of Macedonia and Serbia), technology supportprogrammes are mostly still in a pilot phase, althoughprogress has been recorded in Bosnia and Herzegovina,and Serbia in the cluster development area.Albania,Kosovounder UNSCR1244/99 and Montenegro are at a very earlystage of policy elaboration. There have been positivedevelopments in the intellectual property rights (IPR) area(in terms of institutional development and legislativeupgrading and, to a lesser extent, policy enforcement)witha number of countries: Croatia, the former YugoslavRepublic of Macedonia and Serbia. As a way forward,government should further extend the support to initiativesestablishing inter-firm clusters and networks, integratingthose initiativeswith other enterprise-supporting schemes(voucher schemes, business incubators, innovationsupporting schemes, etc.). Governments should alsocontinue to change the orientation of the existing clustersfrom the traditional sectors to higher value added ones.Asargued in the section on high-growth enterprises, in orderto forge an environment that encourages innovation andgrowth, it is important to move forward on diverse yetcomplementary areas (intellectual property rights,businessincubators, cluster development and skills development).As noted in the previous report, it is vital to ensure a highlevel of co-ordination among the Ministry of Economy,Ministry of Education and Science, the private sector,universities and research institutes. Finally governmentsneed to continue to act on IPRs; they need to devote moreresources to the enforcement of IPR legislation throughcommunication campaigns, training of officials andmonitoring of IPR cases to ensure results, particularly ineconomies with weak IPR enforcement records.

Dimension 9 - Successful e-businessmodels and top-classbusiness support

Although the range and quality of business serviceshave generally improved over the last two years (due inpart to the arrival of renown international business serviceproviders), there is still a strong need for greater clarity,quality service standards and better co-ordination ofbusiness support strategies. Most business incubators,for example, are still the product of ad hoc initiatives thatdisappear once the funding does. There is thus acontinuing need in the Western Balkans to establishnational strategies for the development of businessincubators, linking these with measures to encourageinnovation and ensuring that clear funding andperformance measures are in place. Furthermore, thereis an urgent need in mostWestern Balkan countries andKosovo under UNSCR 1244/99 to complete the regulatoryframework for introducing the electronic signature andto establish a functional and legitimate accreditationbody. This is a precondition to developing electroniccommerce and more advanced online business-to-business functions, as well as for making the most ofonline government services.

Dimension 10 - Developing stronger and more effectiverepresentation of small enterprises’ interests

Dimension 10 deals with the effectiveness of SMErepresentation and the involvement of the publicadministration and the business community in public-private dialogue.The overall situation improved inmost oftheeconomies in the regionsince the2007 reportduemainlyto two aspects: the reforms of the chambers of commerceand improved framework for public-private dialogue.

Both the public administration and the private sectorneed to step up the scope of public-private dialogue andits quality. The main challenge for the government is toconsult the business community systematically and earlyin the process,while the business communitymust buildup the necessary capacity to conduct consultationswithinthe different business associations and to provide welldocumented proposals and comments. Although thereare numerous business associations and a system ofchambers of commerce in each economy, this capacity isstill relatively limited. Regarding the format of public-private dialogue, despite the fact that only Bosnia andHerzegovina ismissing a body for this purpose at nationallevel, all the others have to improve their own system inorder to hold regular meetings and to improve thetransparency of the system.

Dimension 1: Entrepreneurship education and training

0

1

2

3

4

5

Albania Bosnia andHerzegovina

Croatia Kosovo underUNSCR 1244/99

FYR Macedonia Montenegro Serbia

Dimension 2: Cheaper and faster start-up

0

1

2

3

4

5

2009 2007




24

Progress across the Charter dimensions: Overall SME Policy Index scores2

The following figures show the SME Policy Index scores for each economy and Charter dimension, comparing thecurrent results to those published in the SME Policy Index 2007 Report. Due to the large number of new indicators, theresults in dimensions 1, 4 and 7a are not comparable to the results from 2007.

Dimension 3: Better legislation and regulation

0

1

2

3

4

5

2009 2007




Dimension 4: Availability of skills

0

1

2

3

4

5

2009




25

Dimension 6: Getting more out of the Single Market

0

1

2

3

4

5

2009 2007




Dimension 5: Improving online access

0

1

2

3

4

5

2009 2007




26

Dimension 7a: Taxation3

0

1

2

3

4

5

2009




Dimension 7b: Access to finance

0

1

2

3

4

5

2009 2007




27

Dimension 8: Strengthening the technological capacity

0

1

2

3

4

5

2009 2007




Dimension 9: Successful e-business models

0

1

2

3

4

5

2009 2007




28

Dimension 10: Develop stronger representation

0

1

2

3

4

5

2009 2007




Overall cumulative changes in scores since 2007 SME Policy Index in the Western Balkans

0

1

2

3

4

5

6

7

8

9

REGIONBosnia andHerzegovina

MontenegroCroatiaFYRMacedonia

Kosovo underUNSCR 1244/99

Albania Serbia

29

Notes

1. Within this assessment, the Republika Srpska and the Federation of Bosnia and Herzegovina were assessed separately due to the differing tax systems.TheBrcko District was not assessed.

2. Although this report is published in 2009, its data collection took place in 2008. For the SME Policy Index Report 2007, data were collected in 2006. All SMEPolicy Index scores have been rounded up or down to the nearest 0.25

3. The assessment for dimension 7a: taxation was not completed for Serbia due to a lack of data.

31

Introduction andMethodology

The Charter Process in the Western Balkansand the SME Policy Index Methodology

The Charter Process in the WesternBalkans and the SME Policy IndexMethodology

32

Introduction

The objective of this report is tomonitor progress inimplementing the European Charter for Small Enterprises(the Charter) in theWestern Balkans.

The report covers Albania, Bosnia and Herzegovina,Croatia, Kosovo under UNSCR 1244/99, the formerYugoslav Republic of Macedonia,Montenegro and Serbia.It presents an analysis of the process of policy elaborationand implementation for each of the Charter’s tendimensions.1 It evaluates the performance of each countryand Kosovo under UNSCR 1244/99 in implementing theCharter’s policy guidelines, based on a common set ofindicators.This evaluation focuses on policies elaboratedand implemented by governments.

The report is structured in three parts:

• Part I contains an assessment of the degree ofimplementation of each of the ten Charterdimensions, with an analysis of trends and keyissues, as well as comparisons of the differentcountries and Kosovo under UNSCR 1244/99.

• Part II focuses on a specific area of SME policy,namely supporting high-growth SMEs. The SMEPolicy Index 2007 Report identified the areas ofinnovation in SMEs and technological developmentas in particular need of improvement anddevelopment. Hence, this part focuses on policymeasures to support high-growth SMEs in theWestern Balkans.

• Part III contains chapters on eachWestern Balkancountry and Kosovo under UNSCR 1244/99,providing additional insight on the implementationof the ten dimensions of the Charter.

The Charter process in the WesternBalkans

At the 20 June 2003 EU-Western Balkans Summit inThessaloniki, Greece, the countries and entities of theWestern Balkans (Albania, Bosnia and Herzegovina,Croatia, the formerYugoslav Republic ofMacedonia, SerbiaandMontenegro including Kosovo under UNSCR 1244/99)adopted the European Charter for Small Enterprises.TheCharter is a pan-European policy document, adopted inthe framework of the Lisbon Agenda to improve co-operation on enterprise policy issues within the EU andbetween EU Member States.

The 2003 Thessaloniki Agenda for the WesternBalkans provided a three-yearmandate for the EuropeanCommission to monitor and support implementation ofthe Charter in the region.

The Charter monitoring process resulted in thepublication of three sets of national reports,prepared by thenational Charter co-ordinators, and three regional reportson the Implementation of the European Charter for SmallEnterprises for the Western Balkans, adopted as CommissionStaffWorking Documents in 2004, 2005 and 2006.

In 2006, the Charter reporting was integrated in thereporting under the new Lisbon Strategy for Growth andJobs for the 25 EUMember States,while the Charter GoodPractice collection continued as a separate procedure.Bulgaria and Romania also joined the Lisbon Strategy.Faced with the possibility of a discontinuation of theCharter reporting, the six countries and Kosovo underUNSCR 1244/99 adopted the Belgrade Declaration at aregional meeting in Belgrade, Serbia, on 26 October 2005.It called on the Commission to continue the Charterprocess in the region.As a policy response to the BelgradeDeclaration, the Commission expressed its readiness tocontinue the process for another three years (2006-08).

33

The General Affairs and External Relations Council(GAERC)meeting of 20March 2006welcomed the decisionof the Commission to prolong the European Charter forSmall Enterprises in the region.

This new phase of the Charter process wascharacterised by a range of new features, including:

• A multi-agency approach: The OECD InvestmentCompact decided to fully align its policy evaluationprogramme with the Charter process, and tointegrate it in one single process focused on theEuropean Charter for Small Enterprises. Equally,the EBRD decided to continue to support themonitoring activity.The process now involves fourpartners: the EC, the OECD, the ETF and the EBRD.

• The SME Policy Index:The four partner organisations,in co-operation with the national Charter co-ordinators, developed a specific measuring tool tomake progress in Charter implementation moretangible, and to raise the stakes and visibility of theoverall process.The inter-agency co-operation andthe consultations with the national Charter co-ordinators led to the elaboration of a commontemplate (the SME Policy Index) based on morethan 80 indicators,with five different performancelevels.

• Assessment: The launching of a new Charterevaluation process, based on a self-assessmentconducted by each of the six Western Balkancountries and Kosovo under UNSCR 1244/99 underthe supervision of the national Charter co-ordinators and complemented by an independentassessment by a team of local consultants with ETFexperts providing the independent assessment forthe human capital dimensions.

The importance of the process was reconfirmed intwo subsequent documents:

• The Commission Communication the WesternBalkans: Enhancing the European perspectiveCOM(2008) 127 final 5.3. 2008;

• The Commission StaffWorking Paper EU regionallyrelevant activities in theWestern Balkans 2008/09SEC(2009)128 final 3.2. 2009.

The 2008-2009 process

A first regional report on the Charter implementationin theWestern Balkans was published in March 2007. In

May 2008, a second assessment, based on the samemethodology as in 2006, was launched.

As in 2006-2007, the Western Balkan governmentsconducted self-assessments (July to September 2008)published in national reports. The independentassessments were conducted in the same time frame bya network of local consultants.Theywere co-ordinated bythe OECD Investment Compact, in close consultationwiththe EC (DG Enterprise and Industry) and the EBRD.The ETFprovided the independent assessment for the humancapital dimensions.The government self-assessment andindependent assessment were discussed and comparedat bilateral meetings held in each capital, under theauspices of government authorities and the EC. Thesebilateral meetings (with 40 to 70 key SME policystakeholders participating) were held throughout October2008.

This report is the result of the consolidation of thesetwo assessments, enriched by further desk research by thefour partner organisations and inputs from otherorganisations such as the World Bank, InternationalFinance Corporation (IFC) and the United NationsDevelopment Programme (UNDP), research centres andbilateral development agencies.The assessment is basedon all information available to governments and partnerorganisations as of 15 November 2008. Any policydevelopments that occurred after that date were notconsidered in this report.

One of the key regional weaknesses identified inboth the 2007 report and this report has been the lack ofprogress in supporting innovative SMEs and strengtheningtechnological capacity in theWestern Balkans.As part ofthe 2009 report, the OECD Investment Compactconsequently decided to work in co-operation withProfessor Stephen Roper from the Warwick BusinessSchool.Together, they searched for solutions to promotethe development of high-growth SMEs in the WesternBalkans, based on OECD and EU good practices. (Thefindings are summarised in Part II of this report.)

At a regionalmeeting in Zagreb on 10 and 11 February2009, the Western Balkan governments and the partnerorganisations expressed strong interest in adopting theEuropean Small BusinessAct as ameasuring tool for SMEpolicy, replacing the European Charter for SmallEnterprises.They called for a continuation of the regionalSME policy measuring and implementation process.

Box I.1

The SME Policy Index process

1. Regional meeting is held with national Charter co-ordinators to approve new indicators and launch SMEPolicy Index 2008 evaluation (Milocer, Montenegro, 5-6 May 2008);

2. Western Balkan countries/entities conduct self-evaluations, structured in a national report, corresponding tothe ten Charter dimensions (June-September 2008);

3. Partner organisations conduct second-level measurement through desk research (June-September 2008) tofurther incorporate:- Primary data from eachWestern Balkan country and Kosovo under UNSCR 1244/99;- Input from specialised government bodies (e.g. SME agencies);- Input from the private sector (e.g. chambers of commerce, SME associations);- Input from other studies commissioned by international organisations (e.g.World Bank).

4. A team of independent local consultants, co-ordinated by the OECD, and ETF experts, in the case of thehuman capital dimensions, use the SME Policy Index to conduct independent assessments (June -September2008);

5. SME stakeholder meetings are held in each country and Kosovo under UNSCR 1244/99, with partnerorganisations, the country’s government and key SME stakeholders (including the private sector), to compareand discuss each self-assessment and independent assessment (October 2008);

6. Regional meeting is held for partner organisations to present aggregated scores and for governments todiscuss scores and country performances at a regional level (Belgrade, 1-2 December 2008);

7. Partner organisations aggregate final scorewith an opportunity for countries to comment on preliminary scoring(December 2008-January 2009);

8. Discussion about structure of the report and confirmation of final scores (Zagreb, 11 February 2009);

9. Charter report is finalised and published (March – May 2009);

10. Charter report is officially launched at a high-levelmeeting in Brussels organised by the European Commissionand the OECD (Brussels, 17-18 June 2009).

34

This new phase could include the development ofnew indicators related to the Small Business Act, and afocus on certain areas of weakness, identified in thisreport.

The SME Policy Index

The SME Policy Index was introduced in response tothe request of the national Charter co-ordinators in 2006for a more systematic and analytical tool to track policydevelopments and identify gaps in policy elaboration andimplementation at the national and regional levels. It hasbeen developed by the EC and the OECD InvestmentCompact in co-operation with the ETF and the EBRD, and

in close consultation with the national Charter co-ordinators of theWestern Balkans.

The Index was developed by combining the Charterstructure with an assessment approach developed by theOECD Investment Compact for evaluation of theinvestment climate in South East Europe.2The frameworkhas been adjusted to reflect the conditions of policymaking in theWestern Balkans.

SME Policy Index objectives

The main objectives of the SME Policy Index (andcorresponding means to achieve them) are:

• Structured evaluation:- Evaluate progress in SME policy reform in theWestern Balkans on a comparative basis;- Assess countries’ performance on a scale of 1 to 5 (weaker to stronger), corresponding to the variousdimensions of reform.

• Targeted support for improvement:- Prioritise regional and country level policy priorities and support needs.

• Regional collaboration and peer review:- Encourage more effective peer review through a common evaluation framework.

• Public and private sector involvement:- Offer a simple and transparent communication tool for potential entrepreneurs or investors;- Establish a measurement process that encourages public/private consultation.

• Planning and resource allocation:- Facilitate medium-term planning, particularly for dimensions that require multi-year programmes;- Provide a tool for resource mobilisation and allocation, following the identification of strong points andareas for improvement.

35

The SME Policy Index methodology

The SME Policy Index is structured around the tenpolicy dimensions covered by the European Charter forSmall Enterprises:

1. Education and training for entrepreneurship;2. Cheaper and faster start-up;3. Better legislation and regulation;4. Availability of skills;5. Improving online access;6. Getting more out of the Single Market;7. Taxation and financial matters;8. Strengthening the technological capacity of smallenterprises;

9. Successful e-business models and top-classbusiness support;

10. Developing stronger, more effective repre-sentation of small enterprises’ interests.

Each policy dimension is further divided into sub-dimensions that capture the critical feature of policydevelopment in each specific area. For example, the sub-dimensions included in dimension 3 (Better legislation andregulation) are:

1. Regulatory impact analysis for new SMEregulation;

2. Simplification of rules;

3. Institutional framework.

Sub-dimensions are broken down into indicators.For example, the sub-dimension Institutional frameworkcontains the following indicators:

1. Intergovernmental co-ordination in policyelaboration;

2. SME development strategy;3. SME policy implementation agency or equivalent.

The indicators are structured around five levels ofpolicy reform,with 1 theweakest and 5 the strongest. Thepolicy development path for each indicator is typicallystructured as follows:

• Level 1: There is no law or institution in place tocover the area concerned;

• Level 2: There is a draft law or institution, andthere are some signs of government activity toaddress the area concerned;

• Level 3:A solid legal and/or institutional frameworkis in place for this specific policy area;

• Level 4: Level 3 + some concrete indications ofeffective policy implementation of the law orinstitution;

• Level 5: Level 3 + some significant record ofconcrete and effective policy implementation ofthe law or institution. This level comes closest to

Figure I.1. Breakdown of the SME Policy Index structure

1. Education and training forentrepreneurship

2. Cheaper and faster start-up3. Better legislation and regulation

4. Availability of skills5. Improving online access

6. Getting more out of the SingleMarket

7. Taxation and provision of finance

8. Strengthening the technologicalcapacity of SMEs

9. Successful e-business modelsand top-class business support

10. Developing stronger, moreeffective representation ofsmall enterprises' interests

SME Policy IndexDimensions

36

good practices identified as a result of the EUCharter process and the OECD Bologna Process.3

Where countries were clearly in transition betweentwo levels, or where the actual situation combinedelements of two subsequent levels, a half point isattributed.

Each sub-dimension and indicator is weightedaccording to its perceived importance in relation toenterprise policy development. The weights have beenassigned as a result of a process of consultation amongthe four partner organisations and the national Charterco-ordinators.Theweighting system ranges from 3 (mostimportant) to 1 (least important).4The final score assignedto each policy dimension is therefore calculated as aweighted average of sub-dimensions and indicators.

It was decided not to aggregate the evaluation resultsfor each country or jurisdiction in a single numericalindex. It would, in fact, be impossible to correctlydetermine the weight of each dimension.The SME PolicyIndex has been designed as a tool to foster policy dialogueamong the SME policy stakeholders at country andregional level. It is therefore up to the policy stakeholdersto decide on which dimension or specific dimension toconcentrate their efforts. In addition to beingmethodologically unfounded, a single numerical indexwould riskmisleading the policy debate, concentrating thediscussion on countries’ overall relative performanceinstead of focusing more productively on relativestrengths and weaknesses.

37

Notes

1 These dimensions are referred to as “lines for action” in the Charter.

2 OECD Investment Compact (2006), Investment Reform Index, OECD, Paris.

3 See http://ec.europa.eu/enterprise/enterprise_policy/charter/gp/index.cfmfor the Charter good practices and http://www.oecd.org/document/43/0,2340,fr_2649_201185_2505195_1_1_1_1,00.html for the OECD Bologna SMEprocess.

4 See annex 2 for the full grid of indicators.

Part I

38

39

PART I

Policy Findings byCharter Dimension

Dimension 1

Education andTraining forEntrepreneurship

Education and Trainingfor Entrepreneurship

Dimension 1

42

1.1 Introduction

With increasing unease as to the effects of the globaleconomic crisis on transition economies, it will beimportant for governments to focus on long-term growthchallenges which ensure that achievements to date arebuilt upon. Education is a long-term challenge,increasingly recognised as the bedrock of sustainablegrowth and competitiveness.1 This recognition isgenerating new policy interest in the potential ofentrepreneurship education and training orentrepreneurial learning2 for improving productivity,innovation and overall economic growth.While particularemphasis has been given to the efficiency model forentrepreneurial learning (contribution to compet-itiveness), arguments in favour of the equity model(contribution to socio-economic inclusion) are gainingground.The equity model considers self-employment asa viable alternative to joblessness.3 Theoretical andempirical support is strong for both models4 and iscaptured within the EU Lisbon Strategy for Growth andJobs towards which the countries of theWestern Balkanswill increasingly need to evolve given EU accessionaspirations.5

The first Charter report of entrepreneurial learningin theWestern Balkans in 2007 concluded that efforts topromote entrepreneurial learningwere hampered by poorunderstanding of why and how entrepreneurial learningshould be promoted, particularly within compulsoryeducation. Secondly, the assessment found that policydevelopments, where they existed, were scattered. Itrecommended a more concerted effort by all players toensure coherence and consensus as to how a moreintegrated lifelong entrepreneurial learning frameworkcould be shaped. A third issue from the 2007 report was

that the lion’s share of the initiative in entrepreneuriallearning was donor-driven and developed outsidemainstream education curricula,with evidence of projectactivity often dissipating upon withdrawal of donorsupport.

This chapter considers the developments in theregion since the 2007 report and closes withrecommendations to bring forward developments inentrepreneurial learning.

1.2 Assessment framework

The 2009 report involved five indicators: the policyframework for lifelong entrepreneurial learning;entrepreneurship promotion in lower secondaryeducation; entrepreneurship promotion in uppersecondary education; dissemination of good practice inentrepreneurial learning; and non-formal entrepreneuriallearning6. Each of the five indicators is considered as aseparate unit in the assessment, but taken as a wholethe indicators have aggregate value in providing acomprehensive review of entrepreneurial learning in theregion.

The focus of the assessment differs in two respectsfrom the 2007 exercise. Firstly, following feedback on theuse of the 2007 indicator package, three indicators (policyframework, primary education and secondary education)were subject to further elaboration: each of the originalindicators was disaggregated into more meaningful andmeasurable indicators. Secondly, the 2007 “pilot projects”indicator was substituted by a “good practice” indicatorgeared more to encourage exchange and co-operation inentrepreneurial learning. Based on the experience of the

43

2007 assessment, some small adjustments were alsomade to the descriptors of the indicator for non-formalentrepreneurial learning. The policy framework, lowersecondary education, upper secondary education andnon-formal learning indicators used within the presentassessment still allow for an overall comparison ofregional performance against the outcomes of the 2007assessment.

Policy framework for entrepreneurial learning

The rationale for this sub-dimension is that publicpolicy frameworks are instrumental in reinforcing anindividual’s entrepreneurial learning opportunities.7Thesub-dimension comprises four indicators which aim toencourage participating countries to develop acomprehensive policy framework to support lifelongentrepreneurial learning. The indicator draws on therecommendations of the EU’s Oslo Agenda, a set ofguidelines and recommendations for strategicdevelopment of lifelong entrepreneurial learning.8

Partnership is central to this indicator: efforts to promotean entrepreneurial society require inputs from all levelsof education and training (both formal and non-formal)acting as a collective; and partnership ensures coherencewith relevant national strategies (e.g. education, SME,employment, research and development). A secondindicator focuses on financial support for lifelongentrepreneurial learning. A third addresses the formaleducation system, prompting separate but inter-relatedpolicy instruments for primary, secondary and highereducation,9 and linked to the wider economic policyframework. A final indicator focuses on systemicmonitoring and evaluation of entrepreneurial policy andpractice.Overall, the policy sub-dimension acts as a driverfor the remaining indicators within dimension 1 of theCharter, as progress on the policy indicators should allowfor developments in the remaining “companion”indicators.

Lower secondary education

The rationale behind the indicator forentrepreneurship promotion in lower secondaryeducation (ISCED 2)10 is that education is important inshaping the entrepreneurial mindset. Enshrined withinthis indicator is the notion of entrepreneurship as a keycompetence. Now an integral feature of EU educationpolicy,11 the entrepreneurship key competence comprisesa set of individual traits and behaviours (e.g. creativity,opportunity identification, risk assessment and risk-taking, resource management) which make up the

entrepreneurial character. This requires adaptations tocurriculum and a shift away from traditional teaching,considered counterproductive to the development of theattributes and skills of an entrepreneur.12 The indicatorcomprises three sub-units. These focus on teaching andlearning arrangements for entrepreneurial learning.Thechallenge here is considerable as the indicator foreseesa phased roll-out of curriculum adjustments and teachertraining across lower secondary education.

Upper secondary education

An indicator for entrepreneurship promotion inupper secondary education (ISCED 3) includes the sameobjectives as those for lower secondary education but theindicator also addresses harder entrepreneurshipknowledge, skills and experience (e.g. specific business-oriented modules, business planning, marketing).Countries generally approach this by way of compulsoryor elective subjects, as well as outside-school activities,including co-operation between schools and enterprises.Again, a phased development of entrepreneurship atupper secondary level schooling is encouraged throughthe indicator.

Good practice

This indicator encourages policy makers andpractitioners to seek out and to share know-how inentrepreneurial learning. An important feature of theindicator is the structured build-up of intelligence onentrepreneurial learning good practice.The rationale forthe indicator is that more developed information onentrepreneurial learning allows others to borrow on theexperience,making for better efficiency in the design anddelivery of entrepreneurial learning.A final feature of theindicator is international co-operation: the opportunityand benefits of sharing good practice across theWesternBalkan region, and beyond.

Non-formal entrepreneurial learning

Non-formal entrepreneurial learning makes up aconsiderable share of the effort in entrepreneurial learningin the Western Balkan region. It is typically undertakenin training organisations, businesses and local economicdevelopment agencies. Unlike formal learning, it is notsubject to the rigours of assessment and examinations ofschools and universities. Its value is in its contents andtiming: this indicator promotes flexible and accessiblelearning through engagement with a range oforganisations involved in its design and delivery.

1.3 Analysis13

The results of the assessment for dimension 1 areprovided in Table 1.1 below. These highlight how thechallenges in the Western Balkan region for both policyand delivery of entrepreneurial learning remainsubstantial. Two performance clusters are clearlyidentifiable: Croatia, Kosovo under UNSCR 1244/99, theformerYugoslav Republic of Macedonia and Montenegroabove the regional averageweighted scoring of 2.4 and theremaining countries falling below. While Croatia leadson the dimension as awhole in the 2009 report, the formerYugoslav Republic of Macedonia stands out for its overallprogress on entrepreneurial learning since the 2007 report.

Looking at the range of areas covered withindimension 1 (see Table 1.1), Montenegro leads on thepolicy framework. It also performs well with Croatia onentrepreneurship promotion in lower secondaryeducation, with Albania additionally demonstratingforwardmovements. Sharing of good practice stands outas the strongest feature for the region overall.Entrepreneurship in upper secondary education (as inthe 2007 report) remains strong,with improvements notedin Croatia, Bosnia and Herzegovina, Kosovo under UNSCR1244/99, the formerYugoslav Republic of Macedonia andSerbia. On non-formal entrepreneurial learning, Croatiaand Albania lead the region.

Policy framework

Kosovo under UNSCR 1244/99 has made goodprogress in cross-stakeholder co-operation resulting in anational entrepreneurial learning strategy. Similarly,Montenegro’s efforts in developing its policy frameworkhave been helped by a working group that has drawn upa focused lifelong entrepreneurial learning strategy. Its

policy formulation coincided with a broad nationaldialogue on human resources culminating in a WhitePaper on Human Resource Development and a nationalemployment and human resource development (HRD)strategy. This allowed for co-ordination between thevarious policy documents. For example, socialentrepreneurship is a core feature of the nationalemployment and HRD strategy. This policy interfacereinforces the likelihood that the entrepreneurial learningstrategywill be implemented. Croatia has alsomade goodefforts in partnership and strategy building. Itspartnership approach ismore robust in institutional terms(for example, cross-ministry co-operation with directengagement of the Chamber of Economy). InMontenegroand Kosovo under UNSCR 1244/99, partnershiparrangements are more informal.

Policy developments remain less pronounced in theremaining countries although Albania, Bosnia andHerzegovina, and Serbia have plans to bring forward policybuilding in 2009-2010. Given that the policy indicatorpromotes coherence between entrepreneurial learningpolicy and wider economic, research, education andemployment policies, all three countries would dowell toensure coherence and additionality vis-à-vis existing oron-going policy developments in related areas.

The litmus test for policy is how it is implemented.The countries of the Western Balkans are awash witheducation and other strategies, many of which are theresult of good intentions by well-meaning donors butwhich are not followed through when donors move on.That the development of entrepreneurial learning policyin both Montenegro and Kosovo under UNSCR 1244/99has been directly supported by international donors incursa risk that the policy objectives may not be realised.Montenegro has alreadymitigated this risk by earmarking

44

Dimension 1

Figure 1.1 Assessment framework for dimension 1

Education and training for entrepreneurship

Policy Lowersecondaryeducation

Uppersecondaryeducation

Good practice Non-formallearning

national funds through an action plan for lifelongentrepreneurial learning: financial commitmentreinforces ownership of the policy. Other countries in theregion that are engaging international support for policybuilding (Albania, Bosnia and Herzegovina, and Serbia)should be clear as to national sources, to ensure policiesare implemented when international funds would bediscontinued. Ensuring co-financing from the domesticpurse, even at the policy elaboration stage, could go someway to instil a culture of commitment to be built upon asthe entrepreneurial learning policy is implemented.

Finally, the assessment reviewed the extent to whichentrepreneurial learning policies and activities were beingmonitored and evaluated. The conclusion of theassessment team is that monitoring and evaluationarrangements across all countries are weak.There is littlestructured intelligence or tracking of investment inentrepreneurial learning. At best, monitoring andevaluation is confined to projects, supported by anexternal purse with no evidence of regular reviews ofactivities. The indicator for monitoring and evaluationaims to encourage a culture of systematic monitoringand evaluation of activities in entrepreneurial learning,as much for good policy governance as for determiningthe effectiveness of investment. Each country should givemore serious consideration to developing a monitoringand evaluation structure.

Lower secondary and upper secondary education

Both lower secondary and upper secondaryeducation are considered together, given commonalities

in the indicators, particularly on the entrepreneurshipkey competence.

As with the 2007 report, developments in lowersecondary education remain the weakest of all areascovered by the dimension 1 indicator package. For themost part, the difficulty remains in addressingentrepreneurship as a key competence. Despite slowprogress, there is clearly amore developed understandingby both policy makers and a small, proactive group ofpractitioners (teachers, curriculum specialists) as to theethos and implications of introducing entrepreneurshipas a key competencewithinmainstream curriculum.Thisis helped by a growing awareness for more open andinnovative teaching and learning arrangements whichwill be essential in each country’s bid to reform andmodernise education. Good efforts are being made byAlbania, Croatia and Kosovo under UNSCR 1244/99 inintegrating the entrepreneurship key competence intonational curricula while Montenegro (perhaps due thecountry’s size) is proving more able to roll out reforms.Evidence from Bosnia and Herzegovina, the formerYugoslav Republic of Macedonia and Serbia points toschool-based reforms, some of which are excellent, butwhere more concerted efforts at curriculum policy andteaching reforms are required.

While challenges for the entrepreneurship keycompetence apply to both lower and upper secondaryeducation, it is in the latter wherewider entrepreneurshippromotion sees more notable developments.The formerYugoslav Republic of Macedonia has mainstreamedentrepreneurship education across its upper secondary

45

Box 1.1

Lifelong entrepreneurial learning strategy

The Strategy for Entrepreneurship Education and Training of Kosovo under UNSCR 1244/99 aims to provide allstudents and adult learners with practical and theoretical insight into entrepreneurship. The strategy has beenelaborated by a cross-ministerial task force (education, labour, trade and industry) in co-operation with the worldof business. It calls for teacher training and curriculum reform to ensure that entrepreneurship as a key competenceis addressed in compulsory education, with entrepreneurship as an elective subject in secondary education.Thestrategy also gives particular emphasis to promotion of entrepreneurship in third-level education, ensuring a lifelonglearning dimension to entrepreneurship.

Download the strategy from: www.masht-gov.net

schools, with good efforts also in Croatia, Kosovo underUNSCR 1244/99 and Serbia.Where piloting of reforms isunder way (particularly financed by donors), it will beimportant that learning, in terms of policy and practice,is mainstreamed. The 2007 report warned of the risk ofaimless pilots; this assessment reiterates that concern.

The Charter places particular emphasis on school-enterprise co-operation.With little data available, it wasdifficult to determine the extent of school co-operationwith business. School-business co-operation is importantfor two reasons. Firstly, a more enterprise-open policy byschools fosters engagement of students and teacherswith local businesses. It also creates greater awareness ofthe importance of a learning economy. Secondly, anenterprise-open policy by schools encourages a moreeducation-open economy.With the business worldmoredirectly engaged in school management and planning,this should allow for improved relevance of curriculumand learning for the economy.

A further issue from the assessment is thatentrepreneurship promotion in secondary education ismore likely to be developed in vocational streams. Thatentrepreneurship is vocationalised is not surprising, giventhat vocational courses are more geared to the labourmarket. However, this bias will need to be corrected ifthe Charter’s objective of “entrepreneurship educationfor all” is to be achieved.

Finally,what stands out from the assessment is thatthe primary drivers for development of entrepreneuriallearning within theWestern Balkan region lie outside theformal education system. In particular, understanding ofentrepreneurship as a key competence ismore prevalentamongst representatives of the world of enterprise thaninside educationministrieswith push for its considerationby the education authorities coming from economicactors. For example, one initiative of a regional SME agencyin Bosnia and Herzegovina engaged the pedagogicalinstitute and schools (in the Republika Srpska) intodialogue as to how entrepreneurship education could beenhanced.

That the demands of the economy should be betterreflected in the curriculum and teaching and learningprocess is breathing new life into an old debate. Fromdiscussion (particularly with education officials), theassessment team is aware that introducingentrepreneurship into formal education is considered asa further disruption to an already overcrowded educationreform agenda. But with growing expectations as to

education’s contribution to changing economies, policymakers will be increasingly called upon to respond. Theappeal for more openness and readiness of educationsystems to ensure that young people are equipped withkey competences to deal with labourmarkets exposed toeconomic crisis and uncertainty has never beenstronger.14

Good practice

Overall, efforts to share good practice inentrepreneurial learning are well developed across theregion. Interesting is the range of players involved inhighlighting and disseminating information on theiractivities through high-visibility events like nationalentrepreneurship fairs and conferences by education,industry and enterprise associations. Kosovo underUNSCR 1244/99 stands out for its cross-ministerialapproach to raising public awareness on entrepreneurshipeducation, while entrepreneurship education is profiledand publicly debated during Serbia’s national smallenterprise conference. Montenegro has made particulareffort in promoting a local dimension to entrepreneuriallearning, with a conference organised by the Mayor ofBerane bringing together all parts of society to learn of theefforts of that municipality’s schools, teachers, studentsand enterprises to integrate entrepreneurship in all itsschools.

Although the Charter encourages more systematicco-operation among the range of players involved inentrepreneurial learning, information exchange isgenerally confined to loose networks, with practitionersshowing little ambition to make their achievementsknown. More developed networks could inspireconfidence amongst practitioners to publicise their work,thereby opening the door to opportunities for borrowingon expertise, concepts and practice. Plans byMontenegro’sSME Directorate to develop an information portal onentrepreneurial learning have potential for promotingaccess to knowledge on entrepreneurial developmentsin that country, and beyond.This initiative highlights thepotential advantages of more innovative use ofinformation and communications technologies forentrepreneurial learning development.

Non-formal learning

A key finding from the overall assessment is thatmost effort in promoting entrepreneurial learning takesplace outside the formal education system, administeredby a range of agents particularly in the small business

46

Dimension 1

47

Table 1.1

Scores in dimension 1: Education and training for entrepreneurship (2009)

ALB BIH HRV XK MK MNE SRB

Policy 2.00 1.75 3.00 2.75 2.25 3.25 2.00

Policy partnership 2.00 2.00 4.00 3.00 2.00 4.00 2.00

Policy support resources 2.00 2.00 3.00 3.00 2.50 3.50 2.00

Policy elaboration process 2.00 2.00 2.50 3.00 2.00 3.50 1.50

Monitoring and evaluation 2.00 1.00 2.00 2.00 2.00 1.50 2.00

ISCED 2 2.25 1.50 2.75 2.25 2.00 2.75 1.75

ISCED 2 organisation 2.00 2.00 2.50 2.00 2.00 3.00 2.00

ISCED 2 key competence 3.00 1.50 3.00 2.50 2.00 2.00 2.00

ISCED 2 learning environment 2.00 1.00 2.50 2.00 2.00 3.00 1.50

ISCED 3 2.00 2.50 3.25 2.50 3.25 2.00 2.50

ISCED 3 organisation 2.00 3.00 3.50 2.50 4.00 2.00 3.00

ISCED 3 entrepreneurial learning 2.00 2.50 3.00 3.00 4.00 2.00 2.50

ISCED 3 learning environment 2.00 2.00 3.00 2.00 2.00 2.00 2.00

Good practices 2.00 1.50 4.00 4.00 3.00 4.00 3.00

Non-formal learning 3.00 1.50 4.50 2.00 1.50 2.00 1.50

Overall weighted average for dimension 1:Education and training for entrepreneurship

2.25 1.75 3.25 2.50 2.50 2.75 2.00

support environment. The assessment was keen todetermine where non-formal entrepreneurial learningfeaturedwithin national strategies.Montenegro’s nationalentrepreneurial learning strategy gives considerableemphasis to non-formal developments.

In terms of practice, organisations like JuniorAchievement (Albania, Bosnia and Herzegovina, Kosovounder UNSCR 1244/99, the former Yugoslav Republic ofMacedonia,Montenegro and Serbia) and ECONET training

firms (Albania, Bosnia and Herzegovina, Croatia, theformerYugoslav Republic of Macedonia andMontenegro)continue to be important players in promoting knowledgeand business acumen amongst young people in theregion.While such activities are particularly appreciatedby the select number of schools where they are involved,the investment could bemaximised if the activities couldbe knitted into a broader systemic development inentrepreneurial learning within each country.

Dimension 1

48

Figure 1.2 Overall scores for dimension 115

0

1

2

3

4

5




n 2009

1.4 The way forward

Based on the foregoing analysis, two areas areidentified to bring forward entrepreneurial learningdevelopments in the Western Balkan region: moredeveloped co-operation and knowledge-sharing on policydevelopments, and increased efforts to developentrepreneurship as a key competence.

Regional co-operation on entrepreneurial learningpolicy

The case for more structured co-operation amongstnational stakeholders to develop policy for lifelongentrepreneurial learning has been made earlier.Partnership building and partnership reinforcementshould continue in all countries.The objective should bea one-system approach to lifelong entrepreneuriallearning developments in each country. Simultaneously,national developments could be reinforced throughmoredirect co-operation between countries in the region,particularly on policy formulation and where policylearning and knowledge-sharing could be considered. Ifnational policy experts from the regionweremore directlyengaged in Charter assessments (e.g. undertakingindependent reviews of Charter progress in fellowcountries in the region or beyond, such as in the SouthernMediterranean region where a similar Charter initiativeis operational), greater understanding of the policy issuesand options for back-home improvements could bepromoted, including further opportunities for regional(and cross-regional) co-operation.

To create more structured co-operation onentrepreneurial learning within the Western Balkanregion, all developments could be overseen by the RegionalCo-operation Council (an inter-governmental bodyestablished to promotemutual co-operation in a numberof sectors, including human capital development) andengage the South East European Centre forEntrepreneurial Learning. Established in February 2009, theCentre already includes regional co-operation in itsmandate, with a specific focus on working withpractitioners. It could be called upon to provide technicalsupport for more concerted co-operation amongst policymakers from both economy and education areas.

Support framework for entrepreneurship keycompetence developments

Entrepreneurship key competence developments forthe most part remain sketchy in the region. Moredeveloped efforts are needed to raise understanding of theentrepreneurship key competence amongst the educationcommunities (teachers, curriculum specialists, teachertraining organisations and senior policy officialsresponsible for compulsory education); particularly of theimplications for curriculum, teacher training, schoolgovernance and management. A working group withineach country could be considered, with high-profileleadership from the education authorities (e.g. DeputyMinister, State Secretary) tasked with developingcommitment by policymakers and the schooling systemto the entrepreneurship key competence.

49

Pilot developments in entrepreneurship keycompetence will need to be better integrated into policydialogue and closely monitored to determine value intheir contribution to mainstream education.

When engaging international technical assistance,governments in the region should ensure that the

expertise of international contractors is not confined tothe traditional “business plan”model of entrepreneurshipeducation, and should include good understanding of thepolicy and practitioner implications of entrepreneurshipas a key competence.

Notes

1 EBRD (2009), Transition Report: 2008, European Bank for Reconstruction and Development, London.

2 The remaining text will refer to entrepreneurial learning which encompasses both entrepreneurship promotion within formal education and trainingsystems, as well as outside the education and training system.

3 Levine, L. (2004), Self-employment as a contributor to job growth and as an alternative work arrangement, Federal Publications, Cornell University ILRSchool.

4 Thurik, A.R. et al. (2008), “Does Self-employment Reduce Unemployment?”, Journal of Business Venturing, 23, pp. 673-686.

5 European Commission (2005), “Communication to the Spring Council.Working together for growth and jobs: A new start for the Lisbon strategy”, Brussels.

6 “Non-formal entrepreneurial learning” refers to education, training and other forms of knowledge and skills build-up which is not subject to formalassessment or examination (e.g. a community-based youth entrepreneurship club) even though these activities may be supported and administered withinthe school environment.

7 See Pittaway, L. and Cope, J. (2007), “Entrepreneurship education – a systematic review of the evidence”,Working Paper n°01/2007, Enterprise and RegionalDevelopment Unit, University of Sheffield Management School, White Rose CETL Enterprise, Sheffield. UK.

8 European Commission (2007), The Oslo Agenda. Entrepreneurship education: fostering entrepreneurial mindsets through education and learning, Brussels.

9 This assessment did not address entrepreneurship in primary or higher education. Indicators for entrepreneurship in higher education within a future regionalassessment will be piloted in all countries in 2009-2010.

10 “ISCED” refers to the UNESCO International Standard Classification of Education.

11 European Commission (2005), Proposal for Recommendation of the European Parliament and Council on Key Competences for Lifelong Learning, COM 548.10.11.2005.

12 Kirby D.A. (2004), “Entrepreneurship education: Can business schools meet the challenge?” in Education and Training, 46 (8/9), pp. 510-519.

13 All SME Policy Index scores have been rounded up or down to the nearest 0.25

14 Sahlberg, P. (2009), “Creativity and Innovation in Lifelong Learning”, forthcoming in Lifelong Learning in Europe journal.

15 Although this report is published in 2009, its data collection took place in 2008. For the SME Policy Index Report 2007, data were collected in 2006.

Dimension 2

Cheaper and FasterStart-Ups

2.1 Introduction

An efficient start-up process combines simple andstreamlined procedures, with overall low charges for thenew entrepreneur and low processing costs for the publicadministration, securing at the same time compliancewith legal and regulatory requirements.

Until a few years ago, starting up a business was acomplex and costly process in most of the EU and OECDcountries. However, over the last decade, the applicationof new information and communications technology (ICT)solutions together with new approaches to regulatoryissues have led to substantial gains in terms of efficiency.

According toDoing Business data, the average time tocomplete the overall start-up business process in OECDcountries was cut between 2004 and 2008 by over 60%,from 32.8 to 13.2 days, while the average cost for theentrepreneur was reduced by nearly 50%, from 9.3% to4.9% of average per capita income.

The 2007 Charter report showed that most of theWestern Balkans had already achieved good results inimproving efficiency and quality of the business start-up process (particularly in the registration and notificationphase), while obstacles remained in the compliancephase.

The 2009 scores show that further progress has beenachieved at regional level. In the case of the countriesthat had already reformed the company registrationprocess (Croatia, the former Yugoslav Republic ofMacedonia, Montenegro and Serbia), progress has beenrelatively marginal. There have been improvements inthe operations of government agencies dealing with theregistration and notification process and/or reduction offees andminimumcapital requirement.However, over thelast two years,Albania completed an extensive reform ofthe company registration process and installed a newstate-of-the-art registration system, hence achieving amajor improvement its scores for the registration and

notification phases. Bosnia and Herzegovina is now theonly country in the region that has not completed a reformof the company registration process.

Based on the 2009 report results, it is possible toconclude that the company registration and notificationprocess in the Western Balkans countries no longerconstitutes a significant burden to business start-up.Attention should be now turned to improving theefficiency and transparency in the compliance phase (thatdelays the completion of the start-up process), speedingup the introduction of online registration and establishingreliable electronic company registers.


The assessment framework for dimension 2 has notsignificantly changed from that adopted in the 2007Charter report, allowing for a substantial comparisonbetween the two periods.

A company start-up can be divided in three phases:

• The first phase covers company registration (orincorporation, in cases where the process leads tothe establishment of a new legal entity). Theregistration act is issued by a court or specialisedcompany registration agency.

• The second phase covers notification of theestablishment of a new company to variousbranches of the central and local publicadministration (e.g. tax administration,employment and labour agencies, customsadministration and office of statistics) that dealwith the business sector.

• The third phase covers all the proceduresnecessary to ensure compliancewith the country’slegislative and regulatory framework.When theseprocedures are completed, licences and permits areissued.

52

Dimension 2

Cheaper and Faster Start-Ups

As in the 2007 Charter report, the evaluation forPhase 1 (company registration) and Phase 2 (notification)is conducted using a set of data provided by theWesternBalkan governments, adjusted through an independentassessment. Data for the overall process of setting up abusiness are taken from the 2009 IFC/World Bank DoingBusiness report.1 The discrepancies between the datacontained in the set of analytical indicators for Phase 1and Phase 2, and the overall time and cost indicatorsprovided, indicate the impact of private or public players,such as notaries, lawyers, municipal authorities andgovernment agencies others than those directly involvedin the two previous phases.A particularly important factoris the impact of obtaining licences and permits from thecentral or local administration.

Croatia, the formerYugoslav Republic of Macedoniaand Kosovo under UNSCR 1244/99 have introducedsimplified start- up process for crafts, while others applythe same company registration procedures to allcategories of enterprises. Crafts represent a verysubstantial number of new annual registrations. Thenumber of registered crafts in Croatia is approximatelyequal to the number of all other active enterprises. Inorder to take into consideration those proceduraldifferences we have introduced in the 2009 report twonew sub-dimensions dedicated to craft registration andnotification. However, it is important to highlight thatDoing Business data refer to the start-up process of abusiness entity registered as a limited liability company,therefore scores based on Doing Business indicators donot take into consideration simplified procedures forcrafts.

The assessment framework is completed by a sub-dimension measuring progress made in the WesternBalkans in introducing online company registrationprocedures. Creating an electronic company register,regularly updated and properly maintained, couldcontribute significantly to the collection of reliablebusiness statistics, the exchange of information amonggovernment agencies and the dissemination of businessinformation. It could also open the way for integrationwith European business information networks. Most ofthe Western Balkan countries are actively engaged inestablishing electronic company registers that could beeventually accessed online. Although we have not yetelaborated specific indicators and assessed progress inthis area, this could be done in the view of a possiblecontinuation of the process.

2.3 Analysis2

The company registration process

In the 2007 Charter report, we divided the WesternBalkan countries in two groups, according to their positionin the company registration reform process. The firstgroup included countries that, by end of 2006, had alreadyconducted a comprehensive reform of the companyregistration process. Croatia, the formerYugoslav Republicof Macedonia, Kosovo under UNSCR 1244/99,Montenegroand Serbia were part of this group.

The second group was made up of Bosnia andHerzegovina and Albania – countries that at the time

53


Company Registration Notification Compliance

• No. of days to obtaincompany registrationcertificate

• No. of steps to obtaincompany registrationcertificate

• Official cost of obtainingcompany registrationcertificate

Phase 1 Phase 2 Phase 3

• Administrativeidentification numbers

• No. of days to obtainrequired identificationnumbers

• Number of days tocomplete overall process

• Number of steps tocomplete overall process

• Application of silence-is-consent rule

• Total cost of overall process• Minimum capitalrequirements

• Online registration

were at different stages of planning company registrationreforms. Bosnia and Herzegovina had already elaborateda blueprint for reform,with substantial donor support, andit had started to amend the relevant legislation, whileAlbania was at an early planning stage and still debatingwhat kind of institutional framework to adopt (i.e.whetherto leave company registration under the domain of thejudicial courts or establish a specialised companyregistration agency).

Two years later, Albania has completed theimplementation of a radical reform of its companyregistration system and it is now leading the first group(see Table 2.1). We can observe an improvement in thecost and efficiency of company registration inmost of thecountries belonging to the first group,withmore significantprogress in the former Yugoslav Republic of Macedonia,thanks to the implementation of the 2006 Law on One-Stop-Shop System for the maintenance of the trade

registry and the register of other legal entities. Croatia hasalso the one-stop system, operated by Hitro, the country’spublic administration service, in co-operation with FINA,the Croatian National Financial Agency.

However, company registration reform in Bosnia andHerzegovina remains blocked. The new companylegislation law (calling for delivery of a companyregistration certificate within five days) was approved,harmonisation of company legislation procedures atentity level was approved in 2004 at state level andlegislation has been passed at entity level in line withstate legislation, but the new system is still notoperational. Each entity therefore maintains a separatecompany register, using different procedures and applyingdifferent fees.The software system designed to facilitatethe exchange of information between registration courtsat entity level and establish a virtual national registerhas not been installed.

54

Dimension 2

Box 2.1

Good practice: Company registration reform in Albania

The reform conducted by the Albanian government is remarkable for its scope, its speedy implementation andthe quality of results. Under the previous system, company registration could only be performed at the Tiranacourt. The system was cumbersome (particularly for entrepreneurs based outside the capital) and data in thecompany register was not easily accessible.The reformwasmade possible by the passing of the Law on NationalRegistration Centre (NRC) in May 2007, transferring responsibility for company registration from theTirana courtto a new dedicated public agency.The new agencywas in charge of implementing a one-stop business registrationsystem, performing all the notification functions andmaintaining the national electronic company register.Thereform was conducted with the financial and technical support of the United States-sponsored MillenniumChallenge Corporation, and co-ordinated by the Ministry of Economy,Trade and Energy.

Table 2.1

The company registration process in figures3


No. of days to obtain companyregistration certificate

2007 8 10 2-7 1 2-5 4 5

2009 1 <15 <5 1 1 <4 <5

No. of steps to obtaincompany registrationcertificate

2007 7 6 1 3 1 1 2

2009 1 5-7 1 3 1 1 2

Official costs of obtainingcompany registrationcertificate

2007 EUR 140 Approx. EUR 600 EUR 450 EUR 22 EUR 50-150 EUR 15 EUR 50-100

2009 EUR 1 EUR 150-750 >EUR 350 EUR 5-20 Approx EUR 57 EUR 11 Approx EUR 60

The NRC became operational in early September2007. By the end of October 2008, there was a network of18 company registration centres across the country,withthe target of 30 local centres by the end of 2008. In the yearafter the establishment of the NRC, there has been asignificant surge of new company registrations, surpassing

the threshold of 15 000 new applications. The centre isupdating the records of existing companies, andtransferring those records to the new electronic register.It is also processing the large backlog of company recordmodifications accumulated under the previous system.

55

Table 2.2

Scores for sub-dimension 2.1: Issuing of company registration certificate

Table 2.3

The notification process in figures

Source: National self-assessment reports.


Number of days for comp. reg.certificate

2009 5.00 3.00 3.50 4.00 5.00 4.00 4.00

Change since 2007 +2.50 0.00 0.00 -1.00 +1.00 0.00 0.00

No of admin. steps for comp. reg.certificate

2009 5.00 3.00 5.00 4.00 5.00 5.00 4.00

Change since 2007 +2.00 0.00 0.00 0.00 0.00 0.00 0.00

Official costs for comp. reg. certificate2009 5.00 1.50 1.00 4.00 3.00 4.00 3.00

Change since 2007 +2.00 +0.50 0.00 0.00 0.00 0.00 0.00

Overall weighted average forsub-dimension 2.1:Company registration certificate

2009 5.00 2.25 2.75 4.00 4.00 4.25 3.50

Change since 2007 +2.00 +0.25 0.00 -0.25 +0.25 0.00 0.00

The notification process

Over the last two years, progress on notification hasbeen less marked than on company registration. Thenumber of required notification procedures (resulting inthe issue of identification numbers by differentadministrative authorities) and the length of the processhave largely remained unchanged inmost of theWesternBalkan countries. However, as corollary to theestablishment of the NRC, Albania (which had alreadyadopted a single identification number) has been able to

cut the notification process down to one day. Similarly theformer Yugoslav Republic of Macedonia, following theintroduction of the one-stop system,has also streamlinedthe process of issuing registration numbers. Just twonumbers are now required (company registration numberand tax office number), and they are issuedsimultaneously by the one-stop-shop within four hoursof the application. Croatia and the former YugoslavRepublic of Macedonia are working towards theestablishment of a single identification number.


Administrativeidentification numbers

2007 1 3 2 3 3 5 2

2009 1 2-3 2 3 2 5 2

No. of days to obtaincompulsory identificationnumbers

2007 57 for court registration15-30 for foreign trade

6-15 2-5 2-5 5 15

2009 1 15-20 5-15 5-15 1 5-15 15

In Montenegro, five registrations and identificationnumbers are still required (e.g. statistical office, customs,labour office and tax office). Each of Montenegro’s

administrative authorities has its own registry andrequires corresponding numbers for companies.

56

Dimension 2

Table 2.4

Scores for sub-dimension 2.1: Company identification numbers

Table 2.5

Scores for sub-dimension 2.3 : Crafts registration


Administrative identification numbers2009 5.00 3.00 4.00 3.00 4.00 1.00 4.00

Change since 2007 0.00 0.00 0.00 0.00 +1.00 0.00 0.00

No of days for company identificationnumber(s)

2009 5.00 2.50 3.00 4.00 5.00 3.00 3.00

Change since 2007 +1.00 0.00 0.00 0.00 +1.00 0.00 0.00

Overall weighted average forsub-dimension 2.1:Company Identification numbers

2009 5.00 2.75 3.50 3.50 4.50 2.00 3.50

Change since 2007 +0.50 0.00 0.00 0.00 +1.00 0.00 0.00


Number of days for craft reg. certificate 5.00 3.00 3.00 4.00 5.00 4.00 5.00

No of admin. steps for craft. reg. certificate 5.00 3.00 5.00 3.00 5.00 5.00 5.00

Official costs for craft. reg. certificate 5.00 2.00 3.00 4.00 3.00 5.00 5.00

Overall weighted average for:Crafts registration certificate

5.00 2.50 3.50 3.75 4.00 4.75 5.00

Administrative identification numbers 5.00 3.00 4.00 3.00 4.00 1.00 4.00

No of days for craft identification number(s) 5.00 3.00 4.00 3.00 5.00 3.00 3.00

Overall weighted average for:Crafts identification numbers

5.00 3.00 4.00 3.00 4.50 2.00 3.50

Craft registration and notification

Croatia and the former Yugoslav Republic ofMacedonia are the only two countries that have adopteddifferent registration and notification procedures forcrafts. Kosovo under UNSCR 1244/99 has introduced asimplified procedure for craft registration, including thedelivery of the business registration certificate withinone day for a fee of EUR 9.

In Croatia, craft business owners can complete theregistration procedureswith theHitro contact pointwithinfive days. The registration and licence fees aresubstantially lower than company registration fees,totalling around EUR 65 In addition, certain activitiesrequire a technical licence at a cost ranging between EUR55to EUR 150 depending on the activity. In the formerYugoslav Republic of Macedonia, craft registration ishandled by the Chamber of Crafts, acting as a singlereference point.The entire process is completed in eightdays for fee of approximately EUR 100.

Compliance and overall process

The indicators covering the entire businessestablishment process paint quite a different picture fromthe one that emerged from the previous set of indicators,although the country trends appear to be in line with theresults of the previous analysis.

The country scores for this sub-dimension arelargely based on the results of the annual Doing Businesspublished by the International Finance Corporation/World Bank.The section on “Starting a Business” of DoingBusiness measures the overall number of procedures,number of days to complete those procedures and theoverall cost of starting up a new company (from thestarting to the time the new company can legally startbusiness operations). It therefore includes proceduresperformed by public bodies, at central and local level, aswell as procedures performed by other players, such aslawyers or public notaries. It includes the time and costsfor licences and permits. Data have been collected bylocal legal advisers, using the case of a locally ownedcompany involved in commercial/industrial operationsthat do not involve specific health or environmentalrisks, with up to 50 employees and a start-up capital often times the per capita gross national income (GNI).The new business is incorporated as a limited liabilitycompany.The data in Table 2.1 refer to the performanceof the public administration bodies directly involved inthe registration and notification process, from the timea new application is presented.They are not related to aspecific class of companies and exclude data on craftregistration.

Although themethodology is not exactly comparable,the discrepancy between the Doing Business observationsand data collected through the Charter monitoringexercise on public administration performance providesan indication of the level of actual barriers faced byentrepreneurs in completing the start-up process.

As noted before, over the last two years theWesternBalkan countries have taken actions to improve theperformance of the public administration bodies in chargeof processing company registration applications,with theexception of Bosnia and Herzegovina, and amore limitedimprovement in the notification process.

Data fromDoing Business seems to confirm that suchactions had an impact on the overall start-up process(see Table 2.6.), but also that the main obstacles and themost significant charges are related to procedures outside

the scope of the company registration and notificationbodies, and are often incurred at local level.

In Albania, there has been a significant drop in thetime and procedures in completing the start-up process,as a result of the company registration reform. Overalltime and procedures have also been reduced in Croatiaand the former Yugoslav Republic of Macedonia, twocountries that are moving towards the implementationof one-stop-shop systems. Costs have been cut in theformer Yugoslav Republic of Macedonia, but remainunchanged in Croatia. In Serbia, one more step has beenadded to the process, in light of the newmoney launderinglegislation.

Data for Montenegro show that themain obstacle tocomplete the start-up process is still related to obtainingthe municipal business licence and receiving municipalinspection, compromising the performance improvementconsolidated for the registration and notification phase(a point already highlighted in the 2007 report). A similarsituation is present in Kosovo under UNSCR 1244/99.Thecompany registration and notification procedures atcentral level are quite efficient, but procedures atmunicipal level for obtaining the work permit and theapproval of the local technical committee are stillrelatively lengthy. In addition, start-up costs are verysignificantly increased by the need to pay a EUR 1 000work permit fee at a commercial bank,while official feesare low.

Doing Business data for Bosnia and Herzegovinaindicate a worsening of overall performance, due to asignificant increase in the number of procedures and theoverall time required to complete the start-up process.However, there are some differences between the twoentities, with the Federation of Bosnia and Herzegovinarecording theweaker performance.Again themain delaysand obstacles are concentrated atmunicipal level.Actionsplanned under the project Streamlining Permits andInspection RegimesActivity (2005-09) supported by USAIDhave not had yet ameasurable impact atmunicipal level.

Over the last two years, the formerYugoslav Republicof Macedonia and Kosovo under UNSCR 1244/99 haveeliminated the minimum capital requirement, joiningMontenegro that had already eliminated this requirementwhen it reformed the company registration process. In allthe otherWestern Balkan countries, theminimum capitalrequirement remains in place and it is set at a relativelyhigh level for Albania, Bosnia and Herzegovina, andCroatia.

57

58

Dimension 2

Table 2.6

Overall business establishment process in figures

ALB BIH HRV XK4 MK MNE SRB

No. of days to completeoverall process

2007 39 54 45 23 18 24 18

2009 8 60 40 22 9 21 23

No. of steps to completeoverall process

2007 11 12 10 5 10 15 10

2009 6 12 8 12 7 15 11

Total cost of the overallprocess (EUR)

2007 429 679 739 N/A 158 182 252

2009 575 845 930 1 088 99 192 97

Total cost of the overallprocess(% of income per capita)

2007 22.4 37 12.2 22 7.4 6.6 10.2

2009 25.8 30.8 11.5 78 3.8 4.4 7.6

Minimum capital requirement(% of income per capita)

2007 36.7 52 20.6 Over 40 112.0 0.0 7.6

2009 32.3 36.3 16.6 0 0 0 6.9

Source: Doing Business 2007, 2009 (for Kosovo under UNSCR 1244/99, Doing Business 2006, 2009).

Source: Based on data fromWorld Bank Doing Business 2007, 2009.

Table 2.7

Scores for sub-dimension 2.1: Completion of the overall registration process6


No. of days for overall registrationprocess (Doing Business)

2009 3.00 1.00 1.00 2.00 3.00 2.00 2.00

Change since 2007 +2.00 0.00 -0.50 0.00 +1.00 0.00 0.00

No. of steps for overall registrationprocess

2009 3.00 1.00 2.00 1.00 3.00 1.00 1.00

Change since 2007 +2.00 0.00 +1.00 -1.00 +2.00 0.00 0.00

Silence-is-consent2009 5.00 1.00 1.00 5.00 5.00 5.00 5.00

Change since 2007 +4.00 0.00 0.00 0.00 +4.00 0.00 0.00

Costs of registration for limitedliability companies

2009 1.00 1.00 1.00 1.00 3.00 3.00 2.00

Change since 2007 0.00 0.00 0.00 -2.00 +1.00 +1.00 +1.00

Minimum capital requirements2009 2.00 2.00 3.00 5.00 5.00 5.00 4.00

Change since 2007 0.00 +1.00 +1.00 +4.00 +4.00 0.00 0.00

Overall weighted average forsub-dimension 2.1:Completion of the overall registrationprocess

2009 2.75 1.25 1.75 3.25 4.00 3.75 3.25

Change since 2007 +1.50 +0.25 +0.50 +0.50 +2.50 +0.25 +0.25

As noted in the previous report, the application of thesilence-is-consent principle5 is a useful way to speed upthe overall process of setting up a business, as it shifts thecosts of delaying the processing of a company applicationfrom the entrepreneur to the public administration. In2006, the silence-is-consent rule was applied to thecompany registration process by Kosovo under UNSCR1244/99, Montenegro and Serbia. (In the case of Kosovounder UNSCR 1244/99, the rule applied and continues toapply only to craft registration.) Following the reform ofthe registration process in 2007, Albania also introduceda silence-is-consent rule for the issue of the companyregistration certificate. Unless the National RegistrationCentre has not communicated the refusal or suspensionof the registration application within one day from theapplication, the registration certificate is automaticallyapproved.

Online registration

Online registration ismaking progress in theWesternBalkans, as shown byTable 2.8. Croatia is still leading theprogress in this area, being the only country in whichelectronic signature is fully operational and where pilotprojects are under way. Online registration is alreadyavailable in two counties:Varazdin andMedjimurje.All theother Western Balkan countries are taking steps to passthe supporting legislation, integrate databases anddevelop the software system. However, the lack of anoperational electronic signature system remains a keyobstacle to launching online registration procedures, evenon a pilot basis.

The introduction of online procedures for applyingfor permits and licences presents a picture similar to that

59

Table 2.8

Status of online registration

Table 2.9

Scores for sub-dimension 2.2: Increase in online access for registration


Online registration2009 3.00 1.50 4.00 2.50 2.50 2.50 3.50

Change since 2007 +2.00 0.00 +1.00 +1.00 +0.50 +0.50 +0.50


2007

A number of stepshave been takentowards itsintroduction.

Law in theprocess ofadoption, butpreconditions forintroduction of e-signatures inpractice have notbeen created.

Project office atthe Central StateOffice for e-Croatia, electronicsignature,document,commerce actsare in place.

No steps takentowardsintroduction initialexploratory work.

Not yet a speciallaw for onlineregistration, butthe possibility isactively beinginvestigated.

Evaluation ofexistingadministrativeprocedures andproposals forintroduction ofonlineregistration.

Law on onlineregistration,action plan andbudget provisionsapproved.

2009

The NRC ispreparing tointroduce onlineregistration, butprocess blockedby theunavailability ofthe electronicsignature.

No major change,still waiting for theapproval of thelaw on theelectronicsignature.

Online registrationfor craftsoperationalthrough Hitro.Two pilot projectsfor onlineregistration forcompanies.

Legislationadopted, technicalpreparation underway, but onlineregistration notyet operational.

Tendering processfor thedevelopment of anintegrateddatabase underway. Onlineregistrationtargeted forOctober 2009.

Integration ofelectronicdatabase underway, waiting forthe entry inoperation of the e-signature.

Online applicationin place, butonline procedurecannot becompleted yet, ase-signature notyet operational.

60

Dimension 2

of online registration. However, progress in this area hasbeen relatively slower. It is closely linked to progressmadeon broader regulatory reform, as well as progress on theentry into operation of an electronic signature system.

Croatia and Serbia are the only two countries that offerthe possibility of online application for a number ofpermits and licences.The other countries only offer so farthe possibility to download online application forms.

Figure 2.2 Dimension 2 scores by sub-dimension

0

1

2

3

4

5

SRBMNEMKXKHRVBIHALB

Company registration certificate Company identification numbersCompletion of the overall registration process Increase on-line access for registrationCrafts registration certificate Crafts registration numbers





0

1

2

3

4

5

2009 2007




2.4 The way forward

The 2009 report shows that there has been significantprogress across the region in promoting faster andcheaper start-ups. Progress has beenmore impressive inthe registration phase. Today, new entrepreneurs cancomplete average registration procedures with company

registers (specialised agency or commercial court) in lessthan five days from the time of application in all theWestern Balkan countries, excluding Bosnia andHerzegovina. In most countries, it takes a day to obtainthe company registration certificate from the time ofapplication, for a fee less than EUR 60.The pre-applicationsteps have also been streamlined. Progress in the

notification phase has been less marked. Two countries(Croatia, the formerYugoslav Republic of Macedonia) aremoving towards the one-stop-shop model. Progress hasbeen patchy and slow in the compliance phase, withintervention focusing on the elimination or reduction ofminimum capital requirements for start-ups (the formerYugoslav Republic ofMacedonia and Kosovo under UNSCR1244/99). Over the last two years,Albania and Serbia werethe most successful reformers in this dimension, whileBosnia and Herzegovina lagged further behind theregional average. Overall, the priorities set out in the 2007Charter report were only partially tackled and thereforeremain largely valid for the near future.

Having successfully dealt with the first phase of thestart-up process, governments should focus on the twoother phases and in particular on the main remainingobstacle to cheaper and faster start-ups.Themost criticalarea is compliance.There, governments need to find theright balance between the need to conduct checks andthorough inspections, in order to secure compliance withlaws and regulations concerning health, security andenvironmental risks; and the desire not to put excessive

burden on new business ventures. In addition, a numberof compliance functions are handled by local authorities.The implementation of a wider regulatory reformprogramme (already adopted by most of the WesternBalkan countries) will bring about progress in this area.

In the previous report, it was suggested as amedium-term objective to transform the company registrationbody into a centre of collection and dissemination ofcompany data for the public administration (taxadministration, office of statistics and employment office)and the private sector, within the limits set byconfidentiality rules and regulations.This would requirethe establishment of an electronic data bank coveringthe entire population of registered enterprises (not onlythe latest entries) and the integration of a number of newfunctions. A further important development is theintegration of the company registration systems intointernational networks, such as the European BusinessRegisters. Steps in this direction have been taken by anumber of countries (Albania,Croatia, the formerYugoslavRepublic of Macedonia and Serbia), but further workremains to be done.

61

Notes

1 Doing Business provides standard measurements of the time and cost of setting up a business. It includes a detailed description of the various steps in theprocess, obtained by replicating the process of registration of a standard company (for the methodology seewww.doingbusiness.org/methodologySurvey/StartingBusiness.aspx). The indicators consider the time and cost required to complete each step, withoutdistinguishing between the time required and fees charged by the public administration, and those associated with other players such as notaries, chambersof commerce or providers of the company seal.



4 Doing Business 2006.

5 The “silence is consent” principle relates to the issuance of licenses for one-off deals or transactions and applies only if the relevant law does not stipulateotherwise. In the absence of an administrative decision within the term provided by the law the applicant must inform the administration that it will undertakethe steps to start the relevant business activity.


Dimension 3

Better Legislationand Regulation

3.1 Introduction

The survey of the business environment identifiesthe administrative burden as a key concern. This is thecase both for the EUMember States and for the candidateand potential candidate countries.

According to the Report of the Expert Group on“Models to reduce disproportionate regulatory burden onSMEs”, the regulatory burden per employee isproportionally inverse to the number of employees.1

Therefore, the regulatory burden for micro enterprises istwice as high as for the small enterprises with fewer than20 employees, and three times as high as for the smallbusinesses with 21 to 49 employees. (Bigger companieswill face a regulatory burden of one fifth or less thanmicro enterprises.)

The economies in the region understood theimportance of this aspect and launchedmajor regulatoryreform projects. However, because this is only one aspectthat contributes to a good regulatory framework, theregulatory impact analysis (RIA) and the institutional set-up are also assessed. Most of the countries in the regionprogressed in all three areas.


This dimension is a relatively complex one as itencompasses three different elements as depicted inFigure 3.1.All three elements are essential to the creationof a stable and friendly business environment.

The objective of the first sub-dimension is a nationallegislationwhich is clear,understandable anduser-friendly.This aspect was very important for the countries in theregion as they had to eliminate from their economyobsolete pieces of legislation inherited from the formerYugoslav Federation, as well as other pieces introducedafterwards. Since the previous report, the indicators havebeen changed in order to focus on the strategic approachof this process and also assess the actual burden reduction.

The measures adopted under the “Simplification ofSME-related legislation”have to be complemented by theintroduction of RIA, the third sub-dimension, in order tokeep the regulatory environment free from overburdenand overregulation. This is because the aim of RIA is toimprove the quality of the policies, and to improve andsimplify the regulatory environment. It should also helpto ensure consistency among different policies and to

64

Dimension 3

Better Legislation and Regulation


Better legislation and regulation for SMEs

Regulatory reform Institutionalframework

Regulatory ImpactAnalysis (RIA)

• Strategy for legislativeand administrativesimplification• Silence is consent

• Intergovernmentalco-ordination

• SME developmentstrategy

• SME policy agency

65

contribute to sustainable development by assessing theeconomic, environmental and social impacts of policyproposals.This area had been developed in the SME PolicyIndex, by looking at both the use and the type of RIA.

Another important aspect related to this dimensionis that these countries are candidate and potentialcandidate countrieswhich, as a precondition for becomingmembers of the EU, will have to adopt the acquiscommunautaire, leading to an improvement of theirregulatory environment.

As the key ingredient for a coherent SME policy andregulatory environment is the institutional framework,this is assessed in the third sub-dimension.

3.3 Analysis2

Better regulatory environment

Assessment of this sub-dimension is based on threemain components:

• Review of the current legislation;• Regulatory impact analysis;• Silence-is-consent principle.

Simplification of existing legislation strategy andreview of legislation

The 2007 report assessed that Albania and Croatiahave the most advanced and formalised simplificationstrategies of the existing legislation, with evidence ofimplementation. The former Yugoslav Republic ofMacedonia joined this group in 2008.The three countriesconducted reviews of legislation. All had already

conducted the simplification of the regulatoryenvironment,withAlbania focusingmore on eliminatingor simplifying business permits and licenses, while theother two envisaged both the elimination of redundantlegislation and the simplification of permits and licences.

Both Montenegro and Serbia registered progress inthis area,withMontenegro being close to the first group asit launched implementation of itsOperational Plan for 2008,in the framework of the Programme to Eliminate BusinessBarriers. In 2008, Serbia adopted its Regulatory ReformStrategy for 2008-2010 and the screening of the legislationshould be carried out in the period end 2008-2009.

Although Bosnia and Herzegovina obtained higherscores in this sub-dimension than in the previous report,thanks to the Public Administration Reform Strategy, theobjective of having a stable, friendly regulatoryenvironment is far from reality: regulatory reform at thenational level is not enough for this purpose. Apart froma systematic review of the legislation at the national level,the same should happen at the entity/district level, asthey have legislative powers as well. The mostcumbersome barriers appear when doing business acrossthe border of entities/districts, as Bosnia and Herzegovinadoes not have an internalmarket.Therefore, co-ordinatedefforts from national as well as entities/districts are thecornerstone of a successful regulatory reform and animproved business environment.

Kosovo under UNSCR 1244/99 was not assessedunder this sub-dimension due to its status, in order toavoid penalising it for something that it does not need atthis point in time. The main challenge for Kosovo underUNSCR 1244/99 is to regulate its business environment.However, in order not to over-regulate, it is recommendedthat RIA be introduced.

Table 3.1

Scores within sub-dimension 3.1: Review of the current legislation3


Strategy for legislative and administrative simplification 4.00 3.00 4.00 N/A 4.00 3.50 3.00

Review and simplification of current legislation 4.00 3.00 5.00 N/A 4.00 4.00 3.00

Elimination of redundant legislation and regulations 4.00 2.00 4.00 N/A 4.00 3.50 1.00

Overall weighted average for sub-dimension 3.1:Business simplification strategy and review of the current legislation

4.00 2.75 4.25 N/A 4.00 3.75 2.50

Regulatory impact analysis

In the current report, a new indicator has been addedto the RIA component in order to have a clearer view onits use in the different countries. This has led to smallvariations in the overall score compared with the 2007report. Otherwise the picture remained almost the samewith one exception, namely the formerYugoslav Republicof Macedonia.

The former Yugoslav Republic of Macedonia, withthe adoption of the legal framework for RIA in 2008,registered a substantial increase in scores. However, theimpact of RIA has not yet been felt as this procedure onlybecame mandatory in January 2009.

Serbiamaintained the position of themost advanceduser of RIA, where it is applied to all draft regulationsand has been formally introduced into the legislativesystem.

Croatia made further progress in the field of RIA. InJune 2007 the Croatian government adopted a decreeestablishing the Central RIA Co-ordination Office.According to the 2004 Government Decision on RIA, beforebeing submitted to the Parliament, an act must undergofour types of RIA: financial impact, market competitionand state aid, environment protection and social impact.The CARDS BIZIMPACT project supported RIAimplementation in Croatia by developing an RIAmanualand organising study tours and training sessions.

The remaining countries are at a similar level, withAlbania standing out as it is currently preparing theintroduction of RIAwith the help of theWorld Bank BERISproject. Montenegro plans the introduction of RIA byDecember 2009. For Bosnia and Herzegovina and Kosovounder UNSCR 1244/99, the plans in this field are not yetclear.

66

Dimension 3

Table 3.2

Scores in sub-dimension 3.1: Regulatory impact analysis (RIA)

Change since 2007

2009


Use of regulatory impact analysis 2.00 1.50 4.50 1.50 3.00 1.50 4.50

Type of regulatory impact analysis 1.00 1.50 4.00 1.00 3.00 1.50 4.50

Overall weighted average for sub-dimension 3.1:Regulatory impact analysis

1.50 1.50 4.25 1.25 3.00 1.50 4.50

0.00 0.00 +0.25 -0.25 +1.5 0.00 0.00

Box 3.1

Regulatory impact analysis in Serbia

Serbia is the most advanced country in implementing systematic RIA for new legislation as this obligation isincluded in the Government’s Rules of Procedure of 2005. As RIA is only one component of the better regulationprocess, it is part of the Regulatory Reform Strategy for 2008-2011, together with the regulatory review.

The Council for Regulatory Reform and Quality Control was set up in 2003 to help the government in theregulatory reform process, focusing on RIA.

As the type of RIA applied in this country is not very sophisticated, further improvements are needed. However,a soft RIA is applied for each piece of legislation. Serbia benefited from the help of Swedish InternationalDevelopment Co-operation Agency and theWorld Bank Group for the introduction of RIA and the developmentof procedures and methodology.

Silence is consent

Overall, the use of silence is consent in standardSME administrative practice is underdeveloped, butprogress has been made since the last report. The mainreason for the increase in scores is due to its applicationin business registration: this is the situation in Albania,Serbia, the formerYugoslav Republic ofMacedonia.Kosovo

under UNSCR 1244/99 also currently applies it for businessregistration. Montenegro plans to introduce it in thepractice of the public administration, and Croatiarecognises the importance of this principle but noconcrete steps have been taken yet towards the generalapplication of this principle. No progress was registeredin Bosnia and Herzegovina since the last report.

67

Table 3.3

Scores for sub-dimension 3.2: Silence is consent


Silence is consent2009 2.50 1.00 1.50 2.50 2.50 2.00 2.50

Change since 2007 +0.50 0.00 +0.50 -1.50 +1.50 +1.00 +0.50

Institutional framework

Since the 2007 report there are several changes in theoverall ranking, as well as significant progress in the casesof Albania and Serbia.

The institutional structure for the SME policyremained almost the same from the previous report interms of both policy making body and executive agency,with one exception: Kosovo under UNSCR 1244/99, due tothe establishment in 2006 of the SME Support Agency.The increases in scores came from the improvements inthe efficacy of these bodies in carrying out their tasks.Table 3.5 offers an overview of the bodies in charge of theinter-ministerial co-ordination and the basis for this co-operation.

The higher score for Serbia is thanks to increased co-operation between the policy making body and theexecutive agency.At the bottom of the ranking are Kosovounder UNSCR 1244/99 and Bosnia and Herzegovina. InKosovo under UNSCR 1244/99, the elaboration of the SMEpolicy was transferred to the newly created agency,whichalso has executive functions. Although they are buildingtheir capacity and are helped by different donors, theirexpertise is still limited and they rely heavily on thetechnical assistance of donors.

Bosnia and Herzegovina has yet to improve thecapacity of the Department for Economic Developmentand Entrepreneurship in the Ministry for Foreign Tradeand Economic Relations, especially concerning the co-ordination between the entities/district. This situation

should change with the creation of the Council for SMEDevelopment previewed in the draft SME strategy.

The situation in Croatia, the former YugoslavRepublic of Macedonia andMontenegro has not changedsignificantly since the previous report.

In examining the executive agencies to implementSME policy, there are few marginal improvements in thecases ofAlbania, Kosovo under UNSCR 1244/99 and Serbia(the Serbian Agency is leading the ranking). The maincharacteristics of the agencies in the regions are presentedin Table 3.6.

The Serbian Agency for the Development of SMEsand Entrepreneurship stands out, together with theDirectorate for Development of SMEs of Montenegro, interms of staff, budget and network of local offices, witha considerable increase in the case of Serbia. In terms ofprojects, both the Serbian Agency and the MontenegrinDirectorate have several well defined and well fundedprojects to improve the business environment, supportedby international organisations.

In the case of the former Yugoslav Republic ofMacedonia, although the projects to be implemented(stipulated in the Strategy for SMEs and the Action Plan)are well defined, they do not have adequate staffing andmore importantly, the necessary financial resources toimplement them.

The performance of Croatia comparedwith the othercountries is due to the fact that the agency has not set

clear objectives. Its communication with the Ministry ofEconomy, Labour and Entrepreneurship could beimproved.

Both Albania and Kosovo under UNSCR 1244/99increased their scoring, as Albania stepped up itsefficiency in implementing the SME Strategy, and Kosovounder UNSCR 1244/99 established its agency.

The situation of Bosnia and Herzegovina remainedthe same, where an executive body at the national levelhas yet to be established.Again, the draft Strategy shouldimprove the situation in the near future.

With the exception of Bosnia and Herzegovina, andKosovo under UNSCR 1244/99, all other countries in theregion adopted and began implementing a strategicdocument for the development of SMEs. Both countrieshave elaborated their strategies, but as the strategies havenot yet been adopted, they are at the same level as in theprevious report.

Themost advanced countries in this area are Croatia,Montenegro andAlbania (the latter thanks to the adoptionof the Business and Investment Development Strategyfor 2007-2009, and the SME Strategic DevelopmentProgramme for 2007-2009).All these countries’ strategiesinclude a medium to long-term policy agenda, explicitlyaimed at developing the SME sector, accompanied bytime-bound targets and an analysis of the necessaryfinancial resources. There is strong evidence ofimplementation in all three countries.

Serbia is in the early stages of a new strategy forSMEs in October 2008, designed to contribute to thedevelopment of competitive and innovative SMEs, but itis too early to have proof of its implementation (hence thelower score for this country).There is also a slight decreasein the case of the formerYugoslav Republic of Macedonia.The National Development Strategy for SMEs for 2002-2012 was updated after six years of implementation,taking into consideration the results of the first period.The decrease in the score is due to the insufficiency offunds for implementation.

68

Dimension 3

Table 3.4

Overview of inter-ministerial co-ordination


The inter-ministerial co-ordination is carried out by :

The body elaboratingthe SME policy � � � � � � �

How

Specificcommitteescomposed ofdifferentinstitutionsresponsible forSMEDevelopmentand donor forummeetings.

Through co-operation withthe stakeholderson ad hoc basis.

It should bedone throughthe AdvisoryBody of theAgency, but thisis not yet inplace.

In conformitywith theGovernment’sRules ofProcedure.

Through regulargovernmentsessions.

External advisory bodyNationalCompetitivenessCouncil

SMEConsultativeCouncil, advisorybody to theMinistry forTrade andIndustry

SME andEntrepreneurshipCouncil

69

Table 3.5

Comparison between the executive agencies from the region

Table 3.6

Scores for sub-dimension 3.3: Institutional framework


Inter-governmental co-ordination inpolicy elaboration

2009 4.00 2.00 4.00 3.00 4.00 4.00 4.00

Change since 2007 0.00 0.00 0.00 0.00 0.00 0.00 +1.00

SME development strategy2009 4.00 2.00 4.00 2.00 3.00 4.00 3.50

Change since 2007 +2.00 0.00 0.00 0.00 -0.50 0.00 +1.00

SME policy implementation agencyor equivalent

2009 3.50 2.00 3.50 3.00 3.50 4.00 4.50

Change since 2007 +0.50 0.00 0.00 +0.50 0.00 0.00 +0.50

Overall weighted average forsub-dimension 3.3:Institutional framework

2009 3.75 2.00 3.75 2.75 3.50 4.00 4.00

Change since 2007 +0.75 0.00 0.00 +0.25 -0.25 0.00 +0.75


The name of thebody

AlbInvest NoAgency for SmallEnterprises(HAMAG)

SME SupportAgency

Agency forPromotion ofEntrepreneurship

Directorate forDevelopmentof SMEs

Serbian Agencyfor theDevelopment ofSMEs andEntrepreneurship

Type of body Executive agencyExecutiveagency

Executive andpolicy makingbody

Executive agencyExecutive andpolicy makingbody

Executive agency

Total number ofstaff/ professionalstaff

11/5 for the SME andExport PromotionDepartment

40/N/A12/noinformation

12/9 20/17 35/26

2008 budgetexcluding donorfunds (in EUR)

1 800 000 but for allthree fields: exportand investmentpromotion and SMEdevelopment

N/Aapprox.2 400 000

325 000 3 150 000 3 000 000

Network of localoffices

No No No No 9 local offices 17 local offices

The overall situation on this sub-dimension,presented in Table 3.7, is positive. Albania, Kosovo underUNSCR 1244/99 and Serbia demonstrated improvements,

while the slight decrease registered in the formerYugoslavRepublic ofMacedoniawas due to the insufficient fundingfor SME policy.

70

Dimension 3


0

1

2

3

4

5

SRBMNEMKXKHRVBIHALB

SMEs impact assessment for new legislation Simplify rules Institutional framework





0

1

2

3

4

5

2009 2007




3.4 The way forward

The situation for the Better regulation dimensionhas improved from the previous report. The overallaverage for the Western Balkans has increasedsignificantly; all but two (Bosnia and Herzegovina, andKosovo under UNSCR 1244/99), are above level 3,

considered as a threshold at which a solid legal and/orinstitutional framework is in place.

Of the three elements considered in this dimension,the poorest performance across the region is in theapplication of the silence-is-consent principle, and furtherefforts are needed in this area.

The systematic application of RIA also requiresattention.There are two countries with relative good trackrecord in RIA, namely Croatia and Serbia, and this systemshould also start to be implemented in the formerYugoslav Republic of Macedonia this year. The mainchallenge that has to be addressed in this area is theimprovement of the authorities’ capacity to carry outpertinent analyses of the implications of the respectivelegislative proposal, and then incorporate the respectiveresults in the draft of the law.

Currently, for the overall situation of this dimension,there is a compact group of five countries. All have aneffective institutional framework in place and haveadopted strategic documents for the SME sector’sdevelopment and for the regulatory environment. (Furtherefforts need to be put into implementation of theirstrategies.) Bosnia and Herzegovina, and Kosovo underUNSCR 1244/99 are lagging behind because theymiss oneor both of these elements. They have to adopt theirstrategies and start implementing them without delay.

71

Notes

1 European Commission, Report of the Expert Group on “Models to reduce disproportionate regulatory burden on SMEs”, May 2007,http://ec.europa.eu/enterprise/entrepreneurship/support_measures/regmod/regmod_en.pdf



Dimension 4

Availability of Skills

4.1 Introduction

The case for investment in education and traininghas never been stronger. Economists and policy makersincreasingly consider human capital as crucial forenterprises operating in more open and volatile marketsandwhere knowledge-intensive economies, dependent onquality education and training, replace traditionalmanufacturing. Set against these challenges, a primarymessage from the Charter is that workforce competenciesshould be regularly reviewed and improved,with resultingimplications for the education system andwider trainingmarket.

A primary conclusion of the 2007 Charter report wasthat getting to a more comprehensive understanding ofhuman capital within enterprises in theWestern Balkanregionwas problematic, given lack of skills’ data on thosealready employed. Workforce statistics (including dataon education and skills where they exist), are generallyconcerned with those out of work rather than thosealready employed.The 2007 Charter report recommendedmore systematic tracking of enterprise human capital(especially training needs) to allow for better targeting ofinvestment, particularly for training and re-trainingprogrammes. This issue takes on further significance asthe severity of the global financial crisis bites, and whereenhanced human capital is considered as an essentialelement in the recovery effort.47

A particular interest within this dimension of theCharter is to determine the degree of investment andsupport for training for new businesses (start-ups), aswell as the extent to which expanding enterprises areengaging training as part of their growth drive. This isset against the potential that start-ups and growthenterprises may have in contributing to the EU Lisbonobjectives of economic growth and employment.Given EUintegration perspectives, all countries participating in theCharter will be required to gradually work towards theseobjectives and to meet the challenge of the economiccriteria for EU accession - the capacity to cope withcompetitive pressure and market forces within theUnion.1

This chapter discusses the outcomes of theassessment of six indicators whose objective was todetermine how the business world in theWestern Balkan

regionwas engaging training as part of the region’s effortsto step up its competitiveness drive. It concludes withproposals for the countries to consider in the bid toimprove enterprise human resource developments.


The assessment framework covers six indicators:training needs analysis, enterprise training, access totraining, start-up training, enterprise growth and qualityassurance. The indicators as a whole have an inherentpolicy focus and in terms of content are generallyqualitative. Nonetheless, most of the indicators containquantitative criteria. For the purposes of the assessment,each of the indicators was considered as a separate unitin the assessment. However, all six indicators have acumulative value in providing a primary assessmentframework for human capital within the enterpriseenvironment in theWestern Balkan region.

The assessment differs in two respects from the 2007report. Firstly, two additional indicators have beenintroduced. These address training for start-ups andtraining for growth enterprises. Secondly, based on theexperience of the first run of the indicators in the 2007report, small adjustments were introduced to theindicators addressing training needs analysis and qualityassurance. Further details on the changes are detailedbelow.

An indicator addressing affordability of training inthe 2007 report was not included in the 2009 report as itwas considered unworkable.

Given a more elaborate set of indicators in the 2009assessment, a strict comparisonwith the 2007 assessmentis not possible but the outcomes underline importanttrends in enterprise human resource developments.

Training needs analysis (TNA) and enterprise training

The rationale behind the TNA indicator is thateffectiveness of training supported by public and privateinvestment ismore likely to be successful when it reflectsthe specific demands of themarket.The indicator foreseesTNA as fulfilling three functions: determining skillweaknesses in the workplace, identifying skill gaps and

74

Dimension 4

Availability of Skills

defining future skill requirements. In the absence ofconcrete data on training within the small enterprisesector in theWestern Balkans, the objective of the Charterindicator is to encourage countries to develop anintelligence framework that ensures that data onenterprise skills is available and provides ameasure of thehealth of human capital within the private sector.

A second indicator (enterprise training) seeks toquantify the extent to which small enterprises in theWestern Balkan region are engaging in training.As such,it acts as a policy barometer to determine the wellbeingof HRD within a country’s enterprise environment.Assuming sufficient recognition within a country of thepotential of a skilled workforce to contribute tocompetitiveness and growth, the indicator additionallyprovides a number of policy signposts which countriescould use to upgrade knowledge and skills within smallenterprises.

Start-up training

The purpose of the “start up” indicator is toencourage the development of training for start-ups witha particular emphasis on e-training (i.e. where those in abusiness start-process would engage in self-learningthrough training available on line).

Enterprise growth

The “enterprise growth” indicator focuses on trainingwithin expanding enterprises where HRD investment innew markets, products and services creates businessopportunities. Central to the indicator is that policy andsupport structures are available to provide HRD supportto businesses ready to take the growth route; and thatinvestment in enterprise growth strategies issystematically monitored.

Access to training

The “access to training” indicator seeks to determinethe extent of training services within a given countrywith particular reference to geographical spread. Therationale for the indicator is that awell developed trainingmarket should ensure that small businesses have readyaccess to training, thus enhancing the prospects for betterbusiness performance.

Quality assurance

The rationale for assessment of quality assurance inthe trainingmarket is that cash-strapped enterprises aremore likely to engage in training when they are assuredof the quality of the training. Further, enterprise

75


Trainingneeds

Enterprisetraining

Access totraining

Start-uptraining

Enterprisegrowth

Qualityassurance

Improved skills

confidence in the quality of training should create furtherdemand for training, making for a more developedtraining market. The indicator specifically encouragesthe development of a quality assurance framework fortraining programmes and training providers.

4.3 Analysis2

This section considers the findings from theassessment. Overall, and taking into account the various

adaptations to the indicators for this Charter dimension,the progress by the countries since the 2007 report hasbeen slow. With an overall weighted average of 2.2, theresults break the countries into two groups: Croatia andSerbia are above the regional average and the remainingcountries make up a weaker performing group(see Figure 4.2), although the former Yugoslav Republicof Macedonia falls just short with 2.1.

A limitation in the assessment exercise was the lackof comprehensive and reliable data on enterprise training

(improved data on enterprise training was cited in the2007 report). With little strategic development by thecountries to establish more comprehensive data onhuman capital within the small enterprise environment,and generally poor data to consult in the assessmentexercise, it was decided not to include the quantitativeresults for the enterprise training indicator within theoverall analysis. While four other indicators involvedquantitative criteria, the quantitative demands layprimarily in the upper levels of the indicators (apartfrom start-ups where evidence was relatively easier toidentify) and therefore allowed for assessment.

Training needs analysis (TNA) and enterprise training

Both the “TNA” and “enterprise training” indicatorsare addressed together given their interconnectednessand the concerns raised by the assessment about reliabledata.

First, the enterprise training indicator determinesthe extent to which businesses are engaging in trainingin each country.This requires comprehensive and reliabledata.The assessment could not identify sufficient, reliablestatistics on human capital within the small enterprisesector in all countries.At best, althoughmore data sourceswere available compared to the 2007 report, the data wereconfined to projects.This differed according to a diverserange of purposes and was generally dispersed across aplethora of organisations (ministries of economy, SMEagencies, employment authorities, chambers ofcommerce, programme management units ofinternationally supported enterprise developmentprogrammes, employer organisations) with no apparentattempt to bring order to the data.

With the available data, arriving at confidentconclusions on the situation of human capital in thesmall enterprise sector in each country was not possible.For these reasons, data on enterprise training have notbeen included in the assessment.Nonetheless, a numberof countries are taking initiatives to build morecomprehensive data particularly on training needs ofsmall businesses. Kosovo under UNSCR 1244/99’sChamber of Commerce, for example, intends to establishmore systematic tracking of enterprise skills, building ona model enterprise survey of small companies. Anotherexample involves theMontenegrin Employers’ Federation(MEF) which has piloted a TNA survey in its mostunderdeveloped region in the north of the country. TheMEF data found that only 15% of existing businesses hadbenefited from start-up training while just 1% of small

enterprises had engaged in training since businessoperations started.3 The findings have spurred MEF tomove forward with country-wide development ofenterprise human capital intelligence. Meanwhile,Albania, Bosnia and Herzegovina, the former YugoslavRepublic of Macedonia and Serbia have each reviewedthe range of training data available within their enterpriseenvironments, with options for improving enterprisetraining data sharedwith key stakeholders.The extent towhich the recommendations associatedwith each reviewwill be followed through remains to be seen.

A proposal for the countries as a group to movetowards more strategic intelligence building on humancapital for small enterprises supported by the EuropeanUnion provides an opportunity for the countries tomovebeyond the constraints imposed by weak data onenterprise human capital in the region.

Data aside, the assessment identified considerableeffort to promote training in all countries with goodnetworks of training providers, for the most part publictraining services. Given that training provided by publictraining services is generally targeted at the unemployed,the extent to which this training provision is directlyaccessible by enterprises is not clear. This issue isconsidered further below.

Access to training and quality assurance

In terms of access to training, the assessment putsparticular emphasis on information on trainingprogrammes available, particularly online informationthat enterprises could draw upon in their quest to develophuman resources. The assessment identified a range ofinformation sources available across all countries.Information generally included details on trainingprovided by public training centres and whose trainingoffer is primarily marketed at job seekers, as well astraining information services provided directly by SMEsupport institutions. Croatia’s HITPOP portal provides agood example ofmulti-functional,web-based informationon the training market.

Information on private sector training provision isgenerally not available, underlining an undevelopedtraining market. One constraint to development of thetraining market is quality assurance. Without anestablished and transparent quality assurance frameworkfor training, enterprise confidence and consequently take-up of training services will remain compromised.Nonetheless, a number of countries (e.g. the former

76

Dimension 4

Yugoslav Republic of Macedonia and Serbia) are alreadytaking steps to introduce formal accreditationarrangements for training providers, which will go someway to addressing quality concerns.

Specifically on public training services, it is not cleartowhat extent training provided by these services (usuallyunder the auspices of the labour administration) is directlyavailable to workers already employed. Assuming each

country undertakes to develop more systematic data ontraining within/for the enterprise environment, thesources of training (public and private training providers)would make it possible to determine public support forhuman resources already employed within enterprises,including funding frameworks and incentives schemes toencourage enterprises to develop understanding of thepotential that investment in staff can bring to theenterprise.

77

Box 4.1

Using technology to promote access to training

Since 2008, Croatia’s HITPOP web portal has provided a comprehensive range of information to the enterpriseworld on training (providers and their programmes) available within the country. It features a search functionfor easy identification of training by geographical area as well as content of training. It provides details onupcoming training events, including costs. In some instances, visitors to the web portal are also able to downloadtraining materials.With password access, visitors may join online discussion groups.The portal is financed andmanaged by the Ministry of Economy, Labour and Entrepreneurship.

Visit the HITPOP website: http://eobrazovanje.mingorp.hr/default.aspx

Start-up training

All countries were able to furnish some evidence ofstart-up training, which immediately allowed for a level2 in the assessment. Determining more precise data forhigher levels within the indicatorwas difficult.Overall, theassessment finds that data on start-up training aregenerally drawn from singular sources, includingministries of economy (e.g. Croatia), SME agencies (e.g.Serbia) and enterprise support institutions (e.g.Montenegro). Data for Serbia, however, are drawn fromintelligence gathered from a specific campaign by Serbiato promote business start-ups, which (combined withmore data available at the SME agency) allowed for a fullerassessment.

Aside from general statistics, a further gap in theregion’s intelligence framework is weak empirical enquiryin the area. Results from the Global EntrepreneurshipMonitor (GEM) 2009 report nevertheless provide somegeneral indications on start-up training in three countries(Bosnia and Herzegovina, Croatia and Serbia).4 In a surveyof the adult population, some 28% of respondents inCroatia had undertaken some training for business start-up, with 20% of respondents in Bosnia and Herzegovina,and 10% in Serbia.5 While the data may not be entirely

relevant for the purposes of the Charter assessment, theysuggest clear differences between the countries in termsof how the learning systems are preparing people forbusiness start-up. (By way of comparison, statistics forFinland and Slovenia stand at 50% and 36%, respectively.)

The start-up indicator particularly seeks to promoteself-learning (i.e. budding entrepreneurs accessing start-up training online).The 2009 report suggests that start-upe-learning is not being promoted as a strategic option forpreparing people for new ventures. One good practiceexample from outside Europe and reported in the GEM2008 report could be considered by the governments fromthe region. Chile provides online training for businessstart-ups. Some 20% of adults surveyed here hadundertaken self-learning.The high rate of self-learning forbusiness start-up is a result of online learning that isintegrated with the online business registration systemin that country.

Tomove forward on this indicator, all developmentsto build intelligence on human capital within theenterprise environment should also track how training ispromoted for business start-ups. Including training as anintegral feature of the start-up registration process couldalso be considered.

Enterprise growth

The assessment reveals varying degrees of policysupport across the region for training for growthenterprises. Growth enterprises featured within nationaleconomic plans (or similar instruments) inmost countries.However, the extent to which financial support isearmarked for training and advisory services for growingbusinesses is difficult to determine, given that financingis generally included in amore global budgetary allocation

for broader enterprise development. This suggests thattraining and advisory services for businesses with growthpotential are not receiving sufficient priority.

Croatia and Serbia demonstrate more developedpolicy commitment and targeted financial supportspecifically for growth businesses. For example, Serbia’sSME strategy and five-year operational plan for thepromotion of competitive and innovation SMEs givesparticular emphasis to expanding businesses. Croatia’s

78

Dimension 4


0

1

2

3

4

5

2009




Table 4.1

Scores for dimension 4: TNA and enterprise training6


Training needs analysis policy 2009 2.00 1.50 2.50 2.50 1.50 2.50 2.50

Quality assurance 2009 2.00 2.00 3.50 2.00 2.50 1.00 3.00

Access to training 2009 1.00 2.50 4.00 1.00 3.00 1.00 3.00

Start-ups 2009 2.00 1.00 2.50 1.00 2.00 1.50 3.00

Enterprise growth 2009 2.00 1.50 3.50 2.00 2.00 1.50 3.00

Overall weighted average fordimension 4:Availability of skills

2009 2.00 1.75 3.00 2.00 2.00 1.75 2.75

SME agency (HAMAG) gives financial support to growingenterprises as part of its wider package of services forthe enterprise community. Its policy commitment togrowth enterprises is backed up with training datagathered by the economy ministry.

To improve training provision for expandingenterprises, all countrieswould dowell to raise their profilebeyond the national development plans to be includedwithin more specific policies with clear budgetaryallocations earmarked. Secondly, assuming that a specificbudgetary line can be established for training and advisoryservices for growth enterprises, this should be allocatedagainst pre-defined business growth criteria (e.g. productdevelopment) and clearly indicate type of training eligiblefor support (e.g. training for quality assurance, HRD,strategic planning, marketing, financial management,information technology skills, coaching and performancemanagement). More developed data on human capitalneeds and developments of growth enterprises wouldallow for improved policy focus, as well as more targetedallocation of public financial support.

4.4 The way forward

Two areas are proposed here that would allowcountries tomove forward on dimension 4 of the Charter:systematic data development and development of thetraining market.

Systematic data development

There remains a dearth of data on enterprise trainingacross the Western Balkan region. A shift to evidence-based policymakingwill be important if the countries areto ensure that investment in training ismore effective.Toquickly address this data gap, a regular survey ofenterprises, particularly those operating in moredeveloped economic sectors, should be considered. Thesurvey should address bothmanagement and trade skills,while taking into account the knowledge requirements ofthe business sector vis-à-vis European trade. The surveyshould focus on three areas: skill gaps, so that these canbe addressed as a priority; skill weaknesses in areas suchas ICT, so that businesses and sector associations candetermine solutions with training providers; and futureskill and knowledge requirements. Given specific EUrecommendations for more developed labour marketintelligence, all efforts in this area would ensure that thecountries also respond to the EU’s “jobs and growth”strategy8. Further, given a more specific concentration

on gender within the European Small Business Act, alldata developments should be gender-sensitive.

Plans for development of TNA models across all EUpre-accession countries (Turkey included) by the SouthEast European Centre for Entrepreneurial Learning shouldgo some way to meeting this requirement. But given theregional focus of the Centre, efforts here will not besufficient to address the needs at national level. All datadevelopments ideally should involve a partnershiparrangement in each country, with responsibility,ownership and commitment clearly defined betweenpublic and private sector.

In terms of data collection, management, analysisand reporting, an established business supportorganisation(s) or university (with applied researchinterests within each country) could provide the service.All strategic data developments should accommodatethe information needs of the range of policy makers(enterprise, economy, education and training) involved.

Finally, while data build-up is fundamental, there isclearly a need formore developed, independent researchon human capital in the region. Earlier research efforts ontransition economies in Europe (such as theACE initiativesupported by the EU’s Phare programme in the 1990s)provided for independent, professional analysis oncommon areas of socio-economic concern in transitioneconomies, with emphasis on policy making. With anagreed research framework and financial backing,identification of common areas of human capital concern(includingwider enterprise policy interest) for allWesternBalkan countries could be considered.

More developed training market

Setting aside the potential impact of the globaleconomic crisis on the economies of theWestern Balkans,the perspective of all countries should be geared towardsamore developed trainingmarket where both public andprivate sector training providers respond to increasingdemands from enterprises for training and advisoryservices as the national economies grow. The role andcontribution of public training organisations,with traininginfrastructure and capacity in providing services on tradeskills, should be reconsidered to allow for “services ondemand” for local enterprises.Given a particular emphasisof public training services on training for the unemployed,extension of training to those already employed withinenterprises will require further investment. This alsorequires amore concerted policy dialogue between those

79

responsible for employment and economic policies,withenterprise representations to determine options thatprovide staff of existing enterprises access to affordabletraining.

All developments in the training market should beundertaken within a quality assurance framework,

thereby generating confidence and further demand fromenterprises for services. With the potential for trainingproviders to deliver services across the region, co-operation amongst the countries on quality assuranceand accreditation of training provision could be explored.

80

Dimension 4

Notes

1 European Commission (2008), New skills for new jobs: Anticipating and matching labour market and skills needs. Communication from the Commissionto the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, COM (868/3).

2 European Council (1993), Conclusions of the Presidency, Copenhagen, 21-22 June 1993.


4 Curovič, V. (2008), Training Needs Analysis for the Municipality of Berane, Montenegrin Employers’ Federation, Podgorica.

5 GEM (2008), Global Entrepreneurship Monitor: 2008 Executive Report, Babson College and Universidad del Desarrollo, Santiago.

6 This data do not refer to existing and potential start-ups. They capture education and training which have addressed business start-ups within the formalschool environment as well as non-formal training provided outside national education systems.


8 Op cit. European Commission (2008).

Dimension 5

Improving OnlineAccess for SMEs

5.1 Introduction

This chapter examines the development of, andsupport for, e-governmentmeasures that encourage smallenterprises to adopt electronic forms of communication,linking them with an increasing number of governmentsupport services.Within the EU, several governments nowprovide sophisticated online support services related tofiling of annual tax returns by individuals or companies,and advice on various tax matters, export support, etc.

Encouraging enterprises to adopt ICT solutions is acritical aspect of the Lisbon Agenda for building aninternationally competitive knowledge-based economy.As small enterprises adopt ICT solutions, they will beable to establish electronic links with other businesses,engage in e-business activities, and access new and richerinformation sources in order to enhance innovation andcompetitiveness.

Online access to e-government is of particularimportance to micro and small companies whereentrepreneurs cannot carry out their core business (i.e.running their company) during time spent onadministrative matters in the offices of public officials.Governments that adopt ICT approaches to provideservices to small enterprises will be able to improve theirservices, while reducing their own costs and enablingenterprises to reduce the costs of meeting legalrequirements.


To assess progress by each country and Kosovo underUNSCR 1244/99 in providing online services to businesses,two sub-dimensions have been evaluated:

Interaction with government services. The interactionbetween governments and enterprises is of centralimportance to both. Creating an online filing systemrequires reviewing existing procedures and adaptingand simplifying them for the online environment. Itshould reduce the compliance costs to enterprises (with

respect to government tax requirements) and enhancetheir ability to estimate tax liabilities. Online filing willalso reduce collection costs, enabling the authorities todevote more resources to providing information andsupport to taxpayers. In addition to online filing of taxes,this year’s assessment also includes an indicator on thepossibility of filing social security returns and reportingenterprise statistics online. A last new indicator in thisdimension covers any other online services provided bythe government, such as procurement, pensions orcadastre.

Online information for SMEs, including a dedicated portalwith interactive capacity. With the Internet explosion, therange and variety of information available online hasgrown exponentially.This includes government-generatedinformation describing the services and programmes theyprovide to businesses, and the requirements of thebusiness community. In this area, the level of informationavailable and its accessibility were investigated. Thissection looks at the availability of a dedicated SME portalto help direct an individual business to the informationrequired, and the extent of interaction between SMEs andgovernment-sponsored services in developinginformation tailored to individual requirements.

The set of indicators within this dimension havebeen altered slightly since the 2007 SME Policy IndexReport: the former sub-dimension on tax returns wascomplemented by three indicators on additional onlinegovernment services, namely online social securityreturns, online reporting on enterprise statistics, and anindicator on any other online government services, suchas public procurement or cadastres. In turn, the sub-dimension onmanaging permits and licences online wastaken out of this dimension, as it is already covered by theindicator on online registration in dimension 2. Finally, thesub-dimension on information online, which formerlyonly included one general indicator, was broken downinto two separate indicators: one indicator measuringthe availability of online information for SMEs and theexistence of an online portal for SMEs, and a secondindicator measuring the quality of the online portal, ifexistent.

82

Dimension 5

Improving Online Access for SMEs

5.3 Analysis1

Currently, only Croatia has a clear e-governmentstrategy. The e-Croatia programme was initiated tostrengthen the use of modern technologies incommunications between public authorities andcitizens/the private sector. It is definitely leading to anoverall reduction of private sector costs in their dealingswith governmental bodies. Since 2007, the programmehas had several parts: e-Administration, e-Justice, e-Education, e-Health Services and e-Business.The CentralState Administrative Office for e-Croatia co-ordinates alle-initiatives. A number of e-programmes (e.g. e-LandRegistry, e-Cadaster, e-REGOS, e-VAT and e-Government)have significantly contributed to better business accessto public authorities and regulations.Albania,Montenegroand Serbia have also made significant progress inrendering government services more accessible online.Together with the formerYugoslav Republic ofMacedonia,they form a second group of countries behind Croatia.

Interaction with government services

Since the 2007 report, onlyAlbania has joined Croatiaand Montenegro as the group of countries where SMEscan file tax returns and/or social security returns online.In the case of Croatia this is in large part due to theeffective implementation of the electronic signature,including a functioning accreditation body (seedimension 9 for further details on the application of theelectronic signature). As in the 2007 report, Croatiamaintains the leading e-government system in theWestern Balkans: it has been operating smoothly forseveral years now, and is thus working with increasingefficiency. In Montenegro, online tax returns operatethrough the revenue RTSXmodel - clearance system. Forsocial security returns, the recently adopted law oncommon registration and reporting systems forcalculation of tax and contribution payments describesthe introduction and function of a central register of

contribution holders for social insurance reportingsystems and data protection. Albania has achieved themost marked progress since the 2007 report. Taxpayerscan pay value added tax, income tax and profit tax online,and submit social security returns since July 2008 in theTirana tax office and in Durres; since October 2008 inVlore, Lezhe, Elbasan and Shkoder; and since November2008 in Korce and Fier. In the case of paying tax, therelevant forms can be downloaded directly from thewebsite,which includes a guide published by the GeneralDirectorate of Tax on how to proceed with the taxpayment online. These developments in e-governmentare part of the US-fundedMillennium ChallengeAccountsupport. The key problem, nevertheless, remains the e-signature system.As it lacks a functioning accreditationbody, the electronically available forms still have to besigned and handed to the relevant public body in person.

The former Yugoslav Republic of Macedonia hasmade some concrete plans to implement a comprehensivesystem of online filing of taxes and social security returns,but has fallen short over technical difficulties. In Bosniaand Herzegovina, Kosovo under UNSCR 1244/99 andSerbia, concrete plans are still lacking, although in Serbiaseveral forms for filling tax and custom declarations canbe downloaded online. In fact, in Bosnia and Herzegovina,and Kosovo under UNSCR 1244/99, e-governmentinitiatives remain very much in their infancy.

Reporting on enterprise statistics

Regarding the possibility of reporting on enterprisestatistics online to government agencies and bodies,Croatia’s and Serbia’s progress ismost notable. In Croatia,FINA has introduced a Registry of Annual FinancialReports through its website and WEB-Bon. The Serbiangovernment posts all of its major enterprise surveysonline (although they have to be submitted by mail or inperson, due to the lack of a functioning electronicsignature).

83


Interactive services Information provision

Tax & social securityreturns

Other governmentservices online Portal provision

84

Dimension 5

Table 5.1

Scores for sub-dimension 5.1: Interaction with government services2

Table 5.2

Main SME-related government websites


Tax returns2009 3.50 1.50 4.00 2.00 2.50 4.00 1.50

Change since 2007 +2.50 +0.50 0.00 +1.00 -0.50 0.00 +0.50

Social security returns 4.00 1.50 4.00 2.00 3.50 3.50 1.00

Reporting on enterprise statistics 2.00 1.50 4.00 1.00 2.00 2.00 4.00

Extension to other services 3.50 1.50 4.00 1.00 4.00 2.00 1.50

Overall weighted average forsub-dimension 5.1:Interaction with government services

3.25 1.50 4.00 1.50 3.00 2.88 2.00

AddressEnglish + local

languageGovernmentinformation

Official formse-business

services

FAQs(frequently

askedquestion)

Fully inter-active

Albania www.albinvest.gov.al � � � � X �

Bosnia and Herzegovina

www.fbihvlada.gov.bawww.vladars.netwww.rars-msp.orgwww.bdcentral.netwww.mvteo.gov.ba

� � � X X X

Croatia www.hitro.hr � � � X � �

Kosovo under UNSCR1244/99

www.odaekonomike.orgwww.kosovo-eicc.orgwww.mti-ks.orgwww.kosovatenders.orgwww.kosovabiz.comwww.sme-ks.org

� � X � X X

The former YugoslavRepublic of Macedonia

www.economy.gov.mkwww.uslugi.gov.mkwww.apprm.org.mkwww.gov.mkwww.ebiz.org.mkwww.euroinfo.org.mkwww.sojuzkomori.org.mk

� � X X X X

Montenegro www.nasme.cg.yu � � X X X X

Serbia

www.pks.rswww.sme.gov.rswww.euprava.rswww.poreskauprava.gov.rs

� � � X � �

Extension to other services

Croatia again leads the way in the region, on thetopic of extension of online applications to othergovernment services not mentioned above. Although inan early stage of implementation, the government hasintroduced e-REGOS, e-pension and e-cadastre systems.In Albania, public procurement procedures can also befiled online, thanks to an electronic procurement law thatwas approved on 20 November 2006 (Law no. 9643).Interestingly, in the former Yugoslav Republic ofMacedonia, the Public Procurement Bureau operates anInformation System for Electronic Filing, through whichall physical or legal persons may access calls for tendersand advertisements. The Bureau website provides fullinformation regarding tenders.

Online information for SMEs and quality of onlineportal

All governments in the region have improved theirprovision of information online, but the quality andquantity of this information varies. In most cases, anumber of unrelated sites are maintained by differentinstitutions and programmes. Some of these sites arefinanced by donor programmes, and their futuresustainability is unclear.

Although much information is available on thesesites, it is generally not well co-ordinated and there aremany duplications and obvious gaps. In addition to thelocal language version, in almost all cases these sitesexist in English. (Often they also exist in the languages ofthe key foreign investors).

Serbia and Croatia have the highest quality andvariety of online information. In Serbia, online informationfor SMEs is particularly abundant, and is spread acrossseveral, well-structured websites available in Serbian,English and often one or several additional Europeanlanguages. The most notable websites are those of theMinistry of Economic Development (Directorate for SMEsand Entrepreneurs), the Serbian Business RegistrationAgency, the National SME Agency and the newlydevelopedwebsite of the Chamber of Commerce.Togetherthe websites provide the SME sector with information onregistration, taxation, regulations and credits, and more,as well as answers to frequently asked questions and thepossibility to ask specific questions. However, only thewebsite of the Chamber of Commerce resembles a portal,bundling several websites and services. The Strategy forCompetitive and Innovative SMEs of the Serbian Agencyfor the Development of SMEs and Entrepreneurshipincludes the creation of an SME-dedicated online portaland there are concrete plans to establish such a portal in2009. Information in Croatia is also extensive on thewebsites listed above.The presentation of the information,however, has several shortcomings: lack of translationinto English, information dispersed over several websitesand limited promotion of these websites across SMEs inCroatia.

Websites in the remaining countries have morefundamental deficiencies; in most cases, a lack of focuson SME issues. In Albania, for example, AlbInvest, whichalso deals with SME development, has established aprofessional and well-designed website available inAlbanian and English. Its focus, however, is almost entirelyon servicing foreign investors, with no information andlinks targeted to SMEs.

85

Table 5.3

Scores for sub-dimension 5.23 : Information


Online information for SMEs2009 2.50 2.00 4.00 2.50 2.50 3.00 4.00

Change since 2007 +0.50 -0.50 0.00 +0.50 -0.50 0.00 +1.00

Quality of online portal 3.00 2.00 4.00 3.00 3.00 2.00 4.00

Overall weighted average forsub-dimension 5.2: Information

2.75 2.00 4.00 2.75 2.75 2.50 4.00

86

Dimension 5

Figure 5.2 Dimension 5 scores by sub-dimension4

Interaction with government services Information

0

1

2

3

4

5

SRBMNEMKXKHRVBIHALBAlbania Bosnia andHerzegovina




0

1

2

3

4

5

2009 2007




87

5.4 The way forward

The comparison to the 2007 SME Policy Index Reportshows that almost allWestern Balkan governments havemade progress in improving online access for SMEs togovernment services, particularly Albania and Serbia.More marked progress, however, remains necessary tofully profit from the new possibilities offered by theInternet.

Although ad hoc improvements have been made inseveral countries to make government services available

online, there is generally still a need for encouragingprogress in the context of wider e-government issues andstrategies designed to improve relations with citizensand to encourage ICT activity. This includes setting up afunctioning e-signature system (see Chapter 9).

There is a clear need in allWestern Balkan countriesto provide more (and bundled) SME-dedicated onlineinformation. Although the quality and variety ofgovernment online information has improved drastically,SME-specific portals are still categorically lacking.

Notes


2 Although this report is published in 2009, data collection took place in 2008. For the SME Policy Index Report 2007, data were collected in 2006.

Dimension 6

Getting More Out ofthe Single Market

6.1 Introduction

The 2007 report recognised that the move towardsfull integration in the EU single market presents a majorchallenge and, at the same time, a huge opportunity fortheWestern Balkan countries.Dismantling tariff and non-tariff barriers is a necessary condition for trade integration.Yet without a major effort to promote productivity andcompetitiveness of the Western Balkan enterprises tobring quality and technical standards up to the EU level,companies (and in particular SMEs) will struggle toestablish a presence in the EU market. They will find itdifficult to withstand competition from EU firms in theirdomestic and regionalmarket.The 2007 report concludedthat theWestern Balkan countries had identified the keyissues and started to introduce measures aimed atenhancing SME competitiveness. At the same time, thereport recognised that theWestern Balkan countries wereonly on the cusp of a multi-year effort to enhanceenterprise competitiveness.

Over the last two years, the process of economicintegration of the Western Balkan countries into the EUeconomy has made significant strides. The StabilisationandAssociationAgreements (SAA), now in place with allWestern Balkan countries, provide the scope for theelimination of remaining tariff (on import from the EU)and non-tariff barriers, the adoption of EU quality andtechnical standards, and the progressive implementationof a free goods circulation regime between the EU and thecandidate and potential candidate countries in theWestern Balkans.

Croatia is most advanced in the EU integrationprocess, as it is currently negotiating EU Accessions. AtOctober 2008, negotiations were open on 21 of the 35Accession Chapters, including all those chapters relatedto economic integration.The formerYugoslav Republic ofMacedonia (which signed a Stabilisation andAssociationAgreement in 2001) is well advanced in itsimplementation and has reached a high level ofcompliance.Albania andMontenegro (which signed SAAsin 2006 and 2007, respectively) are gradually aligning theirlegislation with the acquis communautaire. Bosnia andHerzegovina, and Serbia (which signed SAAs in July and

in April 2008 respectively) are in the initialimplementation phase. However, both countries havesigned Interim Agreements, focusing on trade-relatedareas, aimed at speeding up the implementation ofmeasures supporting trade integration. Relations withKosovo under UNSCR 1244/99 are conducted within theframework of the Commission Communication, AEuropean Future for Kosovo under UNSCR 1244/99, ofApril 2005.

The 2009 report shows that progress on thisdimension has been relatively limited in the last twoyears. It has been more significant in the area of exportpromotion, but remains particularly weak in the area ofcompetitiveness enhancement. Only two countries(Croatia and Serbia) are currently implementingcomprehensive support programmes targeted at SMEs.


The assessment framework for this dimension hasbeen onlymarginallymodified compared to that reportedin 2007. In addition to the two policy areas covered in2007 (export promotion programmes and competitivenessprogrammes), a new area covering national SMEpromotion events has been included. Over the last twoyears, SME development agencies and other governmentand non-government organisations have organisedpromotion events for the SME sector, such as exhibitions,national SME conferences, awards to themost innovativeand performing enterprise, etc. These events provide anopportunity to present government policies, to raise theprofile of the SME sector, and to stimulate innovation andcompetitiveness at company level.

Many export-oriented companies in the WesternBalkans rely heavily on supplier credits and overdrafts fortheir working capital, and act as subcontractors for EU-based companies. This makes them particularlyvulnerable to the combined impact of a sharp slowdownof demand from the EU economy (as a result of the globaleconomic crisis) and the lack of short-term financing dueto the credit crunch. Under such conditions, schemesproviding support for export financing, such as export

90

Dimension 6

Getting More Out of the Single Market

credit insurance schemes or guarantees on export credits,as well as programmes aiming at diversifying clients andexport markets, could play an important role in helpingcompanies to weather the crisis.Access to finance issuesare covered in Chapter 7. This section explores theprovision of services to export-oriented companies.

Export promotion programmes

Export promotion programmes typically includeprovision of trade information, assistance to exporters,organisation of trade missions, support for participationin international trade fairs, training ofmanagers and staffresponsible for export sales, and adoption of technicaland quality standards with internationally recognisedcertification.This section assesses the range of availableexport programmes, their comprehensiveness and co-ordination, and the degree to which they remain fundedby donors.

SME competitiveness programmes

Competitiveness is a broader concept that involvesimproving firms’ ability to sell and supply goods orservices profitably. It can be increased through effectiveexport promotion but also through many otherdimensions covered in this report, including developmentof skills, access to technology and e-business, and accessto finance. Governments can play an important role inenhancing SME competitiveness through a range ofactions. For the purpose of this chapter, the analysis is on:

• Government provision of SME competitivenessprogrammes;

• The degree of co-ordination with other relatedpolicy areas;

• The existence of planning and co-ordination bodiessuch as National Competitiveness Councils.

National SME promotion events

As mentioned before, such events have multiplepurposes, ranging from commercial purposes, to thepresentation and debate of policymeasures aimed at theSME sector. Successful events are built upon a close co-operation among stakeholders, including governmentagencies, chambers of commerce, local authorities andprofessional associations.

6.3 Analysis1

Export promotion programmes

In the 2007 Charter report we noted that, while allgovernments in the region had launched active exportpromotion programmes and a number of countries hadestablished export promotion agencies, seldomwere thoseactions based on a multi-year strategy, integrated in theSME development strategy or the broad competitivenessagenda.

Over the last two years the situation has generallyimproved. A number of countries (Albania, Croatia andSerbia) have elaborated and approved integrated multi-year export promotion strategies. Others such as theformerYugoslav Republic of Macedonia and Montenegrohave re-financed and expanded existing programmes.

In Kosovo under UNSCR 1244/99, the export base isstill very limited and export promotion initiatives are stillconducted on an ad hoc basis, support largely by donorfunding. In Bosnia and Herzegovina, export promotionactivities remain fragmented, mostly donor-supportedand conducted at entity or regional development agencylevel.

91


Getting more out of the Single Market

Export promotionprogrammes

EnhancingSMEs’competitiveness

National SMEpromotion events

In the 2007 Charter report we had identified threegroups of countries, according to three criteria: the levelof institutional development (presence and performanceof an export promotion agency, presence of an exportpromotion strategy), the range of services provided toexporters (export intelligence, insurance, support formarketing and promotion activities) and the amount ofresources available to support those programmes.

Croatia andMontenegro were in themost advancedgroup, while the formerYugoslav Republic of Macedoniaand Serbiawere in the second group,made up of countrieswith active trade policy promotion programmes thatinitially began with donor support but were increasinglysupported by government funding.

Albania, Bosnia and Herzegovina, and Kosovo underUNSCR 1244/99 were in the third group; they were atdifferent stages of establishing pilot export promotionprogrammes.

The results of the 2009 report show that the first andsecond group have largely converged, with Croatia, theformerYugoslav Republic of Macedonia,Montenegro andSerbia now offering similar ranges of services and supportto exporters. Albania has also joined this group,following the approval of an integrated exportstrategy in February 2007 and the establishment of theCompetitiveness Fund, with an initial budget of

EUR 200 000 managed by AlbInvest, the governmentinvestment and trade promotion agency.

The situation is Bosnia and Herzegovina has notsignificantly changed, despite the establishment of anExport Council and Export Promotion Agency (BHEPA) atstate level,while in Kosovo under UNSCR 1244/99, exportpromotion is now under the portfolio of the newlyestablished Investment Promotion Agency.

The countries belonging to the first group have allintroduced cost-sharing support schemes, wheregovernment contributes part of the export promotioncosts (participation in international exhibitions,marketingoperations, etc.) sustained by exporters. Budget are stillrelatively limited inAlbania, the formerYugoslav Republicof Macedonia andMontenegro,while aremore significantin Croatia and Serbia. Countries still benefit from technicalassistance support to build databases, develop contactsin foreign markets, and upgrade skills and operationaltools, but financial resources are now largely provided bythe state budget. In this context, the participation ofmostof the countries in the region in the Enterprise EuropeNetwork (EEN) comes as important advantage (see Box 6.2on EEN).

Currently, Serbia and Croatia are leading the firstgroup. They both have a well structured and fullyoperational export promotion agency (covering both

92

Dimension 6

Box 6.1

Serbia Investment and Export Promotion Agency

The Serbia Investment and Export Promotion Agency (SIEPA) is a governmental agency, established in 2001. Itprovides a range of services free of charge, to both foreign and domestic companies, and is financed from thegovernment budget and other donations (mostly from foreign governments and international organisations).

SIEPA can be considered as a one-stop-shop for information and advising. SIEPA provides foreign investors withvarious business information (e.g. about taxation, set-up procedures, relevant legislation, etc.); offers legal advice;assists foreign investors in obtaining licences and permits; organises visits and contacts with officials from thegovernment and municipalities, as well as potential local suppliers; assists in selection of the investment site,inter alia by maintaining a database of investment locations; presents ready-to-invest projects etc. RecentlySIEPA has become in charge of organising a contest for allocation of state grants for Greenfield and Brownfieldinvestment projects.

Concerning export promotion activities, SIEPA maintains a database of exporters, organises participation ofSerbian companies at trade fairs abroad, offers training and education for exporters, provides information aboutimportant export markets, and also subsidises certain export marketing activities of SMEs (such as marketresearch, product and packaging design, promotional materials, etc.).

export and investment promotion) and offer a broad rangeof integrated services to exporters, including exportfinancing and export credit insurance. The SerbiaInvestment and Export Promotion Agency plans to opentrade promotion offices in the main export markets,starting with Germany.

SME competitiveness programmes

The 2009 report shows that very limited progresshas been made in the region in the elaboration and

implementation of programmes enhancing SMEcompetitiveness. As shown in Table 6.3, performancescores for most of the Western Balkan countries haveremained unchanged, with the exception of Serbia andAlbania.

This situation contrasts with the progress made onthe implementation of export promotion programmesand, together with the results emerging from Chapter 8(on strengthening technological innovation), casts doubtson the ability of the Western Balkans to benefit in the

93

Table 6.1

Export promotion agencies in SEE countries

Table 6.2

Scores for sub-dimension 6.1: Export promotion programmes


Export promotion programmes2009 3.50 2.00 4.00 2.00 3.50 3.50 4.50

Change since 2007 +1.00 0.00 0.00 +0.50 +0.50 0.00 +1.50

Country Organisational structure Linkage promotionInformation/ consulting

servicesTraining offered

AlbaniaAgency for Business andInvestments (AlbInvest)

Merged functions: SME + Investment + ExportPromotion � � �

Bosnia and HerzegovinaExport Promotion Agency (BHEPA) operateswithin the BiH Foreign Trade Chamber

N/A N/A N/A

CroatiaTrade and InvestmentPromotion Agency (APIU)

Merged functions: Investment and ExportPromotion

N/A � �

Kosovo under UNSCR1244/99Investment Promotion Agency

Executive agency operating under thesupervision of the Ministry of Trade and IndustryTrade Promotion section recently established

� N/A N/A


Agency for Foreign Investments � � N/A

MontenegroDepartment within the Directorate for SMEDevelopment of the Ministry of Economy

N/A � �

SerbiaSIEPA

Executive AgencyInvestment and Export Promotion � � �

medium term from the integration into the EUmarket andto withstand competition from EU firms.

Competitiveness-enhancing programmes addressstructural issues affecting company productivity. Theseinclude the adoption of EU technical standards andinternational quality standards, the improvement ofmanagerial skills, the creation of company networks andthe development of joint projects between private andpublic sectors to improve operational environment (suchas logistic centres, training facilities and technologicalcentres).

The range of initiatives and programmes covered bythis indicator is therefore quite broad and complex.However, the analysis looks at two main factors:developments at policy level and company assistanceprogrammes.

At policy level, a number ofWestern Balkan countrieshave established specific bodies in charge of promotingand co-ordinating competitiveness-enhancing policiesand projects. Croatia and the formerYugoslav Republic ofMacedonia were the first countries to establish NationalCompetitiveness Councils.These councils bring togetherkey stakeholders in a forum for policy elaboration thatbuilds synergies among institutions and programmes,and launches broad-based projects. Such initiatives havegenerated significant donor support, particularly fromUSAID, the EC and a number of other bilateral donors.Serbia followed the same route in 2008. In the remainingcountries, competitiveness enhancement is part of thebroad portfolio of theMinistry of Economy. Initiatives aremainly conducted on an ad hoc basis, as there are nospecific mechanisms in place to ensure programme co-ordination and monitoring.

At company level, as noted in the previous report,most of the Western Balkan countries have launchedtargeted programmes at sector, cluster or regional level.These programmes provide direct technical and financialsupport to companies, fostering the adoption ofinternational standards and upgrading ofmanagerial andtechnical skills. However, progress in adopting EUstandards at company level is heavily determined by gainsmade by the country on standardisation, accreditation,metrology and market surveillance. While those areasare not directly covered by the Charter assessmentprocess, they aremonitored by the annual Progress Reportof the European Commission andmeasured by indicatorsincluded in the Investment Reform Index of the OECDInvestment Compact.

Croatia and Serbia are most active in policydevelopment and co-ordination, aswell as in the companyassistance area.

Croatia has had an active National CompetitivenessCouncil since 2002, representing all the key private andpublic stakeholders. It has launched a number ofprogrammes managed by BICRO, the Croatian businessinnovation centre.

Croatia still leads the region in this sub-dimension,in terms of scope of competitiveness-enhancingprogrammes and the resources dedicated to thoseinitiatives. It is actively working on the implementationof the 55 recommendations for promotingcompetitiveness elaborated by the NCC in 2004. Thesecover such areas as education for growth anddevelopment, compliance with EU standards, cost andprice competitiveness, development of innovativenessand technology, strengthening small and medium-sizedenterprises, regional development, cluster development,positive mindset and leadership, and monitoringprogramme implementation through annual NationalCompetitiveness Reports. However, Croatia is still tryingto fully develop synergies among various programmes(export promotion, innovation, financing of innovativeenterprises and skill development). Co-operation andcommunication between theMinistry of Economy, Labourand Entrepreneurship and theMinistry of Education andScience needs to be strengthened.

Over the last two years, Serbia has launched anumber of initiatives with the broad aim of enhancingSME competitiveness. Following the path developed byCroatia and the former Yugoslav Republic of Macedonia,the government formally established the NationalEntrepreneurship and Competitiveness Council in January2008. Its membership includes all key economicministries, the Central Bank, the main private sectorassociations, leading academics and business leaders.The Council has the mandate to conduct analysis oncompetitiveness issues, elaborate policy proposals,monitor policy development and foster programme co-operation. It operates an annual programme and it isprojected to become a key policy forum. On 17 March2008, the government launched a Competitiveness Fundwith an annual budget of about EUR 7.5 million in 2008and about EUR 5.6million in 2009.The facility refunds upto 50% of the costs sustained by SMEs (established for atleast two years) that have invested in technical and qualitystandards and in marketing activities. In 2008 theCompetitiveness Fund received 1 779 applications,

94

Dimension 6

approved 449 of these and allocated EUR 1,2 million. Inaddition, the government is co-operating with donor-funded projects that provide assistance to SMEs.Themostrelevant is the Competitiveness Project, launched inOctober 2007 with the support of the USAID and with abudget of EUR 11 million.

The formerYugoslav Republic of Macedonia was oneof the first countries in the region to establish a NationalEntrepreneurship and Competitiveness Council in 2003,but over the years this body has progressively lost itscatalyst role. There are currently proposals by privatesector associations to revamp it,with awidermembershipbase. However, in 2008 the government launched aprogramme with a total budget of EUR 81 623 to helpcompanies adopt ISO standards, upgrade skills and investin ICT solutions. Montenegro is focusing on companyassistance programmes,with substantial donor support,conducted through the directorate for development ofsmall andmedium size enterprises (SMEDA), the Chamberof Commerce and theMontenegrin BusinessAssociation.No newmajor policy initiative has been launched over thelast two years.

InAlbania, themain new development has been theestablishment in 2007 of the Albanian CompetitivenessFund, already mentioned in the previous section. Thefund, with an initial budget of approximately EUR 200000 is intended to cover both export promotion andtechnical standards adoption. It is expected to besupplemented by the launching of a new competitiveness-enhancing endeavour under the new Instrument forPre-Accession Assistance (IPA) programme. So farAlbInvest (in charge ofmanaging the fund) has approved49 projects, 20 of which are already fully implemented.

There has been no significant development in thisarea in Bosnia and Herzegovina at state level. However,regional development agencies are implementingcompany support schemes, as part of their clusterdevelopment programmes. Equally, in Kosovo underUNSCR 1244/99 there has been nomajor development inthis policy area over the last two years, excluding thoseconducted by donors. The main government focus hasbeen on building institutions and developing the mainSME policy framework, rather than launching targetedpolicy actions.

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Table 6.3

Scores for sub-dimension 6.2: SME competitiveness


SME competitiveness2009 2.00 2.00 4.00 2.00 3.00 3.00 3.50

Change since 2007 +0.50 0.00 0.00 0.00 0.00 -0.50 +1.00

Box 6.2

The Western Balkans in the Enterprise Europe Network

Croatia, the former Yugoslav Republic of Macedonia, Serbia and Montenegro are currently participating in theEnterprise Europe Network (EEN), a network with 600 partner organisations from 40 countries. Bosnia andHerzegovina is fulfilling the necessary procedures to become associated member.

Building on the experience of the former European Information Centres (EIC) and the Innovation Relay Centres,EEN offers a broad range of high quality services to SMEs: information on EU policies, programmes and legislation;business partner searches and co-operation databases; brokerage events for technology and knowledge transfers;individual on-site visits to companies to assess their needs, etc.

EEN gives a chance to SMEs in those countries to get in contact with enterprises across the European Union andbeyond and to learn more about EU policies which, due to their status of candidate and potential candidatecountries, start to affect them more and more.

96

Dimension 6


Export promotion programmes SME Competitiveness National SME Promotion Events

0

1

2

3

4

5

SRBMNEMKXKHRVBIHALBAlbania Bosnia andHerzegovina




0

1

2

3

4

5

2009 2007




Table 6.4

Scores for sub-dimension 6.3: National SME promotion events (2009)


National SME promotion events 2.50 2.50 4.50 2.50 4.00 3.00 4.00

National SME promotion events

All the Western Balkan countries schedule yearlypromotion events for the SME sectors, most oftensponsored by SME development agencies, chambers of

commerce and professional associations. Trade fairs arethe most common form of events.

In addition, Croatia and Serbia every year holdnational SME conferences which are often used by the

97

governments to present their SME policy agendas.Theseare an occasion for policy dialogue and for exchange ofexperiences among stakeholders (regional developmentagencies, SME associations and non-governmentalorganisations). The national SME conferences are anopportunity for taking stock of the adoption of EU policyguidelines and country participation in EU programmes.

Award competitions stimulate entrepreneurship,innovation and competitiveness among SMEs.The formerYugoslav Republic of Macedonia hosts a contest forEntrepreneur of theYear. Similar events are held in Croatiaand Serbia, targeting innovative enterprises.

6.4 The way forward

The global economic crisis is having a significantimpact, especially on companies that rely on exports tothe EU market and on those that operate in networkindustries (such as the automotive, electronic andmechanical sectors) and supply components tomanufacturers based in EU countries. SMEs in theWesternBalkans have to deal with a drop in the external demand,a shortage of supplier and buyer credit, and sudden shiftsin their competitive position due to the sharp currencymovement across East and South East Europe. In thissituation, governments in the Western Balkans have toaddress simultaneously contingent and structural issues:

On export promotion, the priority in this phase is toprovide export insurance and export credit to companiesaffected by the increase in commercial risk in exportmarket and the drying up of liquidity. Countries that have

already in place export credit insurance schemes anddeveloped export financing schemes in partnership withcommercial banks (Croatia, Serbia and, to a certain extent,Albania and the formerYugoslav Republic of Macedonia)are in a better position to respond to this challenge.Theycan expand the scope of existing schemes, allocatemoreresources, mobilise support from international financialinstitutions, and strengthen dialogue and co-operationwith the commercial banks.On export promotion, priorityshould be given to market diversification, for instance,pursuing market opportunities arising from theimplementation of the 2006 Central European FreeTradeAgreement.

On enhancing competitiveness, countries that havealready launched support programmes (such Albania,Croatia, the former Yugoslav Republic of Macedonia andSerbia) should closely monitor the impact of thoseprogrammes and adapt the range of supporting tools tothe differentiated needs of SMEs. Given the limitedresources available, it is also necessary to step up policytargeting and synergies among different schemes andprogrammes, managed either at local or central level.

Given the significant contribution of donor-fundedprogrammes in these areas, all the Western Balkancountries need donor-supported programmes that areintegrated and co-ordinated into a governmentmedium-term strategy for competitiveness and support tohigh-growth enterprises. It is also essential that lessonslearned across various business support programmes arereviewed and compared, then integrated into thegovernment action.

Notes


Dimension 7

Taxation andAccess to Finance

Within the European Charter for Small Enterprises,taxation and access to finance are combined into onedimension.Within this, chapter, however they have beenseparated into two sections,with separate scoring: due totheir dissimilarity, it is impossible to compare them.

Tax policy development forsmall enterprises

7.1 Introduction

Tax policy development for small enterprises shouldselect a mix of applicable taxes and specific designfeatures that foster small business creation and growth.At the same time, tax policies and administrativeapproaches must encourage compliance with the taxsystem and contribute to overall tax revenues.

Given complexities inherent in tax systems, policymakers are encouraged to rely on certain basic analyticalframeworks to guide their decisions. Tax policydevelopment requires, for example, estimates of how taxliabilities are likely to respondwhen tax rates or other taxparameters change. It is also important that policymakerscan assess effective tax rates on business profits and cantake a disaggregated approach, given that tax burdenscan vary by a significant margin across firms of differingsize, structure and business activity. This assessmentcovers all the Western Balkan economies with theexception of Serbia. Data was not available in time forpublication.Within this assessment, the Republika Srpskaand the Federation of Bosnia and Herzegovina wereassessed separately due to the differing tax systems.TheBrcko District was not assessed.

The assessment framework for dimension 7 (taxpolicy development) of the European Charter for SmallEnterprises in the Western Balkans scores countries intheir progress in implementing certain basicmodels andmethods to assess the tax burden on small businesses,possible tax effects on the cost of funds, tax arbitragebehaviour and risk-taking, and in measuring andaddressing tax compliance costs.


The assessment framework outlined below includeseight sub-dimensions. Five sub-dimensions addressprogress in estimating revenue and a number of basicanalytical frameworks to guide tax policy development.The other three sub-dimensions address efforts to assessand address tax compliance costs (taxpayer resourcesrequired to comply with tax obligations).

The first sub-dimension considers reliance onmicro-simulation models to estimate changes in income taxpaid by small enterprises resulting from tax reform ofincome tax rates and/or tax base rules. Such models –based on taxpayer-level data from samples of tax returnsfiled by unincorporated businesses and by incorporatedsmall enterprises – are necessary in order to assess howtax policy reform specifically impacts small enterprises.This need recognises that tax reform provisions, evenwhere uniformly applied to all firms (regardless of size),can have a significantly different impact on small firmscompared to large.

The second sub-dimension considers progress inimplementingmarginal effective tax rate (METR)modelsto assess tax distortions to investment decisions by smallenterprises. A standard METR model is the basic modelused by policy analysts to assess whether investmentcan be expected to be positively or negatively impactedby tax reform. Now widely used, METR statistics arehelpful in guiding tax reform decisions.They summarisethe net effect on pre-tax “hurdle rates of return” oninvestment, resulting from changes to one ormore key taxparameters (profit tax rates, depreciation rates,shareholder dividend and capital gains tax rates, propertytaxes, capital taxes and sales taxes on inputs).

The third sub-dimension addresses the potential fordouble taxation of profits to discourage investment insmall enterprises, and considers levels of analysis carriedout by policy makers in assessing, within their owncountry context, possible effects on required pre-tax ratesof return and thus on levels of investment.Comprehensiveanalysis would include assessments of the pros and consof alternative approaches to alleviate double (corporate

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Dimension 7

Taxation and Access to Finance

plus shareholder-level) taxation, taking into account thetreatment of marginal providers of finance, varyingdegrees of complexity of different integration provisionsand the degree of numeracy of the taxpayer population.

The fourth sub-dimension addresses the potential forsystem design, in particular the relative setting of taxrates, to introduce tax arbitrage possibilities (realised byexploiting differences in effective tax rates) tending todistort various decisions of small business owners.Thesedecisions might include the choice of business form andearnings payout policies, implying revenue and efficiencylosses.The focus is on assessing scope for revenue losses,with differences in effective tax rates on labour versuscapital income creating taxpayer incentives to artificiallymischaracterise wage income as capital income. Thevarious indicators applied in this context consider thebreadth of analysis carried out by policymakers to assessand address tax arbitrage possibilities.

The fifth sub-dimension addresses the potential fortax design, in particular the treatment of losses, todiscourage investment in small enterprises with relativelyhigh-risk business ventures, leading to reducedinvestment that would be observed without taxation orunder neutral tax design.The focus is onwhether possibletax impediments to risk-taking are taken into account inchoices over the limiting or “ring-fencing” of deductionsfor business losses, and where generous treatment isprovided, what steps have been taken to guard againstpossible significant revenue losses under flexible lossoffset rules.

The sixth sub-dimension addresses the relativelyhigh resource burden on small business of complyingwith the tax system (e.g. preparing and filing tax returns).

The review considers whether assessments have beenmade of compliance costs involved with main taxes, onaverage, for small business. In general, reductions in taxcompliance costs may be achieved by simplifying taxadministration procedures and/or adjusting tax policy(e.g. introducing simplified replacement (presumptive)taxes) for small enterprises. The sixth sub-dimensionconsiders progress in implementing simplified taxadministration procedures found to be relatively onerous.

The seventh sub-dimension also addresses relativelyhigh tax compliance costs on small business, andconsiders whether countries have assessed theimplications of alternative tax policies, such as thetaxation of small enterprises using some form of simplepresumptive tax as a replacement for income tax or valueadded tax (or possibly both). Evidence of analysis of policyconsiderations and trade-offs with the choice of theturnover level for a presumptive tax versus “normal” taxsystem are assessed favourably, as is the adoption ofsimplified taxes where analyses indicate that suchreforms would be desirable and appropriate.

The eighth and last sub-dimension assessescountries in terms of the range and level of taxpayerassistance and education service programmes in place orplanned to reduce tax compliance costs on smallenterprises. This focus recognises limits in reducingcompliance costs by adjustments to tax administrationand tax policy, and that for a given tax system (policyand administration), the costs to taxpayers of complyingmay be significantly reduced by efforts of government toensure that required tax forms and information are readilyavailable, including information that facilitates anunderstanding of required tax calculations, informationgathering, reporting and payment practices.

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Figure 7.1 Assessment framework for dimension 7a: Taxation

Taxation

Taximpediments

to riskyinvestment in

SMEs

Tax arbitrageby SMEowners

Measures toreduce taxcompliance

costs forSMEs

SME taxpayerassistance toreduce taxcompliance

burden

Taximpediment

to SMEinvestment

Tax burden

Taximpediment

to SME equityfinance

7.3 Analysis1

Micro-simulation analysis of the tax burden on smallbusiness

The first sub-dimension considers reliance onmicro-simulationmodels to estimate changes in the amount ofincome tax paid by small enterprises, following tax reformthat includes targeted provisions.A common approach totarget support to small business investment is to enrichtax depreciation allowances or provide enhanced oradditional tax deductions on purchases by smallbusinesses of new capital equipment (e.g.machinery andbuildings). For example, the former Yugoslav Republic ofMacedonia provides preferential treatment of investmentby micro-enterprises in fixed assets.2 Another approachis to tax small business profits at a relatively low rate, asoccurs where business profits are taxed according to atiered (rather than flat) tax rate schedule that applieslower statutory tax rates to lower bands of taxableincome.3 Albania, for example, taxes income ofunincorporated businesses at tiered personal tax rates,4

while taxing profits of incorporated businesses at a flat10% rate. In Croatia, unincorporated business income istaxed under progressive personal rates, while offeringunincorporated businesses meeting certain size-relatedrequirements to opt instead for 20% flat rate corporateincome taxation.5

Estimates of the impact of tax provisions that targetor differentially impact small business cannot be derivedfrommodels that rely on aggregate data.Micro-simulationmodels are required, using data drawn from a sample oftax returns filed by small businesses (unincorporated andincorporated). By providing estimates of how a given taxregime impacts firms differently, depending on size,profitability and capital structure, micro-simulationmodels can identify winners and losers of tax reform.This information helps policy makers strike a desiredbalance of policy considerations including revenue,efficiency and competitiveness effects, implications for taxadministration and compliance costs, and likely supportby the public at large.

The indicators under this dimension assess countrieson their level of implementation of corporate and personalincome tax micro-simulation models. No country in theregion maintains corporate income tax (CIT) and/orpersonal income tax (PIT) micro-simulation models thatdistinguish taxpayers by type (e.g. turnover and totalbusiness assets in the case of CIT). However, theFederation of Bosnia and Herzegovina, the Republika

Srpska, the former Yugoslav Republic of Macedonia andMontenegro have been taking steps to implement suchmodels. Moreover, Croatia and the former YugoslavRepublic of Macedonia recently participated in an OECDtax modelling workshop, covering the implementationof these models.

METR analysis of tax effects on small businessinvestment

METRmodels are routinely used by OECD countries,and by an increasing number of transition economiesand developing countries, to assess whether businessinvestment is encouraged or discouraged by the taxsystem, and whether a tax distortion is increased ordecreased as a result of tax reform.METRmodels facilitatepolicy analysis and assessments of tax reform optionsby providing summary indicators of the likely net impactof corporate and personal taxation on investment,whichis often not evident where tax reform includes elementsthat are encouraging to investment (e.g. reduction in thetax rate on profit), and others that are discouraging toinvestment (e.g. reduced capital cost allowances).

When used together withmicro-simulationmodels,analysts are able to predict both the net impact of taxreform on tax revenues (on a disaggregate and aggregatebasis) and on investment behaviour. An advantage ofMETR analysis is that the input “tax parameter” data arespecified in income tax provisions, rather than collectedfrom actual tax returns, facilitating the implementationof the framework. METR models have been widely usedinmany countries to help guide fundamental tax reform(e.g. reform aimed at broadening the income tax base,enabling a revenue-neutral lowering of the tax rate), aswell as ad hoc policy adjustment.

The indicators under this second dimension assesscountries on their implementation of a METRmodel thatincorporates main corporate and shareholder-level taxparameters determining the tax burden on investment bysmall business. In this area, both the former YugoslavRepublic of Macedonia andMontenegro have been takinginitial steps to implement a METR model. Montenegrohopes to have a METR model in place within a year.

Tax impediments to equity financing

The third sub-dimension considers whether effectivetax rates on dividends and capital gains on shares aremeasured, and assessments are made of possible taximpediments to equity financing of small businesses

102

Dimension 7

linked to double taxation of small business profits. It alsoconsiders whether advantages and disadvantages ofalternative tax treatment of dividends and capital gainson shares are assessed, including options for alternativeintegration mechanisms.

A central consideration when looking at the taxtreatment of incorporated small businesses is scope fordouble taxation of business profit arising fromshareholder taxation of dividends and/or capital gains.6

Double taxation of corporate profit may limit businesscreation and growth in several ways. First, dividendtaxation may discourage the creation of an incorporatedbusiness.While it is common that an entrepreneur maywish to establish a business in unincorporated form, thiswill not always be the case.An entrepreneurmaywish toaccess the advantages (e.g. limited liability) thatincorporation provides, before deciding to create a smallbusiness. However, injecting capital into a newincorporated business may not be attractive on accountof double taxation of dividend returns.7

For growth-oriented firms that start up asunincorporated businesses, continued growth beyondsome size may require incorporation to efficiently reachcapital markets. Double taxation of returns on capitalthat is withdrawn from an unincorporated business andinjected into a newly created incorporated enterprisemaydiscourage incorporation and thereby growth.8 Moregenerally, dividend taxationmay increase the hurdle rateof return on new share capital, and thereby discouragebusiness expansion funded by new equity. Furthermore,capital gains taxation may increase the hurdle rate ofreturn on reinvested profits, and thereby discourageinvestment financed by internal funds.Additionally, to theextent that required rates of return on shares ofmultinationals are not grossed up to cover personal taxon returns, this group may enjoy a cost of capitaladvantage relative to small businesses relying on localinvestors, implying a competitive disadvantage thatmayseriously hamper growth prospects.

Classical tax treatment of corporate profits mayimpede the financing of small businesses (unincorporatedand incorporated) in other ways. In particular, taxation ofcapital gains on a realisation as opposed to accrual basistends to create “capital gains lock-in” incentives forinvestors to hold onto (not sell) assets producing capitalgains,whichmay impede an efficient allocation of capitalto certain start-up businesses requiring external equitycapital.9While established small businessesmay benefitfrom “patient capital” encouraged by realisation-based

taxation of capital gains and resulting lock-in effects, thisbenefit would not apply to new small business start-upswhich have yet to raise external equity financing.To theextent that investments in capital gains-producing assetsare locked in, to benefit from tax deferral, the financingneeds of start-up firms may be frustrated.This outcomeis inefficient if a new business idea could lead to aprofitable business enterprise, but does not go forward dueto this tax distortion.

Furthermore, taxation of dividendsmay impede thefinancing of small businesses (unincorporated andincorporated) where it encourages mature (established)companies to retain rather than distribute profits to avoiddividend taxation (corporate lock-in effect), and whereindividual shareholders are more inclined to invest insmall businesses than mature companies.10 Whiledividend taxation may not affect the timing of dividendpayments, it may be that in practice shareholders ofmature companies are more likely to agree to dividendretention in order to defer dividend taxation.Where thisis the case, the pool of financial capital available to smallbusinesses may be reduced.

The indicators under this dimension examinecountries in terms of their assessment of the degree ofdouble taxation in their tax systems, and the impact thatdouble taxation may have on the availability and cost ofequity financing to small businesses. In Albania, Croatia,the formerYugoslav Republic ofMacedonia, the Federationof Bosnia and Herzegovina, and the Republika Srpska, nostudies have yet been undertaken to examine thepotential impact double taxationmay have on enterprisefinancing, given the relatively low personal tax ratesapplied to returns on equity. InAlbania, personal taxationof dividends is limited to final withholding tax at 10%, andsimilarly capital gains on shares are taxed at a flat 10%.In Croatia, dividends and capital gains on shares are bothtax exempt.While dividends and capital gains are subjectto personal income tax in the former Yugoslav Republicof Macedonia, recent tax reform has implemented a flat10% rate of personal tax,with an inclusion rate for capitalgains limited to 70%. In Kosovo under UNSCR 1244/99and Montenegro, studies have been undertaken toexamine potential effects of double taxation on equityfinancing, and alternative integration systems have beenexplored. Kosovo under UNSCR 1244/99 reports that theresults of these studies have been considered in currenttax policy and proposed reforms and will lead to a newtax system starting 1 January 2009 with a 10% corporatetax and stepped income tax system (4/8/10%).

103

Tax arbitrage opportunities of small business owners

Where different types of income – including self-employment income (dependent) employment income,dividends, capital gains and interest – are taxed atsignificantly different tax rates, owners of smallbusinesses and in particular closely held privatecompanies may alter their decisions over business form,capital structure, earnings distribution and other financialpolicies, in order to reduce their overall tax liability.11 Itis important that policy makers consider tax avoidanceopportunities and incentives under alternative tax ratestructures, so that potential revenue losses accompanyingsuch tax arbitrage behaviour can be taken into accountwhen making an overall assessment of the advantagesand disadvantages that a given tax structuremay provide.

For example,where the corporate income tax rate islow, and distributed profits are free of shareholder tax(or are taxed but at a low final withholding rate), whilewages are subject to relatively high personal income taxand social security contribution rates, an owner/workerof an incorporated small business may pay himself anartificially lowwage (an amount less than an arm’s lengthwage for his labour input), in order to receive not onlycapital income, but also some portion of returns on labour,as dividend income. To take another example, if capitalgains on shares are tax-exempt, while wages anddividends are subject to personal income tax, incentivesmay be created for small business owners/workers toretain earnings in a company, rather than receive themas wages or dividends, and to invest the funds actively inproductive capital, or passively in portfolio assets. Publicawareness of examples of tax relief obtained in this way(e.g. little tax paid on wages) may contribute to a generalpublic sense that the tax system is unevenly applied andthus unfair, tending to erode voluntary compliance ofothers.

The indicators under this dimension examinecountries and regions in terms of their assessment ofeffective tax rates on different forms of income earned byowners/workers of closely held corporations, looking inparticular at the possible distortions caused by differentpayout policies. Throughout the Western Balkans,however, no country has yet to conduct studies on thepotential of tax arbitrage by small business owners.

Treatment of risky investment in small businesses

The fifth sub-dimension addresses the tax treatmentof risk – that is, the tax treatment of unincorporated

business losses, and capital losses on small businessshares – a consideration particularly important in thecontext of potentially high-growth (and high-risk) smallbusiness ventures. In general, risk-taking – that is,investing in cases where the rate of return is uncertain,falling above the rate on a safe asset (government bond)in “good” years, while falling below the safe rate in “bad”years and possible negative – may be discouraged if thetax treatment of profits and losses is asymmetric.12 Ingeneral, symmetric treatment requires that losses aredeductible at the same effective tax rate as profit/gainsare taxed, for only then is the government an equalpartner in the investment, sharing equally in profits andlosses.

Policy makers may be reluctant to provide fullysymmetric treatment of income and losses, because of theimplied revenue loss. Lengthy carry-forward (and possiblycarry-back) provisions may be viewed as sufficient toenable scope for the claiming of capital losses, albeittypically without an interest adjustment.Also as ownersof small businesses in general have some scope tomischaracterise personal consumption expenses (e.g. inrunning a hobby farm) as business expenses, some limitsmay be expected on personal business and corporate lossclaims. Restrictions on claims on capital losses generallyfollow the same policy concerns, notably revenue lossand subsidisation of private consumption (reflected bothin corporate losses and capital losses on corporate shares).

At the same time however, the possible effects ofasymmetric treatment of taxable income/gain and lossesmay encourage policy makers to consider whether thetrade-off could be adjusted throughmore liberal treatmentof losses, with revenue losses possibly covered by morerestrictive rules governing allowable business deductions(i.e. the denial of certain deductions that tend to have aconsumption, and not pure business expense, element).

A comparison of policies across theWestern Balkansfinds considerable diversity in approaches. For example,in the former Yugoslav Republic of Macedonia,considerable flexibility is provided in obtaining relief inrespect of business losses. With the aggregate of netincome of various categories of taxable income, lossesrealised in one category of income (with the exception ofcertain capital losses) may be deducted against othercategories of income in the same year. At the same time,however, no carry-over is allowed for excess losses. Croatiaalso provides relatively flexible loss offset rules, whilealso providing a five-year business loss carry-forward.The tax system in Albania, while providing a loss carry-

104

Dimension 7

forward for businesses subject to profit tax, limited tothree years, requires separate tax computations for eachcategory of income.Moreover, no loss relief is possible inrespect of firms subject to a patent (lump sum tax) charge,as opposed to profit tax.

The indicators under this dimension examinecountries in terms of their assessment of the impact ofloss-offset rules on investment in early-stage, high-riskcompanies. In Albania, the Federation of Bosnia andHerzegovina, the Republika Srpska,Croatia and the former

105

Box 7.1

Risk-taking and symmetric tax treatment of profits/losses

In systems that tax unincorporated business profits in full in the year earned, symmetric treatment requires thatbusiness losses are deductible in full in the year incurred, with excess deductions carried forward with interestuntil claimed. Options for immediate deduction of business losses include allowing them to be carried back tooffset taxable business profit in prior years. Another option is to allow (self-employment) business losses to bededucted against other types of personal taxable income (e.g. interest income, wage income).

Where a business is in incorporated form, relevant loss considerations include the treatment of corporate lossesand capital losses on shares in a loss-making company. As with unincorporated business income, symmetrictreatment of corporate profits and losses would require that corporate losses can be deducted in the yearincurred, involving a loss carry-back to offset corporate taxable profit in prior years, or carried forward indefinitelywith interest.Where a corporation undertakes a range of business activities, allowing losses on one activity tooffset profits on another also furthers symmetric treatment.

As losses at the corporate level result in capital losses at the shareholder level (just as corporate profits are reflectedin shareholder capital gains), symmetric loss offsetting requires that capital losses on corporate shares be treatedsymmetrically with capital gains on shares. This implies the same inclusion rate for capital gains and capitallosses, and current year relief (or the equivalent of current year relief with an indefinite carry forward,with interest)for capital losses (with allowable capital losses determined by the same inclusion rate used to measure taxablecapital gains).

In comparing across countries the treatment of unincorporated business losses, systems can be distinguishedaccording to the degree to which they ring-fence losses. Strict ring-fencing would deny a deduction ofunincorporated business losses against other taxable income of the taxpayer in the same year (e.g. investmentincome, rental income,wage income, pension income), by only allowing business losses to be deductible againstfuture business profits realised in subsequent tax years under business loss carry-forward provisions. Moreflexible ring-fencing provisions would allow business losses to be deductible against other types of taxableincome, in addition to providing loss carry-forward and possibly also loss carry-back provisions, thereby providinggreater scope for deductions for business losses (and thus greater symmetry in the treatment of business profitsand business losses). Loss-offset provisionsmay differ considerably across countries in terms of the types of non-business income that business losses can be deducted against, and the allowed number of carry-forward (andcarry-back) years.

Systems providing greater scope for business loss offsets, at the cost of foregone tax on other income, may (ormay not) be designed to target the relief to genuine business losses (as opposed to losses on consumptionactivities), to active business owners as opposed to passive investors, and possibly to newly established firms toaddress possible tax impediments to business start-ups. Systems may be differentiated according to whetherring-fencing rules apply equally to firms regardless of their size, or whether more flexible rules apply to lossesof smaller firms, targeted under somemeasure of size, possibly with additional restrictions to steer relief whereintended.

Yugoslav Republic of Macedonia, no analysis has yet beendone to determine how alternative approaches to thetreatment of business and capital losses may affectincentives for relatively high-risk investment (e.g. insoftware development or investment in other intangibles),and tax avoidance.However,Montenegro has analysed thepotential for its business loss-offset provisions toinfluence risky investment in small businesses, and hasalso examined tax planning opportunities underalternative loss-offset provisions. The results of thesefindings have been addressed and considered in current

tax policy and proposed reforms. Kosovo under UNSCR1244/99 has also recently assessed its business loss-offsetruleswith the findings documented and reported to seniorMinistry of Finance officials for discussion andconsideration.

Tax compliance costs and administrative approachesfor small firms

The total resource cost imposed on business by agiven tax systemmay be considered as consisting of two

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Dimension 7

Box 7.2

Rationale for tax simplification for small businesses

Tax compliance costs tend to increase with the number of taxes an entrepreneur is subject to, the frequency ofsubmitting returns, the levels of government involved and the complexity of tax rules. Studies systematicallyfind that tax compliance costs as a percentage of sales are relatively high for small firms. By reducing taxcompliance costs and thus lowering the overall tax burden on small businesses, simplification provisions andtaxpayer education and assistance programmesmay help achievemore neutral tax treatment of firms of varyingsizes. This can bring potential efficiency gains and encourage compliance with (adherence to) the tax laws of acountry, including operating in the formal rather than informal (underground) economy, and full reporting of allamounts required to determine the true tax base.

A main efficiency concern associated with significant tax compliance costs incurred, regardless of firm size, isthat absorbing this cost requires a higher pre-tax rate of return on capital, the smaller the size of a businessmeasured by capital.This effect, tending to place small businesses at a competitive disadvantage relative to largerfirms, implies an inefficient allocation of capital, with underinvestment in small businesses.A second efficiencyconsideration is that increased compliance, when resulting in increased tax revenues, may enable reduced taxrates on one or more possibly more elastic tax bases, with possible efficiency gains. Increased compliance mayalso be seen as desirable, taking into account the benefits to society of having all persons participate in the financingof programmes supporting economic and social development (“nation-building”).

Simplification provisions of various types can be expected to impact small businesses differently, given theheterogeneity of the small business population. In particular, certainmeasuresmay directly encourage businesscreation and tax compliance for some small businesses, but not others, suggesting the need to consider a rangeof measures. For example, allowing simplified accounting or less frequent filing of tax returns may be of littlepractical consequence to small businesses with very low turnover (e.g. street vendors) that may regard the taxcompliance burden of even a relatively simple regular tax system as excessive and discouraging to participationin the formal economy. But the same measures may operate to encourage other larger-scale small businessesto establish, and to comply.

For very low turnover businesses for the most part unaffected by simplified accounting and filing measures, taxcompliancemay call for the introduction of a simple replacement tax, for example a turnover-based presumptivetax, to replace regular income tax and/or value added tax (VAT) for firmswith turnover below some (micro) businessthreshold. In such cases, key design considerations include the turnover level for theVAT threshold, the settingof the tax burden under a presumptive (replacement) tax, and in particular the avoidance if possible of large upwardadjustments in tax burden when a business size turnover threshold is passed and the taxpayer is required tomigrate from a replacement regime to the regular regime.

parts: the amount of money that taxpayers are requiredto pay to government to meet their tax liabilities(“statutory tax burden”); and the amount of administrativeresources allocated by taxpayers tomaintain tax accounts,and compute and file tax returns (“tax compliance costs”).Tax compliance costs typically have a significant fixed costcomponent, tending to impose a relatively higher burdenon small businesses. Compliance cost considerationsmayfactor into a number of decisions of small businesses,including whether to establish a business (become self-employed),13 and whether to operate in the formaleconomy.

The introduction of simplificationmeasures for smallfirmsmay bring about efficiency gains and other benefits(see Box 7.2). Certain administrative approaches may betaken to reduce compliance costs for small firms,including allowing cash accounting for value added taxand/or income tax, and allowing less frequent filing of taxreturns. VAT and income tax systems may be accrual-based, or cash-based. Where accrual accounting isnormally required, cash accounting targeted at smallfirms, determining taxable sales and profits based onentries of revenues actually received and costs actuallyincurred (rather than accrued or anticipated), maysignificantly reduce compliance costs, to a degreedepending on the additional supporting documentationthat taxpayers are required to maintain.

Another possible approach that reduces taxcompliance costs, while at the same time provides firmswith a cash-flow advantage, is allowing small firms tofile (declare) VAT returns and/or income tax returns on aless frequent basis, typically with a small business testbased on taxable turnover in the prior year. Where acountry normally requires (large) firms to fileVAT returnsand income tax returns on a monthly basis, allowingsmall firms to file and pay less frequently (e.g. quarterly,semi-annually or annually)may reduce compliance costs.Cash-flow savings realised by less frequent payments oftax may be viewed as a form of subsidy to help defrayremaining compliance costs.

The indicators under this sixth sub-dimensionexamine countries and regions in terms of theirassessment of the average cost to small business ofcomplyingwith taxes.They also look at whether countriesand regions have analysed the advantages anddisadvantages of simplifying certain elements of thecentral government tax administration. Albania hasassessed the average cost to small businesses ofcomplyingwith allmain taxes. It has also prepared studies

to determine the pros and cons of simplifying certainelements of the tax administration. In fact, Albania nowincludes compliance cost assessments when evaluatingnew tax policies or amendments. Kosovo under UNSCR1244/99, the Federation of Bosnia and Herzegovina, theRepublika Srpska and Croatia have assessed the averagecompliance cost for small businesses of some or all oftheirmain taxes. For example, in the Federation of Bosniaand Herzegovina, compliance costs were assessed andtaken into account when implementing the new CIT andPIT laws recently.

Tax policy measures to reduce tax compliance costs

In addition to administrative approaches to reduceVAT, certain policy approachesmay be considered. Studiessuggest, for example, that a simpleVAT rate structure, inparticular a single VAT rate, contributes considerably toreduced VAT compliance costs.14 While a multiple ratesystem may satisfy public demands for lower rates oncertain products, for a variety of reasons, adhering to asingle or simple rate structure may limit tax distortionsto consumption, and production, and at the same timereduce compliance costs.AVAT collection threshold thatwaivesVAT collection for firmswith turnover below somesmall business threshold level may provide an effectivemeans to reduce tax compliance costs, while alsocontaining the costs of tax administration.15 The casemay be especially strong in the context of transitioneconomies where small firms collect relatively very littleVAT and the system of tax administration is undergoingsignificant reform. As firms below a VAT threshold maybe negatively impacted in some cases by an inability toclaim input tax credits, countries may be encouraged toallow voluntaryVAT registration and participation in thesystem by firms below the threshold.16 Providing thisoption increases tax administration costs, and introducescompliance costs on those that elect to be in the systemto protect their competitive position. But the trade-offmay be viewed as necessary.At the same time, a numberof factors would be expected to play a role in the choiceof the VAT collection threshold (see Box 7.3).

Another possibility is a simplified VAT remittancecalculation (presumptive taxation) for small firms.

Given difficulties in introducing a single rate VATsystem, and in adjusting away from a multiple rate VATsystem, compliance costs may be lowered by allowingsmall firmswith turnover above a collection threshold, butbelow some second-tier small firm turnover level, tocalculateVAT payments to government under a simplified

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presumptive approach. For example, certain small firmsmay be allowed to apply a single flat rate to turnover todetermine the amount of VAT to remit to government(instead of requiring a detailedVAT calculation). In somecountry examples, flat rates may vary by sector. Analternative approach relies on simplified input tax creditcalculations. VAT charged on sales would remainunchanged from the regular system, but the amount paidto government would be calculated differently.

Similar approaches may be used to reducecompliance requirements on small business of (self-assessed) regular income tax. Exempting small firms (withturnover below some threshold level) from paying regularincome tax,while requiring these firms to pay some formof presumptive tax as a replacement for income tax,maybe an effective means to reduce tax compliance costsand costs of tax administration.17 Indeed, solid argumentsmay apply to tax firms exempt from regular income taxwith some simpler replacement tax, despite the (notinsignificant) compliance and administration costs thatsuch a system could entail.

Aside from contributing to tax revenues andsupporting good governance by aiming to have all firms,including the very small, participate in the tax system,imposing a replacement tax may ease the transition offirms into the regular income tax regime when a smallbusiness turnover threshold is crossed, and therebyencourage continued participation in the formal economy.

Additionally, to the extent that the economic incidenceof regular income tax falls on business owners, providingan income tax exemption for firms under a small businessturnover threshold,without a replacement tax,may placethem at a competitive advantage relative to firms justover the same threshold and result in efficiency losses.18

Moreover, largely unequal treatment may be expected toencourage businesses subject to regular income tax tooperate in the informal economy. Such considerationsencourage policy makers to assess the pros and cons oflevying some alternative replacement tax on firms exemptfrom regular income tax.

The following types of presumptive taxes may beused to proxy a regular income tax: a patent, an indicator-based tax, a gross-basis turnover tax and a net (adjusted)turnover tax. A number of variants may be observed foreach of these categories of tax. As reviewed in Box 7.4,presumptive tax bases and tax burdens may differsignificantly from those under a regular income tax, to agreater or lesser extent depending on the type ofpresumptive tax and its design features (and thetaxpayer’s profit position).

Albania provides an example of a country relying ona lump sum patent to alleviate tax compliance costs,while encouraging participation in the taxpayingcommunity. In particular, individuals carrying on businessactivities who are registered for VAT are subject to profittax on net business income. On the other hand,

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Dimension 7

Box 7.3

Selection of VAT collection threshold

Choice of a relatively highVAT threshold, by excluding possibly large numbers of firms,may frustrate policy effortsto have all persons actively participate in the formal economy, recognising that once outside the system it maybe less likely that individuals would decide at some point to fully participate. However, this concern may be atleast partly addressed if firms below theVAT threshold (and not opting into the normal system) are required topay another, simpler form of tax (e.g. a simple lump sum patent, with minimal compliance costs) and thus bepart of the formal economy.

At the same time, selection of a relatively low VAT threshold, while encouraging participation by a greaternumber of firms in the regular tax system, and avoiding distortions to competition, may broaden the scope fortaxpayer fraud, committed for example by firms forging false invoices to claim fictitious input tax credits.Wherethe number of taxpayers in the system tends to grow exponentially with lower threshold values, tax administrationchallenges may grow exponentially as well. However, such challenges also tend to arise in systems with higherthreshold values that permit voluntary participation for those below the threshold (but possibly with a reducedrate of fraud if taxpayers opting into a system can be more carefully screened, with fewer firms in the regularsystem).

individuals who carry on a business who are not soregistered are subject to a local tax on small business,which is a lump sum amount depending on the type ofbusiness activity, annual turnover and location of thebusiness.

The indicators under this dimension examinecountries in terms of their assessment of the implicationsof alternative simplified income andVAT tax policy regimesto address small business compliance costs. In theseindicators, progress amongWestern Balkan countries andregions has been impressive: all economies have preparedstudies assessing alternative tax policy regimes. Albania,

the Republika Srpska, the former Yugoslav Republic ofMacedonia,Montenegro andKosovo under UNSCR 1244/99have also evaluated whether to establish threshold levelswithin alternative tax policy regimes and the distortionsto economic activity those thresholdsmight cause.Albania,the Republika Srpska, the former Yugoslav Republic ofMacedonia and Montenegro have even implementedreforms in their tax systems based on the results of theseevaluations. In fact, from the findings of these studies,Albania and the Republika Srpska recently implementedpresumptive turnover tax regimes of 1.5% and 2%,respectively. Montenegro has also recently implementeda simplified tax regime for SMEs.

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Box 7.4

Presumptive taxes to replace regular income tax for small business

The simplest presumptive tax is a patent, levying a uniform fixed lump sum amount on all firms below somesize threshold. However, as a lump sum fixed amount, a patent imposes a relatively high tax burden on firmswith relatively limited turnover, tending to distort competition amongst firms of different sizes. The effectivetax rate is also high on low (or negative) profits during downturns in business activity, tending to reinforcebusiness cycles and create cash-flow problems.

Another relatively simple presumptive tax is an indicator-based tax, based on indicators of firm size, other thanturnover or income, such as number of employees, floor space, inventory, electricity consumption and othervariables that may be correlated with income. However, as such a tax is effectively a tax on the indicator(s) thatform(s) the base, it may discourage employment or investment (depending on the base).

A common presumptive tax is a turnover tax, levied on gross revenues. Unlike a patent or indicator-based tax,a turnover tax varies directly with firm size measured by turnover, and thus goes some way towards avoidingsize-related competitive distortions of profit-insensitive taxes. However, a fixed turnover tax rate imposes arelatively high effective tax rate on businesses that are less profitable than others, tending to discourage theallocation of capital to businesses where profit margins are relatively thin.To address this, reduced tax ratesmaybe applied to turnover of businesses in sectors where profit rates on average are relatively low. With sectordifferentiation, complexity may be contained by applying a flat rate rather than tiered rate schedule. Under asystem with varying flat rates across sectors, a degree of graduation may be introduced to encourage taxcompliance amongst start-ups by relying on standard deductions from the turnover base. Compared to otherpresumptive taxes, turnover taxes may also facilitate the adjustment of firms to a regular income tax system byrequiring the maintenance of cash accounts measuring turnover.

Closer in design and effect to a regular income tax is a net (adjusted) turnover tax, a presumptive tax that adjuststurnover tax base (gross revenues) in respect of business costs. Given the goal of replacement taxes to containtax compliance costs, the cost adjustments tend to be ones that can be readily measured. Rather than capitalisecapital costs, for example, firmsmay be allowed to expense capital cost (i.e. full and immediate deduction). Similarly,rather than require that firms track inventory costs, a simple lump sum deduction may be provided in respectof input costs, determined as a percentage of turnover. Deductions in respect of wages, and possibly other costsand taxes may also be factored into the base definition, on the presumption that the relevant information isrequired for other purposes (e.g. calculation of employee social security contributions) and therefore availablefor presumptive tax purposes.

Taxpayer assistance and education services

While limited simplification measures may bepossible in relation to payroll deductions (given the needto rely on small business to withhold social securitycontributions and/or income tax onwages to employees),certain options may be available.19 For example, somerelief may be provided by reducing the frequency ofremittance payments (e.g. allowing small withholders –firms withholding amounts in the previous year belowsome threshold – tomake quarterly rather thanmonthlyremittances). It may also be possible to align the timingof payment requirements of provisional income tax andsocial security contributions with payments of VAT (orother taxes) to reduce the number of tax payment dates.Another optionmay be to facilitate information gatheringand reporting, for example through Internet access toforms and electronic filing of returns (rather than toreduce or otherwise simplify the information requiredfor tax calculations, or simplify tax calculationsthemselves).Another option in some countriesmay be toprovide small business with a form of subsidy to helpdefray the cost of using external payroll providers tocomply with pay-as-you-earn (PAYE) tax obligations.

Other simplification measures of particular benefitto small businesses include wider availability and use ofservices and technologies to assist taxpayers inunderstanding and complying with the tax system.Electronic platforms may be used in some cases tofacilitate business access to information on how to comply

with payroll, income tax and social security systems, andto ease the transfer by business to government of relevantinformation (forms) and contribution amounts. Whilesuch measures may not be targeted at small businesses,theymay be of benefit to firmswith relatively low turnoverand limited profit to defray the cost of compliancerequirements having a significant fixed cost component.

Governments may consider making software freelyavailable to employers to allow them to compile andpossibly electronically transfer to the tax authorities datain relation to tax withholding, and possible other taxes(e.g. income tax,VAT), avoiding the need for taxpayers torely on hard-copy forms and certificates.

Another simplification initiativemay be to consideradoption by government of a single “small business”definition for tax and non-tax policy reasons (e.g. tostandardise eligibility criteria for (all) small business taxconcessions).

The indicators under this eighth and last dimensionexamine countries in terms of the access to information,supporting documentation and assistance they provideto assist small businesses in understanding andcomplying with the tax system. When sending out taxreturns, all countries and regions in theWestern Balkansalso disseminate relevant information anddocumentation. Albania, the Republika Srpska, Croatia,the former Yugoslav Republic of Macedonia andMontenegro also provide information on the Internet,

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Dimension 7

Table 7.1

Scores for sub-dimension 7.1 : Taxation20

ALB BIH HRV XK MK MNE SRB21

Analysis of tax burden on SMEs 1.00 2.00 1.00 1.00 2.00 3.00 N/A

Analysis of tax impediments to SMEs 1.00 1.00 1.00 1.00 2.00 2.50 N/A

Analysis of tax impediments to SMEs equity finance 2.00 1.00 1.00 4.00 1.00 2.50 N/A

Analysis of tax arbitrage by SME owners 1.00 1.00 1.00 1.00 1.00 1.00 N/A

Analysis of tax impediments to risky invest. in SMEs 1.00 1.00 1.00 2.00 1.00 4.00 N/A

Assessment of tax compliance costs for SMEs 4.00 2.00 2.00 3.00 1.00 1.00 N/A

Assessment of policy measures to lessen tax compl. 5.00 3.70 3.00 4.00 5.00 5.00 N/A

Assessment of SME taxpayer assistance 3.00 2.40 3.00 2.00 4.00 5.00 N/A

Overall weighted average for sub-dimension 7.1:Taxation

2.25 1.75 1.75 2.25 2.25 3 N/A

and each country has established a toll-free telephoneservice with trained tax specialists available to respondto taxpayer questions.The Republika Srpska, the formerYugoslav Republic of Macedonia and Montenegro havealso set up outreach programmes, including educationalseminars on their tax systems. Indeed, both the RepublikaSrpska and Montenegro have gone one step further andregularly meet with local chambers of commerce andother professional groups to consider how taxpayerassistance and education can be improved.

7.4 The way forward

The assessment in this dimension aims to scoreseven economies in theWestern Balkans on the basis ofrough measures of progress to date in implementingvarious frameworks and in exploring a number of aspectsof the tax treatment of small businesses, given policyinterest in assessments of the tax burden on smallbusinesses and in understanding possible tax effects onthe cost of funds, tax arbitrage behaviour and risk-taking,and tax compliance costs.

While all economies forecastmain tax revenues, andcan generate rough estimates of effects of broad-based taxchanges on aggregate revenues, no economy in theWestern Balkan region has yet implemented micro-simulation models capable of estimating disaggregaterevenue effects, and simulating the tax revenueconsequences of detailed fine-tuning of their tax systems.However, the Federation of Bosnia and Herzegovina, the

Republika Srpska, the former Yugoslav Republic ofMacedonia andMontenegro are taking steps to implementsuchmodels. Croatia and the formerYugoslav Republic ofMacedonia recently participated in anOECD taxmodellingworkshop, aimed at assisting countries in pursuingmicro-simulation frameworks.

Another key analytical tool to guide tax policyassessment and development is the METRmodel and itsvariants,which are attractive in generating summary taxburden indicators that take into account a large numberof tax provisions and interactions,while also offering theadvantage of relying on tax codes and regulations forinput data. In this area, both the formerYugoslav Republicof Macedonia and Montenegro have been taking initialsteps to implement a METRmodel.Montenegro hopes tohave aMETRmodel in place within a year. OtherWesternBalkan countries are encouraged to also move in thisdirection.

Limited analysis has been undertaken of effects onthe cost of capital of small business of double taxation ofprofits of incorporated firms. In Albania, Croatia, theformerYugoslav Republic of Macedonia, the Federation ofBosnia and Herzegovina, and the Republika Srpska, nostudies have yet been undertaken to examine thepotential impact double taxationmay have on enterprisefinancing, given the relatively low personal shareholder-level tax rates applied to returns on equity.24 In Kosovounder UNSCR 1244/99 andMontenegro, studies have beenundertaken to examine potential effects of doubletaxation on equity financing, and alternative integration

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Figure 7.2 Overall scores for dimension 7: Taxation

0

1

2

3

4

5

2009

Albania Bosnia andHerzegovina22


FYR Macedonia Montenegro Serbia23

systems have been examined. Kosovo under UNSCR1244/99 reports that the results of these studies have beenconsidered in current tax policy and proposed reforms.

Throughout the Western Balkans, no economy hasyet to systematically carry out studies of tax arbitrage bysmall business owners. A review of income tax rates onself-employed business income, dividends, interest andcapital gains suggests that care has been taken in manyeconomies to limit tax planning opportunities ofowners/workers of closely held companies.Yet significantrate differences are observed in some cases, in particularwhen account is taken of social security contributionslevied on wage income. Additional analysis and sharingof experience across the region would be welcome.

InAlbania, the Federation of Bosnia andHerzegovina,the Republika Srpska, Croatia and the former YugoslavRepublic of Macedonia, detailed analyses have not yetbeen carried out to assess implications of alternative losstreatment on investment in small firms with relativelyhigh-risk business ventures, and on scope for tax-avoidance (mischaracterisation of personal consumptionexpenses as business expenses). However, Montenegrohas analysed the potential for its business loss-offsetprovisions to influence risky investment in smallbusinesses, and has also examined tax-planningopportunities under alternative loss-offset provisions.The results of these findings have been addressed andconsidered in current tax policy and proposed reforms.Kosovo under UNSCR 1244/99 has also recently assessedits business loss-offset rules with the findingsdocumented and reported to senior Ministry of Financeofficials for discussion and consideration.

A number ofWestern Balkan economies have madesignificant strides in addressing tax compliance costs,arguably the most important impediment to address.Albania has assessed the average compliance cost of allof its main taxes and now routinely includes compliancecost assessments when evaluating new tax policies oramendments. Kosovo under UNSCR 1244/99, theFederation of Bosnia and Herzegovina, the RepublikaSrpska and Croatia have also assessed average compliancecost for small businesses of some or all of their main

taxes. In the Federation of Bosnia and Herzegovina,compliance costs were assessed and taken into accountwhen implementing the new CIT and PIT laws recently.

Progress amongst Western Balkan countries andregions has been impressive in assessing implications ofalternative simplified income andVAT policy regimes toreduce small business compliance costs. Indeed, allcountries have prepared studies assessing compliancecosts under alternative tax policy regimes. Albania, theRepublika Srpska, the former Yugoslav Republic ofMacedonia,Montenegro and Kosovo under UNSCR 1244/99have also evaluated the implications of alternativethreshold levels under alternative policy regimes includingpotential distortions to economic activity. Albania, theRepublika Srpska, the former Yugoslav Republic ofMacedonia and Montenegro have implemented taxreforms based on the results of such evaluations. Forexample drawing on findings of threshold studies,Albaniaand the Republika Srpska recently implementedpresumptive turnover tax regimes of 1.5% and 2%,respectively.Montenegro has also recently implementeda simplified tax regime for SMEs.

Encouraging progress is also found with respect toinitiatives to improve taxpayer access to information,supporting documentation and assistance to aid smallbusinesses in understanding and complying with the taxsystem.All countries and regions in theWestern Balkansdisseminate relevant information and documentationwith tax returns. Albania, the Republika Srpska, Croatia,the former Yugoslav Republic of Macedonia andMontenegro provide information on the Internet, andeach country has established a toll-free telephone servicewith trained tax specialists available to respond totaxpayer questions. The Republika Srpska, the formerYugoslav Republic of Macedonia and Montenegro nowhave outreach programmes, including educationalseminars on their tax systems. Indeed, both the RepublikaSrpska and Montenegro regularly meet with localchambers of commerce and other professional groups toconsider how taxpayer assistance and education can befurther improved.

112

Dimension 7

113

Notes

1 Country-specific tax information reported in this section is obtained from questionnaire replies supplied by Ministry of Finance officials, and the EuropeanTax Handbook 2007, IBFD. All SME Policy Index scores have been rounded up or down to the nearest 0.25

2 As from 1 January 2007, a qualifying micro-enterprise (with qualifying criteria including 9 or fewer employees, total income less than EUR 50 000) maydeduct profits reinvested in fixed assets from its tax base.

3 Under a tiered (or progressive) tax rate structure, the average tax rate on business income is higher (lower) the larger (smaller) is taxable income.

4 Graduated personal tax rates are applied to the net income of unincorporated businesses that are registered as taxable persons for value added tax (VAT)purposes. Business income of individuals who are not registered for VAT are subject to a local tax (a lump sum amount, based on annual turnover, businessactivity and location).

5 An individual with an unincorporated business may opt for application of corporate (rather than personal) income tax if, in the preceding tax year, businessturnover (gross revenue) was no less than EUR 277 000, net income was no less than EUR 55380, the business employed on average at least 15 employees,or the value of depreciable assets was greater than EUR 277 000.

6 Profits of incorporated small businesses are normally subject to corporate income tax. When after-tax profit is distributed, it may be subject – under so-called “classical” tax treatment – to personal shareholder income tax, or final withholding tax on dividends at the distributing company level, implying somedegree of double taxation of distributed profit. In the absence of some adjustment to integrate corporate and personal-level taxation to avoid or limit doubletaxation, this may result in a relatively high pre-tax “hurdle” rate of return on new equity capital, relative to an investment subject to single taxation. Similarly,capital gains on retained after-tax profit may be taxed on a realisation basis, implying some degree of double taxation of retentions (in the absence of integrationrelief) tending to increase the hurdle rate of return on invested (retained) earnings. Increased hurdle rates linked to double taxation may be more likely toarise for small businesses with limited access to global capital markets. For large firms with such access, domestic shareholder tax rates may not be expectedto factor into the cost of capital. Thus when considering small businesses that must rely on local financing, domestic shareholder taxes would be predictedto increase hurdle rates of return on funds particularly for this group.

7 Returns on certain other investments (e.g. interest on bonds) may be subject to only a single layer of taxation (e.g. personal taxation), or otherwise subjectto preferential tax treatment (e.g. principal residence, pension savings).

8 Under most tax systems, unincorporated business income (comprising a blend of returns on labour and capital inputs) is subject to personal income taxalone (no corporate-level income tax). Self-employed social security contributions may also apply. In the incorporated business case, in addition to corporateand shareholder-level income tax considerations, employer and employee social security contributions may apply to labour income (e.g. of a worker/owner).

9 Taxing capital gains as they accrue (rather than when realised at the time of asset sale) is difficult on a number of counts. Valuation problems may be metin assessing current market values of assets giving rise to capital gains. Taxing accrued but unrealised capital gains may also introduce liquidity problemsfor taxpayers with insufficient cash-flow to cover the tax burden. Moreover, providing investors with the cash value of accrued losses in excess of accruedgains required for symmetric treatment of accrued gains/losses may be viewed as problematic.

10 This point recognises that mature firms may invest retained earnings directly in small businesses (thereby limiting small business financing problemslinked to corporate lock-in effects on mature firms). However, to the extent that individual investors are more likely to invest directly (or collectively) insmall businesses, than are corporate investors, corporate lock-in may continue to pose financing constraints.

11 Tax systems may also affect levels and the allocation of savings and investment, and employment participation and work-effort decisions, raising efficiencyconcerns. Thus policy makers are encouraged to assess how various features of income and other taxes may influence real behaviour. This section and itscorresponding indicator focus on the exploitation of tax rate differences to minimise income tax for a given set of economic (as opposed to financial) variables(i.e. holding labour and capital fixed), by mischaracterising one form of income (e.g. wages) as another (e.g. capital income). For example, a worker/ownermay pay himself less than an arm’s length wage for a given amount of labour input, in order to characterise labour income as tax preferred capital income.

12 Depending on risk preferences, symmetric treatment of gains and losses may increase the level of risk-taking (i.e. increase the percentage of capital placedin assets generating uncertain returns) relative to the no-tax case. While this outcome is debatable, in practice risk-taking in small businesses may beexpected to be discouraged where the tax system treats small business profits and losses asymmetrically.

13 This recognises that for many employees, personal income tax and social security contribution calculations are carried out by employers with tax withheldat the company level, saving employees considerable time/cost associated with self-assessment, record keeping and tax payment. For other employees,where tax is not withheld and compliance costs are met individually, the time/cost in completing and submitting tax returns may be relatively low for anemployee, compared to compliance costs facing a self-employed individual, or the owner/worker of an incorporated company, which may grow as the complexityof the business operation expands.

14 For example, a study of VAT compliance costs in Sweden estimates that compliance costs would be reduced on average by roughly 30% if a single ratesystem replaced a multiple rate system. See Compliance Costs of Value-Added Tax in Sweden, Report 3B, Skatteverket, 2006.

15 A VAT collection threshold may be referred to as a VAT exclusion threshold. With aVAT exclusion, a firm is waived of the responsibility of collecting VATimposed on consumers.

16 With some firms being part of a country’s VAT system (participating firms, above the threshold) and others not (non-participating firms, below the threshold),the VAT system can be expected to affect the relative competitiveness of firms. Negative effects could be felt, for example, by non-participating firms thatare suppliers of intermediate goods/services, selling to participating firms unable to claim an input tax credit in respect of VAT paid on purchases fromthose non-participating suppliers. On the other hand, non-participating firms may enjoy a competitive advantage when selling to final consumers, if theyare able to sell their output at the same price as participating firms. This follows since, for participating firms, VAT paid on inputs is offset through their

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Dimension 7

input tax credit, while the whole part of VAT charged on their (final) sales is transferred to government in VAT payments. For excluded (non-participating)firms, VAT paid on inputs is offset by inclusion in the output price of this VAT amount. But the part of the VAT inclusive price charged to consumers linkedto final stage value added is retained by the firm (not transferred to government), implying a competitive advantage linked to this amount.

17 Small businesses may be exempted from regular income tax, and/or excluded from VAT (not required to collect VAT). The term “exemption” is used in thecase of income tax, as income tax is levied on businesses. The term “exclusion” may be used in the context of VAT, as VAT is imposed on consumers. Undera VAT exclusion, small businesses are waived of the responsibility of collecting this tax.

18 As considered in the previous section, firms falling under a VAT collection threshold may be placed at competitive disadvantage due to loss of input taxcredits, creating pressure for possibility of opting-in.

19 In countries with social security systems, individuals owning an unincorporated business are typically required to pay self-employed social securitycontributions on their own behalf levied on business income, and employee social security contributions on wages paid to workers. For an incorporatedsmall business, employer and employee social security contributions are typically imposed on the wage income of all workers, including wages of abusiness owner/worker.


21 The scoring for Serbia is absent due to lack of information.

22 Within this assessment, the Republika Srpska and the Federation of Bosnia and Herzegovina were assessed separately. The Brcko District was notassessed.

23 The data for Serbia is absent du to lack of information.

24 In Albania, personal taxation of dividends is limited to final withholding tax at 10%, and similarly capital gains on shares are taxed at a flat 10% rate.In Croatia, dividends and capital gains on shares are both tax exempt.While dividends and capital gains are subject to personal income tax in Macedonia,a flat 12% rate of personal tax applied in 2007, falling to 10% in 2008, with an inclusion rate for capital gains limited to 70%.

Access to Finance

7.5 Introduction

There has been notable progress in the provision offinancial services inmany of the economies of the region.Foreign banks have been competing vigorously to gainmarket share. Non-bank microfinance institutions havealmost everywhere (Croatia is a notable exception)expanded to serve the most remote regions and thepoorest clients and in one case (Bosnia and Herzegovina)are competing extremely forcefully. Other non-bankfinancial institutions have been slower to develop.

These improvements have been recognised and arereflected in the European Bank for Reconstruction and

Development’s transition scores. Every year the EBRDassigns scores to each of its countries of operation onvarious dimensions of transition.Two of these, the bankingreform and interest rate liberalisation, and the securitiesmarkets and non-bank financial institutions, reflectprogress measured in the financial sector. Scores rangefrom 1 to 4+with 1 representing little or no progress froma rigid centrally planned economy and 4+ representing thestandards of an industrialised market economy. Of thenine upgrades in financial sector reform scores awardedby the EBRD in its 2008 Transition Report, five have gone tothe economies of theWestern Balkan region, all in the areaof banking reform and interest rate liberalisation. Table7.2 shows the EBRD banking reform and interest rateliberalisation scores from 2006 to 2008 for each of theeconomies of the Western Balkans (excluding Kosovounder UNSCR 1244/99).

115

Source: EBRD, 2009.

Table 7.2

Banking reform and interest rate liberalisation (scores ranging from 1 to 4.33)

Country 2006 2007 2008

Albania 2.67 2.67 3

Bosnia and Herzegovina 2.67 2.67 3

Croatia 4 4 4

The former Yugoslav Republic of Macedonia 2.67 2.67 3

Kosovo under UNSCR 1244/99 N/A N/A N/A

Montenegro 2.67 2.67 3

Serbia 2.67 2.67 3

Albania’s banking reform score went up from 3- to3 (EBRDTransition Report 2008) as transparency in bankingincreased with the establishment of a new credit bureauand more effective implementation of the new bankinglaw. Bosnia and Herzegovina’s banking reform score wasupgraded from 3- to 3 due to strong progress in the qualityof the banking sector and increased financialintermediation, particularly in the cases of leasing andmicrofinance companies. The former Yugoslav Republicof Macedonia’s banking reform score also went from 3-to 3 as a new banking law was implemented and generalimprovements were observed in financial practices of thebanking sector.Montenegro saw its banking reform scorealso go from 3- to 3 due to important credit growth, and

implementation of sound regulatory measures that mayfacilitate an orderly slowdown in credit growth. FinallySerbia’s banking reform score was upgraded from 3- to 3due to strong growth in financial intermediation andexpansion of financial products within an improvedregulatory framework.

Following years of very rapid growth of credit to theprivate sector, 2008 has seen a gradual but markedslowdown of this growth, as a result of the global financialcrisis (seeTable 7.3). However, year-on-year credit growthis still above 20% in most cases, except in Croatia wherean upper limit on credit growth of 12% has been in placesince 2007.This is an important factor when prospects for

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Dimension 7

growth are discussed, as the growth of the banking sectorhas in recent years been a very important driver forgrowth in the region. Given that domestic credit to theprivate sector as a percentage of GDP is still very low (seeTable 7.4) as compared tomoremature economies and tothe EU average, further stimulus to growth is expectedfrom further expansion of financial intermediation.

The sector is dominated by mostly foreign-ownedbanks. So far these banks appear to be willing to remainfully engaged in spite of the economic crisis.The bankingsystem is also highly liquid and still profitable, and thelevel of non-performing loans is typically low (though

bound to rise in the coming months). For these reasons,there is hope that a credit crunchwill avoid the region andbusinesses will still be able to access credit, albeit ontighter terms than before.

Growth in the degree of financial intermediation hashad definite results for firms in terms of decreasedreliance on internal funds. Preliminary results (seeTable7.5) from the Business Environment and EnterprisePerformance Survey run by the EBRD in 2008 clearly showincreased reliance on bank borrowing and to a lesserdegree on equity finance as compared to the findings ofthe same survey run in 2005.

Source: EBRD, 2009.

Source: EBRD, 2009.

Table 7.3

Real growth in credit to the private sector (%)

Table 7.4

Domestic credit to the private sector as a share of GDP, official data (%)

Country 2006 2007 2008

Albania 53 43 30

Bosnia and Herzegovina 20 17 5

Croatia 21 9 7

The former Yugoslav Republic of Macedonia 27 31 N/A

Kosovo under UNSCR 1244/99 21 27 29

Montenegro 119 146 17

Serbia 10 24 16

Country 2006 2007 2008

Albania 21 29 35

Bosnia and Herzegovina 23 25 27

Croatia 64 67 69

The former Yugoslav Republic of Macedonia 29 36 N/A

Kosovo under UNSCR 1244/99 21 27 32

Montenegro 39 88 95

Serbia 30 35 38

This report looks at various policy tools and financialtools that can facilitate SMEs access to finance and areunder the influence of policy makers. It looks at thepresence and functioning of credit guarantee schemes; thetype of collateral and provisioning requirements imposedby the financial authorities on lenders; bankruptcy laws;the presence, coverage and functioning of cadastres; theleasing industry, its regulation and supervision; andventure capital funds and the legislation that governstheir functioning. From this year it also looks at thepresence of registration systems for movable assets andat the presence of credit information services.These lasttwo new indicators are important in the development ofa financial sector in that they reflect the degree of riskfaced by lenders in a specific economy, and consequentlytheir propensity to lend.


Dimension 7 of the Western Balkans Charter forEnterprise covers two components that are vital forenterprise development: access to finance and taxation.External finance (in the form of debt, equity or otherfinancial products) allows companies to leverage theirinitial capital base, bettermanage cash-flow fluctuations,embark on investment plans and expand turnover at afaster rate than if the company had to rely exclusively oninternally generated funds. According to BEEPS 2009,countries in the region have increased their reliance on

external finance in comparison to 2005, althoughinternally generated funds still make up the majority oftheir funding.

The assessment framework for access to finance inthis report does not contain a complete evaluation ofaccess to finance in the Western Balkans. This wouldrequire a full review of demand by each type of financialinstrument by companies and their supply by financialinstitutions, as well as the related prices. Rather, theassessment framework is derived from the Charter andfocuses on various policy tools and financial tools that canfacilitate SMEs access to finance and are under theinfluence of policy makers. In this context, the reportevaluates areas where government policy can build anenvironment conducive to the development of markets.

The assessment framework for Dimension 7 includestwo subdimensions: credit environment and financialfacilities for SMEs. From this year it also looks at thepresence of registration systems for movable assets andat the presence of credit information services.These lasttwo new indicators are important in the development ofa financial sector in that they reflect the degree of riskfaced by lenders in a specific economy, and consequentlytheir propensity to lend. In looking at credit environment,the report evaluates five indicators: the type of collateraland provisioning requirements imposed by the financialauthorities on lenders, laws and procedures on distressedcompanies, receivership and bankruptcy, the presence,

117

Source: BEEPS, 2008.

Table 7.5

Sources of finance for small firms (%)

CountryInternal funds orretained earnings

Equity (issue newshares)

Borrowing frombanks

Trade credit Other

Albania 75.11 5.77 13.56 0.09 0.68

Bosnia and Herzegovina 39.16 17.33 23.38 17.15 0.67

Croatia 56.57 0.84 31.7 5.61 5.28

The former Yugoslav Republic of Macedonia 63 4 25 2.40 1.50

Kosovo under UNSCR 1244/99 78.50 5.50 12.70 1.70 1.40

Montenegro 27 24 37 9.90 1.80

Serbia 45.90 12.10 27.90 10.30 3.90

coverage and functioning of cadastres, registration formovable assets and credit information services. In termsof financial facilities available to SMEs the report coversanother three indicators: credit guarantee schemes, the

leasing industry, its regulation and supervision; venturecapital/equity funds and the legislation that governs theirfunctioning.

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Dimension 7

• Collateral and provisioningrequirements

• Bankruptcy law• Cadastre• Registration of moveable assets• Credit information services

• Credit guarantee schemes• Venture capital/equity funds Leasing

Figure 7.3 Assessment framework for dimension 7b: Access to finance

Access to finance

Financial facilitiesCredit environment

7.7 Analysis1

Credit guarantee schemes

Guarantee schemes are an important tool to supportSMEs access to credit by reducing collateral requirements.However, not all credit guarantee schemes have thepotential to produce the same desired outcome. Efficientallocation of resources can be best achieved through theincentive structure of a well-functioning private sectormechanism. Therefore economies with state-fundedcredit guarantee schemes which are privately managedare scored higher than economies where such schemesare non-existent or publicly run.

The former Yugoslav Republic of Macedonia isleading the way on this dimension with three creditguarantee schemes in place with a total capitalisation ofapproximately EUR 9.5 million. The largest of theseschemeswas established by the government through theMacedonian Bank for Development Promotion (EUR 4.5millioncapitalisation), the secondwas established by the SwedishInvestment Fund (EUR 3million capitalisation) and thethird is amutual schemewithmainly US capital (EUR 2.5million capitalisation). All three funds were establishedin order to facilitate bank lending to SMEs.

The introduction of new credit guarantee schemesinAlbania and Croatia have granted them increases in thisscore as compared to those assigned to them in the 2007report.

Collateral and provisioning requirements

Collateral requirements (and relative provisioningrules for lenders) if too high, or too restrictive (e.g.collateral allowed is only real estate) seriously impedelending to the smallest borrowers who may not havesufficient assets to offer, or assets of the right type. Bosniaand Herzegovina is setting good standards along thisdimensionwith flexible definition of collateral in place inall three entities and by allowing the extension of micro-loans in the absence of collateral. Improved flexibility inthe definition of collateral used has granted increases inthe scores for Albania and Serbia, and the creation of acollateral registry for Croatia.

Bankruptcy laws

Bankruptcy laws are a legal mechanism to enforcedebt contracts in the presence ofmore than one creditor.The absence of such laws or their imperfectimplementation result in lenders’ reluctance to extend

loans to enterprises as they would have no legal recoursein case of failure of the borrower to repay the loan. SeeTable 7.6 for the average time, cost and expected outcomeof bankruptcy legislation in the Western Balkans, asmeasured by the Doing Business 2009 report. The datashow a situation not different from that of the 2007 SMEPolicy Index.

Cadastres

Cadastres are institutions that support the use ofland as collateral where land registration has beencompleted. There was no upgrade on this dimension.

Leasing industry

The leasing industry can be an important channel offinance in countries where the banking system is notfully satisfying the demand for investment loans of theSME sector. Almost everywhere, the relevant legislationto regulate the sector is in place and leasing companiesare operating. The only upgrades in the scores for thisdimension have been for Bosnia and Herzegovina,wherethe relevant legislation was approved since the last SMEPolicy Index 2007, and inAlbania,where there is evidencethat the law is being implemented.

Venture capital/equity funds

Venture capital and equity funds can be importantsources of long-term finance for SMEs.Their presence islinked to the level of development of the economy, its

growth prospects, the legal framework and exitpossibilities (i.e. a functioning stock exchange vs. directsales). On this dimension the scores have been upgradedfor Bosnia andHerzegovina, and Serbia where equity fundlegislation is now in place and some funds are operating(although exit possibilities are limited to direct sales).

Registration systems for movable assets

Registration systems formovable assets allow smallfirms to effectively use collateral other than land or realestate when applying for a loan and reassure lenders thatthe same collateral has not been used for another loanapplication.

Bosnia andHerzegovina,Montenegro and Serbia leadthe way, thanks to the presence and smooth functioningof registry agencies which keep record of pledges onmovable property.The databases are available online, freeof charge.

Credit information services

This measures whether the economy enjoys theservices of public or private credit registries. Public creditregistries are databases, managed by a governmentagency, often the central bank or the supervisory authorityfor the banking sector, containing information on thecredit status of borrowers and making it available tolenders. Private credit bureaus are private (sometimesnon-profit) organisations that maintain a database onthe credit status of borrowers in the financial system.

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Source: Doing Business 2009.

Table 7.6

Bankruptcy legislation indicators

Country Time (years) Cost (% of estate)Recovery rate

(cents on the dollar)

Albania no practice no practice 0

Bosnia and Herzegovina 3.3 9 35.9

Croatia 3.1 15 30.5

The former Yugoslav Republic of Macedonia 3.7 28 16.7

Kosovo under UNSCR 1244/99 N/A N/A N/A

Montenegro 2 8 43.7

Serbia 2.7 23 24.4

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Dimension 7

Figure 7.4 Overall scores for dimension 7: Access to Finance3

0

1

2

3

4

5

2009 2007




Table 7.7

Scores for sub-dimension 7.2: Access to finance2


Credit guarantee schemes2009 3.00 2.00 3.00 2.00 5.00 2.00 3.00

Change since 2007 +0.50 0.00 -0.50 0.00 +1.50 0.00 0.00

Collateral and provisioning require-ments

2009 4.00 5.00 4.00 2.00 3.00 2.00 3.00

Change since 2007 +2.00 +3.50 +0.50 0.00 -1.00 0.00 +0.50

Laws and procedures on distressedcompanies

2009 3.00 4.00 4.00 3.00 3.00 4.00 4.00

Change since 2007 0.00 +0.50 0.00 +2.00 0.00 0.00 0.00

Cadastre2009 3.00 3.00 4.50 3.00 3.00 4.50 3.00

Change since 2007 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Leasing industry2009 4.00 3.00 4.00 2.00 4.00 4.00 5.00

Change since 2007 +1.00 +1.00 0.00 0.00 0.00 0.00 0.00

Venture capital/equity funds2009 2.00 4.00 4.00 1.00 4.00 3.00 3.00

Change since 2007 0.00 +0.50 0.00 0.00 0.00 -1.00 +0.50

Registration systems for movableassets

3.00 3.75 3.00 2.25 3.00 3.75 3.75

Credit information services 3.00 3.75 2.25 1.50 1.50 3.00 3.75

Overall weighted average forsub-dimension 7.2:Access to finance

2009 3.50 4.25 3.75 2.50 3.25 3.75 4.00

Change since 2007 +0.75 +1.50 -0.25 +0.50 -0.25 +0.25 +0.75

These institutions are set up to facilitate the exchange ofinformation among banks and financial institutions, inorder to reduce the risk they face when taking lendingdecisions. Bosnia and Herzegovina, and Serbia are theleaders on this dimension with well functioning privatecredit bureaus making more than two years’ historyavailable.

7.8 The way forward

Increasing domestic bank lending to the privatesector, particularly SMEs, is an important challenge for thefinancial sector. The analysis of selected indicators onaccess to finance has shown that government policiescould improve the functioning of registries which togetherwith a better functioning cadastre would facilitate theuse of assets as collateral. Although this does notnecessarily require government intervention, there are anumber of measures authorities could take to facilitatethe deepening of financial intermediation. In this respectperhaps the most important challenge (where it is notalready in place) is to allow banks to shift to cash-flow

based lending for small loans, as opposed to standardcollateral-based lending. Lowering administrative barriersand costs for transferring remittances from abroad intothe banking system is also important with respect toincreasing access to finance for new investments. Otherchallenges include the promotion of non-cashtransactions, strengthening of property rights andenforcement of contractual obligations. Broaderavailability of creditor information and improvedbankruptcy laws would also make it easier for banks tolend to enterprises. In addition, there is room forimprovement in credit guarantee schemes as suchimprovements would make it easier for SMEs to accessfinance. To supplement the low levels of bank lending,promotion of new financial instruments such as leasing,venture capital and private equity funds within theappropriate legal and regulatory regime is an importantchallenge with regard to the development on non-bankfinancial institutions. In order to help deepen and broadenthe financialmarkets, government policies should ensurethat the legal and regulatory framework is conducive tomarket development.

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Notes


Dimension 8

Strengtheningthe TechnologicalCapacity ofSmall Enterprises

8.1 Introduction

Small enterprises face higher barriers than largeenterprises in developing and absorbing newtechnologies, due to shortages of skills, financing, and theability to gather and process technical and marketinformation. However, changes in technology devel-opment patterns and the great improvements in accessto informationmade possible by ICT have allowed smallenterprises to get closer to the technological frontier andin a number of cases to develop radical innovations.Small enterprises benefit significantly from theestablishment of innovation and information networks,including other enterprises, universities, private andpublic laboratories, and research and developmentcentres. Public policy has an important role to play indeveloping those networks, in establishing a favourableenvironment for innovative enterprises and in addressingsome of the most critical market failures.

The Charter envisages three types of activitiesdirected at strengthening the technological capacity ofsmall enterprises:

• Developing programmes that promote thedissemination of technology towards smallenterprises, as well as the capacity of smallbusinesses to identify, select and adapttechnologies;• Fostering technology co-operation and sharingamong companies of different sizes (particularlyamong European SMEs), developingmore effectiveresearch programmes focused on the commercialapplication of knowledge and technology, anddeveloping and adapting quality and certificationsystems that are easily accessible by smallenterprises;• Supporting actions at national and regional levelsaimed at developing inter-firm clusters andnetworks, enhancing pan-European co-operationamong small enterprises using informationtechnologies, spreading best practice via co-operative agreements, and supporting co-operationamong small enterprises to improve theircapabilities to enter pan-European markets andextend their activities in third-country markets.

The 2007 Charter report showed that the WesternBalkans lagged significantly behind the EU with respectto their policies for fostering competitiveness andinnovation. Only a number of countries in the region hadadopted an innovation policy and launched programmessupporting innovative enterprises to increase theabsorptive capacity of small enterprises. A focus groupsurvey conducted by the OECD Investment Compact in2007 indicated that interaction between universities andresearch institutes and small enterprises across theWestern Balkans was minimal. The main channels oftransmission of innovation into the region were tradeand foreign direct investment. Over the last two years,governments in the Western Balkans started to react tothis growing policy gap. The extension of theCompetitiveness and Innovation Programme (CIP) to theWestern Balkan countries has acted as a catalyst to reviewgovernment policies in this area. Currently six WesternBalkan economies (Croatia, Serbia, the former YugoslavRepublic of Macedonia, Montenegro and Albania) areparticipating in the first pillar of the CIP, namely theEntrepreneurship and Innovation Programme (EIP). Croatiais also participating in the other two pillars of CIP: theIntelligent Energy Europe Programme and the ICT PolicySupport Programme. However, the onset of the globaleconomic crisis, which may force a reassessment ofgovernment priorities and a re-allocation of resources,may affect the development and implementation ofprogrammes supporting innovative enterprises.


The assessment framework to evaluate progress instrengthening technological capacity of small enterpriseshas remained unchanged from the previous report.Threespecific policy areas (sub-dimensions) have beenexamined: technology dissemination, technology co-operation and research, and development of inter-firmclusters. The indicators for these sub-dimensions are,respectively:

• Support for training in technology applicationssuitable for SMEs,with the evaluation based on theexistence of specific training programmes and theirrange;

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Dimension 8

Strengthening the TechnologicalCapacity of Small Enterprises

• The existence of programmes designed to fostercommercial applications of knowledge andtechnology development, based on measures todevelop and implement a framework to encourageco-operation among SMEs, universities, andresearch and development centres, includingsupport for specific innovation and technologycentres. In addition to these collaboration

measures, there was an assessment of the impactof legislation and its enforcement on the protectionof intellectual property rights (IPRs),which is clearlycentral to collaboration among organisations;• Development of inter-firm clusters and networks,based on programmes and action plans designedto encourage cluster activities among enterprisesin target sectors.

125


Strengthening the technological capacity of SMEs

Technologydissemination

Technologyco-operationand research

Developmentof inter-firm clusters

• Technical training • Information andtechnology centres

• Intellectual property rightsprotection

• Cluster supportprogrammes

8.3 Analysis1

Support for technology training

Over the last two years there has been only limitedprogress across the region in this area.Only two countries,Croatia and the former Yugoslav Republic of Macedonia,have launched government-supported programmes tosupport technology training for small enterprises.

In Croatia, the Business Innovation Centre of Croatia(BICRO) plays a central role in supporting innovative SMEs.BICRO runs a number of programmes, ranging from R&Dsupport to equity financing. The Koncro programme isspecifically directed at strengthening the technical andmanagerial skills of innovative SMEs, through the co-funding of consultancy services.The programmehas beenrecently expanded, however training activities areconductedmainly using the BICRO network of technologycentres, not direct involvement of universities andresearch institutes.

The former Yugoslav Republic of Macedonia iscontinuing theVoucher Counselling Programme launchedin 2005. The programme allows companies to use

vouchers to buy consulting services (including technicaland managerial assistance, and training) from privateconsultants. The vouchers finance up to 50% of theconsulting fees. In 2008 the government introduced a newInnovationVoucher scheme and increase the ceiling fromEUR 750 to EUR 1 500. However, the total budget for thisprogramme is limited to EUR 50 000.

A number of other countries (including Bosnia andHerzegovina, Montenegro and Serbia) are conductingad hoc initiatives,mostly financed through donor funding,but have not yet launched specific programmessupporting training and technical advising. In Bosnia andHerzegovina, several initiatives have been launched atentity level.Additional programmes are conducted by theregional development agencies, such as the programmesrun by the North Economic Development Agency for thewelding and woodworking sectors.

Albania and Kosovo under UNSCR 1244/99 still haveno measures in place to support technology training.However, Albania has formulated a technologicaldevelopment programme, to be partly funded by the 2007-2013 Instruments of Pre-Accession Programme (see nextsection).

Fostering technological co-operation

Two areas are assessed here:

• Direct measures to foster technology transferbetween universities and SMEs;

• Legislation on and enforcement of IPRs.

In theWestern Balkans action to enforce IPRs is seenas crucial, both to help countries meet international

obligations and to create a firm foundation on whichcollaborative innovation developments can proceed.

Innovation and technology (I&T) centres and co-operation

In the 2007 Charter report, the Western Balkancountries were divided into threemain groups accordingto the presence and level of development of innovationand technology (I&T) centres and technology co-operationprogrammes:

126

Dimension 8

Table 8.1

Scores for sub-dimension 8.1: Promote technology dissemination


Promote technology dissemination2009 2.00 2.50 3.00 1.00 3.00 2.00 2.50

Change since 2007 +1.00 +0.50 +1.00 0.00 0.00 0.00 +0.50

Box 8.1

Business Innovation Centre of Croatia – BICRO LTD

The Business Innovation Centre of Croatia, BICRO LTD, is an innovation and investment company establishedby the Croatian Government in order to facilitate technology transfer and commercialisation activities primarilyin the sector of SMEs, contribute to the creation and development of private equity industry (specially VC), andpromote the establishment and development of science and technology parks/centres/other related infrastructure.

BICRO’s programmes were launched in February 2007. The programmes are open to anyone with an innovativetechnological idea but the least common denominator is the presence of potential IPR or protectable assets,whichcan be developed into a marketable technology/product. Examples of such programmes include:

RAZUM - Seed Capital Program

aims to ensure a sustainable increase in the number of knowledge-based technology-driven SMEs. BICROidentifies projects and firms, evaluates their capabilities and on that basis provides them with early seedfinancing.The program operates based on public support and other sources of financing contributing 70% of projectcosts in the form of conditional grants, and the remaining 30% is contributed from the private sector.

TEHCRO - Technology Infrastructure Development Program

is focused on developing efficient and self-sustaining technology and business support infrastructure in orderto support commercialisation of research outputs and development and growth of knowledge-based technology-driven SMEs. The program provides 3-5 yrs financing to projects aimed at establishment, upgrading and/ordevelopment of Technology Business Centres, Incubators, Science parks and commercial R&D Centres linked toresearch/academic institutions or R&D-based industry.

Untill February 2009, RAZUMhas funded 52 innovative projects and placed close to EUR 30million of seed capitalin SMEs,mainly start-ups, for R&D activities. In the last 2 years,TEHCRO invested 2.7million Euros in technologyinfrastructure development projects (i.e. operations of science & technology parks, incubators and R&D centres)with close to EUR 6 million of already committed funds.

Croatia, the formerYugoslav Republic of Macedoniaand Serbia, with a score of 3 and above, were included inthe first group, as they had established a policy frameworkand I&T centres, and had launched programmes to fostertechnological co-operation;

Bosnia and Herzegovina, and Montenegro, withrespective scores of 2.5 and 2, were in the second group,as they were in the policy elaboration phase, and had noactive programmes and centres;

Albania and Kosovo under UNSCR 1244/99, with ascore below 2, were part of the third group, with nosignificant policy action to encourage technology transferplanned.

According to the 2009 report, the situation hasremained virtually unchanged: Albania has recordedprogress (albeit starting from a low base), and Bosnia andHerzegovina, and Serbiamarginally increased their score.All across the region, there are still major obstacles toco-operation among universities, research centre andSMEs. Those obstacles are related to the general poorconditions of university research facilities, the lack offinancial incentives for universities and research centresfor engaging in enterprise consulting activities, and thepresence of cultural differences between the academicand the business worlds.

However, several governments in the region havestarted to launch initiatives favouring technological andinnovation in enterprises,with specific schemes aimed atSMEs.At regional level, twomain programmes are underimplementation.The first one, theWBC-Inco-Net, focusesmainly on research activity, and contributed to theestablishment of a network among universities andresearch and development centres in theWestern Balkans.The second programme, the BusinessAdvisory Service, aprogramme led by the EBRD and active in all theWesternBalkan countries, provides consulting and technologicaldevelopment services to SMEs.

One of themost advantageous components of the EIPfor the Western Balkans is the participation in theEnterprise EuropeNetwork (EEN) (see Box 6.2).This networkis constructed on the basis of the existing EuropeanInformation and Innovation Relay Centres, and includesconsortia from five economies in the region (Croatia, theformer Yugoslav Republic of Macedonia, Montenegro,Serbia, and Bosnia and Herzegovina). These will facilitatethe integration ofWestern Balkan companies in exchangeof technology and co-operation in R&D networks.

At country level, Croatia is still leading theWesternBalkan countries in terms of policy framework, numberof active programmes and pilot projects. Over the lasttwo years, BICRO, established in 1999, has been expandingits activities and support programmes (see Box on BICROabove).

In the formerYugoslav Republic of Macedonia, thereare four technology transfer centres (three in Skopje andone in Bitola) established with the support of GTZ, theGerman technical co-operation agency. Another ninecentres are planned, under the USAID-fundedCompetitiveness Project. In addition, a local consortiumformed of the Ss. Cyril and Methodius University, theFoundation for Management and Industrial Research, theAgency for the Promotion of Entrepreneurship and theEconomic Chamber of the former Yugoslav Republic ofMacedonia is providing technology transfer services in thecontext of the Enterprise Europe Network since thebeginning of 2008, through the European Information andInnovation Centre in Macedonia (EIICM). A new law onsupporting and facilitating technological developmentopens the door for enterprises to apply for governmentco-financing for up to 50% of research and developmentproject costs. At the end of October 2008, 57 projectsproposals were under evaluation. However, budgetallocations are limited to EUR 146 920 in 2008.

Serbia hasmade progress on the implementation ofthe Innovation Law, introduced in 2005. In line with therequirement of the law, 3 innovations centres, 20 researchand development centres, 39 research and productioncentres, 2 technological parks and 3 technologicalincubators had registered with the Ministry of ScienceandTechnology by the end of October 2008.These entitiesbecame eligible for financial support covering up to 50%of their R&D projects, with a pre-determined cap. Budgetallocation in 2008 amounted to EUR 4.7million.Additionalfunding has been provided by the EC-funded theEnterprise Development and Innovation Grant Scheme,mostly channelled through cluster development. Part II ofthis report contains a comprehensive review of theinnovation supportingmeasures introduced by the formerYugoslav Republic of Macedonia and by Serbia.

In Bosnia and Herzegovina the elaboration andimplementation of technology and innovation policyremains under the entity domain with no significantactions taken a state level. However, at entity level, someprogress on pilot project implementation has beenmade.For instance in the Republika Srpska, the Banja LukaUniversity has established a co-operation agreementwith

127

the Agency for SME Development. Technological parkshave been established in Zenica andTuzla (Federation ofBosnia and Herzegovina) and a Business and InformationTechnology Centre has been established in Tuzla,operating in close co-operation with Tuzla University(particularly in the fields of ICT and electrical engineering).

No major developments have taken place inMontenegro over the last two years. The main initiativeis the establishment of a University Centre for Designand Development, based at the University of Montenegro.The centre, planned in 2006, is not yet operational.

In Albania, the government has designed aninnovation supporting programme, to be financed by IPAfunds. It includes the establishment of a BusinessInnovation and Relay Centre inTirana, the training needsanalysis, the development of an Innovation andTechnology Strategy, and the establishment of a schemeof support to innovative SMEs. Programmeimplementation is expected to start in early 2009.

Intellectual property rights

IPR assessment provides a summary of the progressmade by the Western Balkans countries in the area ofprotection of intellectual, industrial and commercialproperty rights, as well as on the enforcement of therelated legislation and international IPR agreements.Theassessment is based on the information provided bygovernments as well as on the conclusions contained inthe country 2008 Progress Report published by the EuropeanCommission in November 2008.2

As noted in the 2007 Charter report, all WesternBalkan economies have introduced basic IPR legislation.The only exception is Kosovo under UNSCR 1244/99,whichwas at the time at a very preliminary stage of legislativedevelopment.

Over the last two years there has been progressacross the region: legislative measures have beenimproved, the institutions in charge of IPR registrationand protection (intellectual property offices and industrialpatent offices) have been strengthened, and IPRenforcement (customs and tax authorities and inspectionbodies) has been improved, as the judiciary is better ableto handle IPR cases. However progress has been unevenlydistributed across the region.

Progress has been more marked in Croatia, on allfronts. Over the last two years, IPR legislation on

copyrights and industrial property is furtherapproximated to the acquis communautaire and there hasbeen solid progress on enforcement,with a significant riseof misdemeanour proceedings resulting frominvestigations conducted by the State Inspectorate.

There has been some progress in the formerYugoslavRepublic of Macedonia and in Serbia, specifically onstrengthening the administrative capacity of theirintellectual property offices and in the area ofenforcement. In the former Yugoslav Republic ofMacedonia, the Copyright Law has been amended,allowing the transfer of the responsibility of inspectionsfrom the Ministry of Culture to the State MarketInspectorate and raising the level of fines for copyrightinfringement. In Serbia the government appointed theIntellectual Property Office as co-ordinator for allgovernment activities concerning copyrights, therebyimproving institutional co-ordination.

In relation to IPRs, Montenegro is a specific case.Under the State Union of Serbia and Montenegro, IPRswere covered by a State of Union Law.After independence(declared in June 2006), Montenegro has continued toapply the pre-existing IPR legislation. However,amendments on administrative fees were introduced inApril 2008, a law on geographical origins was adopted inJuly 2008 and a draft law on patents has been approvedby the Council of Ministers.

Although some limited progress was made inAlbania, and Bosnia and Herzegovina, the IPRs legislativeframework is still under development and theenforcement record is limited.

In Albania, the legislative framework on IPRs wasfurther improved with the approval (July 2008) of a newLaw on Industrial Property, in line with the acquiscommunautaire. The government has also amended theprovisions on the application of the Customs Code, inorder to improve the country IPR enforcement capacity.However enforcement remains problematic, due to thelimited resources of the Albanian Copyright Office.Inspection activity has been stepped up, but relativelyfew cases IPRs violation have been pursued in court.

In Bosnia andHerzegovina, the legal and institutionalframework remains at an early stage of development.However, basic legislation has been put in place and theInstitute of Intellectual Property is operational, with

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headquarters in Sarajevo, a branch inMostar and a secondbranch in Banja Luka (not yet operational). One of themain outstanding issues concerns the area of industrialproperty rights, due to weaknesses in legislation and inthe procedures for handling new applications, whichresults in long delays. The second main area of concernis law enforcement.The inspectorate bodies in charge ofIPR enforcement operate under the remit of the twoentities and the Brcko district. The state is in charge ofenforcing criminal law in relation to IPR violations. TheIndirectTaxAuthority is in charge of IPRs enforcement atborders.The result of this fragmentation of competenciesand mandate is that there is no unified track record ofenforcement. As noted in the EC 2008 Progress Report, in

Bosnia and Herzegovina a “high level of counterfeitingand piracy persist and the country remains a point ofdistribution to the rest of Europe”.3

In Kosovo under UNSCR 1244/99 the IPR legislativeframework and institutional framework is at an earlystage of development. A Law on Customs Measures inrespect to IPRs was adopted in 2008 and implementationstarted in June 2008, providing the basic framework tothe customs administration to take action against piracyand counterfeiting. The Office of Industrial Propertybecame operational in November 2007, but further actionsare needed to strengthen its technical and administrativecapacity. The enforcement record remains very limited.

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Table 8.2

Scores for sub-dimension 8.2: Foster technology co-operation4


Innovation and technology centres/co-operation

2009 1.50 2.50 3.50 1.00 3.00 2.00 3.00

Change since 2007 +0.50 0.00 0.00 0.00 0.00 0.00 0.00

Intellectual property rights2009 3.50 3.00 4.50 2.00 4.00 3.50 4.00

Change since 2007 0.00 0.00 +1.00 +0.50 +0.50 0.00 +0.50

Overall weighted average forsub-dimension 8.2:Foster technology co-operation

2009 2.75 2.75 4.25 1.75 3.75 3.00 3.75

Change since 2007 0.00 0.00 +0.75 +0.50 +0.50 0.00 +0.50

Development of inter-firm clusters and networks

As noted in the 2007 Charter report, cluster andenterprise network development is a key component ofSME policy in theWestern Balkans. All economies in theregion had an active policy in this area and attractedsubstantial donor support. Croatia and the formerYugoslav Republic of Macedonia were highlighted as themost advanced in cluster development, with Bosnia andHerzegovina, and Serbia shaping up their clusters policies.

The results of the 2009 report raise a number ofquestions about the approach adopted by the WesternBalkan governments in cluster development and thesustainability of donor-funded programmes.

Looking at the country performance presented inTable 8.3 we note that two countries, Serbia, and BosniaandHerzegovina, have significantly improved their scores;

Albania and the former Yugoslav Republic of Macedoniarecorded negative progress; while Croatia, Kosovo underUNSCR 1244/99 and Montenegro recorded no significantprogress.

In Serbia, progress in cluster and enterprise networkdevelopment has been based on the dynamic combinationof a well-defined government strategy, defined broadly inthe national strategy for economic development (2006-2012) and more specifically in the strategy for clustersand business incubators (2007-2010). It is built on theparticipation of local administration, broad consultationwith stakeholders and well-structured donor-supportedprogrammes. (Most of those elements were already inplace in Croatia and led to the development of 14 localclusters in 5 industries.)

In the case of Serbia, the Ministry of Economy andRegional Development has registered 20 clusters and is

providing support to 14 of them, operating in woodprocessing, building materials, metal processing,shoemaking and textile, automotive components, agro-business and agricultural machinery, all sectors thatalready had a relatively high level of agglomeration. TheEC and USAID have been the lead donors supportingcluster development. Their activity has been mainlydirected at providing quality services at single enterpriseor network level, while government support has mainlyfocused on infrastructure andhuman capital development.

The same combination of factors has been at play inBosnia and Herzegovina, with a significant difference.State support has been negligible, while the role of the

regional development agencies, of donors (especially GTZ,USAID and the EC), and of entities and cantons has beenmore substantial. Bosnia and Herzegovina has activeclusters in wood processing, automotive components,plastic components and tourism.The automotive cluster,supported by GTZ, had led to the establishment of adynamic enterprise network and schemes to share R&D,product testing and marketing activities.

The relatively poor performance of Albania and theformerYugoslav Republic ofMacedonia is attributed to thelack of synergies among government action, donor-fundedinitiatives, and support by local stakeholders andauthorities.

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Dimension 8


0

1

2

3

4

5

SRBMNEMKXKHRVBIHALB

Promote technology dissemination Foster technology cooperation Develop inter-firm clusters




Table 8.3

Scores for sub-dimension 8.3: Develop inter-firm clusters


Develop inter-firm clusters2009 1.50 3.00 4.00 2.00 3.00 2.00 4.00

Change since 2007 -0.50 +1.00 0.00 0.00 -1.00 0.00 +1.00

8.4 The way forward

All across the region, government policies directedat strengthening the technological capacities of SMEs areat an early stage of development. Croatia is the mostadvanced in the three areas of technology dissemination,technology co-operation, and research and developmentof inter-firm clusters. It has launched a comprehensivetechnological development programme (BICRO). In anumber of other countries (Bosnia and Herzegovina, theformer Yugoslav Republic of Macedonia and Serbia),technology support programmes aremostly still in a pilotphase, although progress has been recorded in Bosniaand Herzegovina, and Serbia in the cluster developmentarea. Albania, Kosovo under UNSCR1244/99 andMontenegro are at a very early stage of policy elaboration.There have been positive developments in the IPR area (interms of institutional development and legislativeupgrading and, to a lesser extent, policy enforcement)with a number of countries: Croatia, the formerYugoslavRepublic of Macedonia and Serbia.

The special section on high-growth enterprise (PartII of this report) reviews good practices at internationallevel, aswell as a first picture of the experiences developedin the Western Balkan region; it broadly confirms theresults of the 2009 report.

Given the limited progress achieved in this area, thepriorities highlighted in the 2007 SME Policy Index Report,

(underlined by the conclusions of the section on high-growth enterprise) are still largely valid.

• Government should further extend the support toinitiatives establishing inter-firm clusters andnetworks, integrating those initiatives with otherenterprise-supporting schemes (voucher schemes,business incubators, innovation supportingschemes, etc.). Governments should continue toorientate the existing and new clusters from thetraditional sectors to include and addressknowledge-intensive and high value addedservices.

• To strengthen the technological capacity of firmsencouraging local co-operation with universitiesis not enough.The companies source technologyworldwide and the services of the EnterpriseEurope Network reply to this opportunity. R&Dand innovation policies have to find the rightbalance between strengthening the local R&Dbase, in particular through specialisation anddevelopment of excellence, and technologicalmodernisation in enterprises.New and better toolsfor regional, European and international co-operation and technology development andapplication should be put in place.The opening ofexisting innovation voucher schemes forinternational co-operation holds, in particular,potential in this respect.

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0

1

2

3

4

5

2009 2007




• As argued in the section on high-growthenterprises, in order to forge an environment thatencourages innovation and growth, it is importantto move forward on diverse yet complementaryareas (intellectual property rights, businessincubators, cluster development and skillsdevelopment). As noted in the previous report, itis vital to ensure a high level of co-ordinationamong the Ministry of Economy, Ministry of

Education and Science, the private sector,universities and research institutes.

• Governments need to continue to act on IPRs; theyneed to devotemore resources to the enforcementof IPR legislation through communicationcampaigns, training of officials andmonitoring ofIPR cases to ensure results, particularly in countrieswith weak IPR enforcement records.

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Dimension 8

Notes


2 http://ec.europa.eu/enlargement/how-does-it-work/progress_reports/index_en.htm

3 Commission Staff Working Document, Bosnia and Herzegovina 2008 Progress Report (COM(2008)674), p. 40.


Dimension 9

SuccessfulE-Business Models

9.1 Introduction

This chapter measures the extent to whichgovernments encourage small enterprises to apply bestpractice and adopt successful business models; anddevelop information and business support systems,networks and services that are accessible, understandableand relevant.

Growing integration with European markets iscreating new opportunities for small businesses in theWestern Balkans, but also new threats to their prosperity.Taking advantage of new technology to improve efficiencyand competitiveness, and to introduce new approachesto purchasing and sales that facilitate access to Europeanmarkets,will be key to continued growth and profitability.Supporting small enterprises’ introduction of e-businesssystems can help ensure that they benefit from greaterintegration and competition. Support systems, relevantintegration networks and systems that supply relevantinformation all help to underpin small enterprises’transition to knowledge-based economic activities.


There are a variety of business support initiativesin theWestern Balkan countries and Kosovo under UNSCR1244/99, including business incubators, general businessservices and information provision.While on general levelthe private sector or governments provide business

support services, the key to their effectiveness is whetherthey are part of an efficient and effective nationalframework.

To assess performance in this dimension, thefollowing three sub-dimensions were analysed (thesesub-dimensions and their indicators have not changedfrom the 2007 SME Policy Index Report):

• SME support facilities, including incubators (anda national strategy underpinning theirperformance), publicly funded business servicesand the quality of business services (based on theexistence and enforcement of quality standards);

• The level of relevant information available to SMEs,taking into account not only the existence of thisinformation but also its accessibility andwhetherbusiness information centres are in operation;

• Whether there is a law on the use of electronicsignatures and whether the application of theelectronic signature works effectively and througha functioning accreditation body (consideredessential in the new economy).

9.3 Analysis1

The 2009 report reveals that only marginal progresshas been made by governments within this dimension.A pattern of isolated and fragmentary initiatives to providebusiness support services (many of which are funded by

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Dimension 9

Successful E-Business Models


Support facilitiesand services Information Electronic signature

• Incubators• Range and quality ofbusiness services

• Availability and access• Business information centres

• Progress in adoption andimplementation

Better e-business models and business support

donors) persists. To a great extent, there are no nationalstrategies within which individual efforts can be co-ordinated. This leads to gaps and overlapping services.While business support services have been seen bymostgovernments as important at both national and locallevels, a lack of long-term strategies means that issuessuch as quality assurance and appropriate range ofservices have not been addressed.

The exception is (just like in the 2007 report) Croatia,where support services are being developedwithin a clearnational strategy. This is one of the dimensions whereCroatia can demonstrate best practice. It has almostreached the level of excellence in the region, and inmanyrespects it is fully comparable with good practices in theEU-27. Since the last report, Croatia’s achievements havebeen further consolidated. In the past 12 months, therange of available business services has expanded, withan increasing presence of high-quality providers: bothtop-class Croatian firms and subsidiaries of internationalconsultancies.

Encouraging e-business is part of the overallGovernment Programme for SME Development. Thenecessary technical and regulatory framework is beingimplemented through a number of initiatives. E-Croatiaand Navigator are establishing the framework for thebusiness-to-government (B2G) environment while theyfoster a culture of ICT use among entrepreneurs. Thecommercial market for providers of business service isexpanding rapidly, reflecting growth in demand fromSMEs and acceptable regulatory requirements. Publiclysubsidised services are available through HAMAG-managed programmes, built on quality assurance servicesthat are based on a Register ofAccredited Business ServiceProviders.

Progress on the introduction of an electronicsignature system ismore limited.Most governments haveapproved legislation, but advanced implementation is inplace only in Croatia and to a more limited extent, theformer Yugoslav Republic of Macedonia.

SME support facilities and services

In evaluating the business support facilities providedby each government, three specific policy areas have beenassessed: business incubators, range of business servicesand quality assurancemeasures for business services. Inthe overall evaluation, range and quality assurancemeasures were each given twice the weight of businessincubators.

Business incubators

Business incubators provide a range of focusedsupport services for new businesses operating as tenantson their premises.Typically, initial rents are very low andrise in stages over the first two years until they reachcommercial levels or above, encouraging businesses tomove on once they are established. Additional supportservices, from common facilities (photocopying, receptionand telephone services) to more technical services(bookkeeping, IT support), skill development (training,coaching) and strategic assistance (advice and consulting)are offered at reduced (subsidised) rates.Often focused onspecific key sectors in an area or a national economy, inthe EU business incubators have proved a successfulmethod of reducing the failure rate of new smallbusinesses.

Overall, the situation has remained very similar tothe state of affairs in 2007: Croatia, the former YugoslavRepublic of Macedonia, Serbia, and now also Bosnia andHerzegovina are the countries in the regionwith themostadvanced business incubator programmes.

In Croatia, there is a national network of businessincubators, as well as a national programme to supporttheir operation and to establish new ones. In most cases,however, the focus is not on innovation and high-qualityservices are not always available. The scope of someincubators is limited to providing subsidised workspacein regions where finding suitable industrial premises isstill a problem. Exit strategies for the tenants are stilllacking in most cases; furthermore, one of the mainproblems remains the relative difficulty of findingalternative locations at affordable prices on the openmarket.

In Bosnia and Herzegovina, the entities/district havemade independent progress in establishing businessincubators, each entity holding a number of operationalincubators. A strategy was recently adopted at theNational IncubatorsMeeting on 16 and 17 November 2006by a country-wide network of incubators, definingcommon activities to foster new incubators.

Business incubators in the formerYugoslav Republicof Macedonia have suffered from the ending of a WorldBank project in 2001, which funded incubators in Prilep,Krusevo,Makedonska Kamenica, Delcevo, Stip, Strumica,Ohrid andVeles.The responsibilities and follow-up of theoperation of the incubators were transferred to somedepartments and units in MoE, as well as APPRM, yet

135

today only the Ohrid incubator is now partiallyoperational. Since 2006, however, a number of newinitiatives have resulted in the opening of new incubatorsand the planning of others, which will be launched in2009.Themost successful incubator is theYES incubator,which officially started operations in September 2007: atthe outset, only two companies commenced operations,but over time this number has grown and now stands at15, all of them functioning successfully and employingabout 50 young people.

In Serbia there are 17 business incubators out ofwhich 7 are operational. Within RASMEE aTraining Centerfor Business Incubators was established.All business andtechnological incubators and scientific and technologicalparks are registered according to the Innovations Law.

In the remainingWest Balkan economies, strategiesfor business incubators are still in their infancy. InAlbania,a strategy is currently being discussed and efforts arebeingmade to establish an incubator in the University ofTirana. In Montenegro, the need for more sophisticatedbusiness services is recognised by both public and privateactors serving SMEs, although an incubator is currentlybeing established through the EBRDTAM programme. InKosovo under UNSCR 1244/99, strategic plans for businessincubators still remain to be concretely implemented,although progress on the establishment of threeincubators can be noted.

Range and quality of business services

As in 2007, still only in Croatia it is possible to finda developed competitive business services market inwhich both national and international consultingcompanies operate, offering a full range of professionalservices. Geographical coverage is not yet uniform: themain urban areas are very well covered, while remoteregions can mostly rely on the local entrepreneurshipcentres.

In the rest of theWestern Balkans, the situation canstill be characterised as one where a number ofprogrammes have been created to establish businesssupport services using a range of donor programmes,with mixed success. There is a trend to require serviceproviders to tender regularly to provide subsidisedservices, but the rules governing the process still largelyrestrict applicants to existing providers. In most cases arange of organisations, originally funded by a single donor,successfully combine grant aid with commercial chargesto provide services to small enterprises. In Albania,

AlbInvest delivers services through a network of localproviders, some of which also receive support fromdonors, and has also started to develop a database ofconsultants and trainers. In Bosnia and Herzegovina,regional and local agencies receive assistance from arange of donors and local public sector support, with theRepublika Srpska co-ordinating a programme of its own,including workshops and seminars.

In Kosovo under UNSCR 1244/99, there is wide rangeof agencies with current or past donor support. TheMinistry of Trade and Industry provides some servicesthrough a voucher counselling programme. In the formerYugoslav Republic of Macedonia, a network of previouslydonor-funded agencies covers the territory.These agenciesreceive some government assistance to provide specificservices supplementing commercial services.TheAPPRMVoucher System of Counselling provides co-financing forbusiness services to participants in the system (100% ofcosts for potential entrepreneurs and 50% for activeenterprises). In Montenegro, a network of regional andlocal business centres has been developed (six regionalcentres and three local centres), providing a number ofsubsidised services for businesses. In Serbia, a network of14 regional SME support agencies exists;2 many basicsubsidised services are also delivered at local level.

In addition to subsidised programmes in the region,there is a growing number of commercial consultancies.While slow to get off the ground, themarket now appearsto be expanding rapidly for these service providers,assisted inmany cases by pilot voucher counselling-typeprogrammes that help introduce SMEs to the benefits ofusing consultants.

Across theWestern Balkans, programmes have beenestablished to set minimum standards for consultantsas a guide to their use by SMEs and governmentprogrammes. Inmost cases these can still be seen as pilotexercises, designed to test systems that link the trainingof consultantswith references from clients.These systemscould form the basis for more established systems at alater date. In some cases, the accreditation programme isspecifically linked to a particular small-scale voucherprogramme rather than onewith broader national reach.

In Albania, AlbInvest has established a database ofConsultants and trainers so that businesses can identifyavailable consultants and evaluate their expertise.However, the register is not yet associated with astandards/quality certification system. In Bosnia andHerzegovina, the Bosnian Institute for Accreditation –

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Dimension 9

BATA provides accreditation services to all organs thatdeal with certification. Domestic firms do certificationactivities, whereas foreign certification firms whichfunction in B&H deal with the certification which requireinternational validity.

In Croatia, HAMAG implements the Certification ofBusiness Consultant Project. The Project resulted in 58certified consultants by the end of 2007. Some businessservices are standardized.

In Kosovo under UNSCR 1244/99, an accreditationscheme exists for a small voucher programme, and therehas been some evidence of certification of trainers andconsultants. In the former Yugoslav Republic ofMacedonia, the quality certification of business servicesoffered to enterprises is still in its early developmentphase.Although there are some attempts, it will still takeseveral years to develop a body of service providers withthe appropriate certification. In Montenegro, consultantaccreditation is under elaboration. The same situationexists in Serbia.

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Box 9.1

The Business Advisory Service (BAS) Programme in the former Yugoslav Republic ofMacedonia

The BAS Programme in the former Yugoslav Republic of Macedonia was established in 2002 with funding fromthe Central European Initiative. Further funding has been provided by the Balkan Region Special Fund, DFID UK,Portugal, the Netherlands and EBRD.To the end of 2008, BAS in Macedonia has undertaken a total of 359 projectswith 315 SMEs, engaging 159 consultants. Some 297 projects have been completed and 245 of thesewere evaluatedwith a success rate of 78.7 (highly successful).The BAS Programme in the former Yugoslav Republic of Macedonia has also undertaken a number of marketdevelopment activities, including eight training events promoting the development of the local consultancymarket.

New initiatives:

In parallel to its standard programme, in December 2005 the BAS Programme in the formerYugoslav Republic ofMacedonia launched the BAS Enviro Programme to strengthen environmental management within the SMEsector and help enterprises tomove into compliance with the Integrated Pollution Prevention and Control (IPPC)directive, without undue adverse effect on their viability and competitiveness.

As a result of the programme, 103 local environmental advisors were trained by international experts to deliverconsultancy support to SMEs on the implementation of the IPPC directive, and related environmental impactassessment and environmental management systems.

The BAS Enviro Programme then supported 103 SMEs affected by the IPPC directive on issues related to compliance.The programme granted these companies a total of EUR 400 000 for covering 50% of the costs of the environmentalprojects.

The programme was funded by the European Union and was completed two years later in 2007.

Information for SMEs

The assessment looked at the general availability ofrelevant, good quality business information and at thespecific development of business information centres.Toobtain an overall evaluation of performance in this sub-dimension, information accessibility was given twice theweight of business information centres. Croatia is stillleading in this field but Serbia has made the mostsubstantial progress in ensuring that good qualitybusiness information is widely available to smallenterprises.

Provision of business information is at an early stageof development except inMontenegro, Croatia, and Serbia.Information services and products exist, but in generalthey are not co-ordinated or part of a wider strategy.

Information provision shows very similar characteristicsto that of online information provision (Chapter 5).

In Albania, Bosnia and Herzegovina, Kosovo underUNSCR 1244/99, and the former Yugoslav Republic ofMacedonia, it would be fair to say that information isavailable from business service providers and is accessibleto some extent online, but the quality and extent ofinformation are relatively low.While specific informationcentres exist within this network, their use and servicelevels should be increased.There is no source of uniform,consistent and easily digestible business information.

In Montenegro, the level of information to whichenterprises have access is relatively high thanks to thework of the Montenegro SME Directorate for SMEDevelopment , that ensures that personalised business

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Dimension 9

Table 9.1

Scores for sub-dimension 9.1: SMEs support facilities and services3

Table 9.2

Scores for sub-dimension 9.2: Information for SMEs


Business incubators2009 1.50 3.50 4.00 2.00 3.00 2.00 3.50

Change since 2007 +0.50 +1.00 +0.50 +1.00 0.00 0.00 +0.50

Range of business services2009 2.50 3.00 5.00 2.00 3.00 3.00 2.50

Change since 2007 +0.50 0.00 0.00 +1.00 0.00 0.00 +0.50

Quality of business services2009 3.00 3.00 4.00 2.50 2.00 2.00 3.00

Change since 2007 +1.50 +1.00 0.00 +1.50 0.00 0.00 +1.00

Overall weighted average forsub-dimension 9.1:SMEs support facilities and services

2009 2.50 3.00 4.50 2.25 2.50 2.50 3.00

Change since 2007 +1.00 +0.50 +0.25 +1.25 0.00 0.00 +0.75


Availability and accessibilityof information

2009 2.00 2.00 4.50 3.00 3.00 3.00 4.00

Change since 2007 0.00 -0.50 0.00 +1.00 0.00 0.00 +2.00

Business information centres2009 2.00 3.00 5.00 2.00 3.00 4.00 4.00

Change since 2007 0.00 0.00 0.00 0.00 0.00 0.00 +2.00

Overall weighted average forsub-dimension 9.2:Information for SMEs

2009 2.00 2.50 4.75 2.50 3.00 3.50 4.00

Change since 2007 0.00 -0.25 0.00 +0.50 0.00 0.00 +2.00

information is available on demand in paper form fromthe network of regional/local business centres and theEICC.

In Croatia there are 51 Business Information Centresthat make business information available to SMEs,including extensive online access via a central website.Furthermore, a directory of business service providers isavailable on-line at the MELE, Chamber of Commerce,HAMAG, Croatian Employers Association and otherbusiness associations.

In Serbia, through the RASME,NES, SIEPA, SBRA andSCC network, on the local, regional and national levels,much high-quality business information is now availableelectronically, through periodicals and printedpublications and can also be obtained by request.

Electronic signature

Electronic signature systems enable direct interactionwith government services and create legally enforceable

contracts within countries’ legal systems. A functioningelectronic signature system with an operationalaccreditation body are key factors to the success ofe-government services such as online filing of taxes orsocial security returns.

AllWestern Balkan countries have at least passed thelaw on electronic signature, but only Croatia and theformer Yugoslav Republic of Macedonia have alsoimplemented its use. In Croatia the law and relevant by-lawswere passed in 2002, and the electronic signature hasbeen used extensively across the SME community of thecountry. In July 2008, the Act on Amendments to theElectronic Signature was adopted by the Parliament.

In the former Yugoslav Republic of Macedonia, theLaw on Electronic Data and Electronic Signature wasadopted in 2001, alongwith four sets of regulations. In June2006, the first issuer of certificates was registered in theSingle Register for Issuance of Certificates. The secondissuer (Makedonski Telekomunikacii A.D.) was recentlyselected. In practice, any interested party may provide

139


0

1

2

3

4

5

SRBMNEMKXKHRVBIHALB

SME support facilities and services Information for SMEs Electronic signature




Table 9.3

Scores for sub-dimension 9.1: SMEs support facilities and services


Law on electronic signature2009 3.00 3.00 4.00 2.50 3.50 3.00 3.00

Change since 2007 +2.00 +1.00 0.00 +0.50 +0.50 0.00 0.00

140

Dimension 9

certificates at this moment and use them legally in allapplications and services (key public infrastructure (KPI)for applications and services). The infrastructure isestablished, as well as the first applications that usedigital certificates, but at this stage they are availableonly to a very limited extent. The beginning of the realupsurge of KPI for the applications is expected in the nearfuture.

9.4 The way forward

There is an urgent need in most Western Balkancountries and Kosovo under UNSCR 1244/99 to completethe regulatory framework for introducing the electronicsignature and establish a functional and legitimateaccreditation body. This is a precondition to developingelectronic commerce andmore advanced online business-

to-business functions, as well as for making the most ofonline government services.

There is a continuing need in the Western Balkansto establish national strategies for the development ofbusiness incubators, linking these with measures toencourage innovation and ensuring that clear fundingand performance measures are in place. Thus far, mostcountries have established ad hoc and mostly donor-funded business incubators, which disappear once thefunding does.

Information on business services is still fragmentedand of low quality.A national directory of business serviceproviders should be available in every Western Balkancountry today, ideally online,withmultiple criteria searchengines and personalised information on demand.


0

1

2

3

4

5

2009 2007




141

Notes


2 For details on the 14 agencies, see: http://www.sme.sr.gov.yu/?lng=3&tme=1240497832&obl=25&str=297


Dimension 10

Developing Strongerand More EffectiveRepresentationof Small Enterprises’Interests

10.1 Introduction

The last line of action of the European Charter forSmall Enterprises recognises the importance of theeffective representation of the businesses’ interest and thepublic-private dialogue (PPD).

The dialogue between the public and private sectorsis essential to both a stable and conductive to growthbusiness environment and a sound regulatory framework.PPD is thus a key preliminary step to the introduction ofany measures taken towards the implementation of theEuropean Charter for Small Enterprises.

PPD plays an essential role in establishing a soundregulatory framework. Input from the businesscommunity through business associations provides theadministration with insight into highly complex issues,and can often contribute to the formulation of effectiveregulatory measures for enterprises. This is especiallyimportant in cases involvingmicro and small businesses,which often lack the capacity for advocacy.This dimensionthus focuses on the advocacy capacity of businessassociations.

Compared with the situation depicted in the 2007report, there are two main sources of improvement: thereforms undertaken by the chambers of commerce andthe formalisation of the public-private dialogue.


The 2009 SME Policy Index is building on the twoperspectives included in the previous index, furtherdeveloping the second one.The two perspectives are:

• The degree to which the SME sector has effectiverepresentation, in terms of general SMEassociations and the specific role of the chambersof commerce;

• The degree to which governments systematicallyconsult the private sector, and whether thisdialogue is institutionalised.

Regarding the first element, although the maincomponent to be considered is the SME associations,there are several types of business associations that areincluded under this dimension, such as: trade/industryassociations, women’s associations and confederations(due to the fact that the some of them have strongeradvocacy capacity and they also include SMEs).They arecrucial in putting forward to the government the interestof the SMEs as well as informing them on changes andrequirements in different policy areas. Apart from theadvocacy and information role, they could also offerdifferent services and training to SMEs.

In the same category, but with a specific status, weincluded the chambers of commerce. The system ofchambers of commerce is present in each of the countries,split in two broad categories: mandatory membershipand voluntary membership. Although some of thecountries switched from mandatory to voluntarymembership, the main reason to maintain mandatorymembership is to ensure the necessary resources to thechambers of commerce so that they can offer good qualityservices to their members.

The second element of this action line was furtherdeveloped from the previous report by adding indicatorsin order to have a more in-depth picture of the public-private dialogue. The following aspects for an effectiveconsultation with stakeholders (featured in an expertsreport for the EC) were assessed in this report:1

• To establishworkable and transparent consultationprocedures (formal/legal or informal) that provide forefficient and effective exchange of informationleading toamore informeddecision-makingprocess;

• To ensure inclusion and secure the participationof all relevant business stakeholders in theconsultation process;

• To allow enough time for consultation to reachthe objectives of the consultation process;

• To take into account the small business dimension;• To publish results of consultations and inform allstakeholders involved when and where theseresults can be found.

144

Dimension 10

Developing Stronger and More EffectiveRepresentation of Small Enterprises’Interests

145

The key to a good consultation process is not only tohave an institutionalised body in place, but it is alsorelated to the capacity of the business organisations toreply to consultations. This process is quite demandingin terms of time, human resources and expertise.

The assessment framework pictured in Figure 10.1has only slightly changed since the 2007 SME Policy IndexReport.The only change is that the indicator public/privateconsultation has been broken down into four indicators,namely the frequency, formal influence, representation,and the meeting format of the public/privateconsultations.

10.3 Analysis2

SME networks and chambers of commerce

According to the scores in Table 10.1, the situationimproved in all countries but one, namely Bosnia and

Herzegovina.The decrease in Bosnia and Herzegovina isdue to a change in the methodology of computing thescore for this country. Compared to the previous report,when the score for this dimension was obtained as anaverage of the scores for the two entities, in this report thescore is given for the situation at the national level,without taking into consideration the developments atentity/district level. The advocacy capacity of thechambers and other business associations in Bosnia andHerzegovina remains to be expanded.

The big increase in the overall weighted averagescores for this sub-dimensionwas due to the reforms thedifferent chambers of commerce underwent between2006 and 2008. In the cases of Serbia and Croatia, thechamber improved both the advocacy role as well as thecapacity to provide services. In Serbia, the nationalchamber is promoting the SME Forum as a body forstructured dialogue between the business sector and thegovernment. In both countries, the chambers have anetwork of foreign offices.


Representation of SMEs

SME network Chambers of Commerce Public/privateconsultation

• Frequency• Formal influence• Representativity• Meeting format

Table 10.1

Scores for sub-dimension 10.1: SME networks


SME network2009 3.00 2.00 4.00 3.00 3.00 4.00 3.50

Change since 2007 0.00 -1.00 0.00 +1.00 0.00 0.00 +1.50

Chambers of commerce2009 3.00 3.00 4.00 4.00 4.00 2.00 4.00

Change since 2007 +1.00 0.00 +2.00 0.00 0.00 +1.00 +2.50

Overall weighted average forsub-dimension 10.1:SME networks

2009 3.00 2.25 4.00 3.25 3.25 3.25 3.75

Change since 2007 +0.25 -0.75 +0.75 +0.50 0.00 +0.25 +2.00

InAlbania, there were two revisions of the legislativeframework for the chambers of commerce, reducing theirnumber from 36 to 12 (according to the number of regionsinAlbania) and eliminating the compulsorymembershipin the chambers.Although the competition among themshould generate an improvement in services andadvocacy, this remains to be proven. The MontenegroChamber of Commerce is also involved in a reformprocess, but it will need major effort to present it as animportant advocate of businesses, as two other businessorganisations are very strong.

Regarding the SME networks, Kosovo under UNSCR1244/99 and Serbia registered progress. The businessassociations are stronger in Kosovo under UNSCR 1244/99,and the sectoral associations are concentrating theirattention more on the donor community. In Serbia thenumber of business associations increased and it is quitelarge now, but those with strong advocacy capacity areusually associated with different chambers.

Public-private consultation

Overall, the situation in the Western Balkans isimproving, as shown in Table 10.3. The situation for thepublic-private dialogue is not as clear as for the previousset of indicators. The picture is mixed because of theadditional indicators included in this section. Thesummarised information on the basis of which the scoreswere awarded is presented in Table 10.2.

The countries with the best performance areMontenegro, Croatia and Albania, while Serbia saw asubstantial improvement. In Montenegro, the culture ofpublic-private consultation is well developed. However,this is not fully captured in the scores because, althoughthe dialogue is important, apart from the Council forElimination of Barriers to Businesses and the NationalSocial Council (of limited scope), there is no institu-tionalised body for the dialogue on SME-related aspects.

Croatia has three bodies for public-private dialogue:the National Competitiveness Council, the BusinessAdvisory Council and the newly established SME Forum.With an appropriate institutional structure in place, it isimportant to further include the business sectors’ opinionin the formulation and development of actual policy andlegislation. Although there might be some overlappingbetween the forums they are focused on specific topics,for example, the Business Advisory Council wasinstrumental in revamping the regulation process.

In the case ofAlbania, the functioning of the BusinessAdvisory Council improved. Although there are somecomplaints of the business community that not all theiropinions are taken on board, it provides for a stabledialogue platform and it has already discussed asignificant number of draft laws.

Serbia has again registered a significant progressdue to the establishment of the SME Forum and the

146

Dimension 10

Box 10.1

SME Forum

A recent initiative to put the SMEs’ interest forward to the public administration was brought to life in Croatiaand Serbia, where the SME Forums were established.

Although both Croatia and Serbia had other bodies for public-private dialogue, the creation of a forum dedicatedto SMEs is one step forward. Both forums include representatives of the government and the SME community,who gather to discuss SME policy and legislative acts affecting them, among other topics. The main differencebetween them is that, while the forum in Croatia is institutionalised (created with the help of SMEPED IPAproject under the leadership of the Ministry of Economy, Labour and Entrepreneurship), the forum in Serbia isstill informal, an initiative of the Serbian Chamber of Commerce. The main advantage of this type of set-up isits focus on SMEs.The institutionalised forums address problems common to SME and large companies, and thelarge companies have amuch stronger voice. Both forums had a good start, but their efficacy is still to be proven.

The formerYugoslav Republic of Macedonia also has such a forum in place, but its meetings are quite infrequent.

resumption of activity of the SME Council (stoppedtemporarily due to the elections).

The slight decrease in the scores for the formerYugoslav Republic ofMacedonia and Kosovo under UNSCR1244/99 is due to the fact that although they have therespective bodies in place, their efficacy has still to beproven.

Bosnia and Herzegovina is the only country in theregion with no consultation body in place.This situationshould change with the adoption and implementationof the Strategy for SME Development.

Figures 10.2 and 10.3 present scores by sub-dimensions and the aggregated average scores for thisdimension.

147

FSME = structured in a specific forum for (and representing mainly) SMEsF = public/private consultation structured in a forum but not specifically for/with SMEsI = informal, no specific forum established> 2 = 2 or more meetings last year< 2 = one meeting or less last yearOL = opinions on draft legislationI = SMEs can initiate/propose measures or legislationPD = policy debate on SME policiesR = recommendations to the government

Table 10.2

Public-private consultation in the West Balkan countries and Kosovo under UNSCR1244/99

ALB BIH XK SRB MNE HRV MK

1. Organisation of consultationswith SMEs

F: BusinessAdvisory Council

NoFSME: SMEConsultativeCouncil

FSME: SMECouncil

F: Council forElimination ofBarriers toBusiness

F: NationalCompetitiveness

Council

F Businessadvisory council

FSME SMEForum

FSME: SMEForum

2. Regular meetings of the ForumAt least 4

meetings peryear

N/A

2

4 meetings peryear

Should meetevery month, butnot frequent in

2008

2 FSME 4/year

5 meetings sinceits creation in

2005

Also meetings atthe local level

3. Other procedures for dialogue(except informal meetings)

Chamber ofCommerceorganisesmonthly

Business Club towhich it invitesgovernment

representativesworking groupsfor drafting

legislation invitemembers of theprivate sector

Serbian Chamberof Commerce

initiated the SMEForum, with theintention to

establish it as aconsultative body

to the Gov

National SocialCouncil

Private sectorrepresentativestake part inparliamentaryworking groups

NECC

4. Influence OL, PD, I, R N/A OL, PD, I, R OL, PD, I, R PD, R, OL OL, PD, I,R PD, R, I

148

Dimension 10


0

1

2

3

4

5

SRBMNEMKXKHRVBIHALB

SME network Public private consultations





0

1

2

3

4

5

2009 2007




Table 10.3

Scores for sub-dimension 10.2: Public-private consultations


Frequency of public-privateconsultation (PPCs)

4.00 2.00 4.00 3.00 3.00 4.00 4.00

Formal influence of PPCs 4.00 2.00 3.00 2.00 2.50 4.00 3.50

Representativity of PPCs 3.00 2.00 4.00 3.50 3.00 3.00 3.00

How does the PPC meet? 3.00 1.00 3.00 3.00 3.00 3.00 3.00

Overall weighted average forsub-dimension 10.2:Public-private consultations

2009 3.50 1.75 3.50 2.75 2.75 3.50 3.50

Change since 2007 +0.50 -0.25 0.00 -0.25 -0.25 -0.50 +1.50

10.4 The way forward

This chapter has explored the effectiveness of SMErepresentation and the involvement of the businesscommunity and the public administration in public-private dialogue.The overall situation improved in mostof the countries in the region since the 2007 report.

However, both the public administration and theprivate sector have to work further to increase the scopeof public-private dialogues and their quality. The mainchallenge for the government is to consult the businesscommunity systematically and early in the process,whilefor the business community it is to build up the necessary

capacity to conduct consultations within the differentbusiness associations and to provide well-documentedproposals and comments. Although there are numerousbusiness associations, plus a system of chambers ofcommerce in each country, this capacity is still relativelylimited.

Regarding the format of public-private dialogue,despite the fact that only Bosnia and Herzegovina ismissing a body for this purpose of the national level, allthe other countries have to improve their own systems inorder to hold regular meetings and improve thetransparency of the system.

149

Notes

1 DG Enterprise, Consultation with Stakeholders in the Shaping of National and Regional Policies Affecting Small Business, 2005,http://ec.europa.eu/enterprise/entrepreneurship/support_measures/stakehold/doc/final_report_en.pdf


150

Part II

151

PART II

Policy Measuresto Support

High-GrowthSMEs in the

Western Balkans

1.1 Introduction

As opposed to Part I and Part III of this publication,Part II was written by Professor Stephen Roper fromWarwick Business School (University of Warwick), whoworked in co-operation with the partner organisations(OECD, EC, ETF, and EBRD) to perform targeted researchand reviews of a specific areawithin the European Charterfor Small Enterprises, namely high-growth SMEs.The SMEPolicy Index 2007 Report identified the areas of innovationin SMEs and technological development as in particularneed of improvement and development. Consequently,this part focuses on policy measures to support high-growth SMEs in theWestern Balkans.

Numerous empirical studies have demonstrated theimportance of high-growth SMEs (HGSMEs) in creatingnew jobs and introducing and commercialising radicalinnovations.Thismeans that HGSMEs can act as catalystsfor change, helping economies to restructure quickly in

response to changing economic, social and marketconditions. For theWestern Balkan countries (WBCs) thereis the potential for HGSMEs to create significant gains inboth short-term prosperity and longer-term structuralchange.

Creating an enabling environment and effectivesupport programmes for HGSMEs is not easy, particularlyin the specific circumstances of theWBCs and the currenteconomic recession. Moreover, as policy targeted atHGSMEs has developed rapidly in recent years, theevaluation evidence from existing policy programmes isrelatively limited.1 Central to many HGSME supportprogrammes, however, are the provision of businessinformation and knowledge transfer between firms, andbetween firms and universities/research institutes.Network contacts and relationships with larger firmsboth nationally and internationally are also seen asimportant as HGSMEs grow and develop. Beyond the start-up phase, managerial and marketing skills allied with

152

Section 1

Background and Context

Table 1

Policy areas and programmes for HGSMEs

Policy area Policy programmes (see annex 2)

Creating an enabling environment for HGSMEs

National SME promotion events (6.3)

Range of business services (9.1.2)

Quality of business services (9.1.3)

Availability and accessibility of information (9.2.1)

Business information centres (9.2.2)

Finance for HGSMEsCredit guarantee schemes (7.2.1)

Venture capital/equity funds (7.2.6)

Supporting innovative enterprises

Enhancing SME competitiveness (6.2)

Support training on technology (8.1.1)

Innovation and technology centres/ co-operation (8.2.1)

Inter-firm clusters and networks (8.3.1)

Business incubators (9.1.1)

Intellectual property rights (8.2.2)

Electronic signature (9.3.1)

adequate financing and effective protection forintellectual property rights is also vital to sustaininnovation and growth.2

Governments – in partnership with otherstakeholders – can play a crucial role in shaping theenvironment in which HGSMEs can flourish, providingappropriate business information, supporting networksand skills development, and ensuring the availability ofsuitable business finance. Here, we focus on three keypolicy areas: creating an enabling environment, financeand supporting innovative enterprises, each of which isrepresented by a series of specific indicators in the SMEPolicy Index (see Table 1).3 In Section 2 of this report wefocus on identifying international leading practice in eachpolicy area, examining a range of specific policyprogrammes and exploring their applicability to theWBCs.This builds on a recent study by the OECDWorking Partyon SMEs and Entrepreneurship on HGSMEs andinnovation which involved a review of literature andbroad-ranging policy audit of OECD countries4. In Section3we focusmore specifically on the situation in the formerYugoslav Republic of Macedonia, drawing on theinformation gathered in a mission conducted in March2009. In Section 4 we consider the specific situation in

Serbia, again drawing on a mission conducted in March2009. Section 5 concludes with some summary remarksand some suggestions for future consideration, includingthe evaluation of policy programmes.

1.2 Defining HGSMEs

To enable statistical comparability, the OECD definesa high-growth enterprise as a firm with an “averageannualised growth in employees (or in turnover) greaterthan 20% a year, over a three-year period, andwith ten ormore employees at the beginning of the observationperiod.”The share of high-growth enterprises can then becalculated as the number of high-growth enterprises asa percentage of the population of enterprises with ten ormore employees.5 Using this definition between 5% and20% of the stock of enterprises are high growth on thebasis of their turnover growth. As Figure 1 illustrates,these proportions are typically higher in the EasternEuropean economies,6 although no specific figures areavailable for theWBCs.

Other international studies use different definitionsof high growth. The Global Entrepreneurship Monitor

153

Figure 1 Share of high-growth enterprises (turnover definition), 2005

0

5

10

15

20

25

Slova

k Repub

lic

Roman

ia

Canad

aIta

ly

Luxe

mbourg

Czech

Repub

lic

Denmark

Netherl

ands

Hunga

ry

Finlan

d

Bulgari

a

Eston

ia

Lithu

ania

Latvi

a

Manufacturing* Services*

*Note: Manufacturing includes mining and quarrying and electricity gas and water (ISIC Rev.3 10-41). Services includes: wholesale and retail trades, hotelsand restaurants, transport storage and communications, financial intermediation, real estate, renting and business activities (ISIC Rev.3 50-74).

Source: OECD (2008), “Measuring Entrepreneurship – A digest of indicators”, OECD-Eurostat EEIP Programme, p. 19.

(GEM), for example, focuses on individual entrepreneursas the unit of analysis (rather than firms) and defines“high-expectation entrepreneurs” as those nascent andnew entrepreneurs who expect to have more than20 employees in 5 years. In GEM, “high-growth”entrepreneurs are established entrepreneurs whocurrently have 20 or more employees. Both can be

expressed as a percentage of the adult population to givean indication of the general level of populationengagement with “high-growth” enterprise.7 In generalterms across Europe, between 0.2% and 0.9% of the adultpopulation report being engaged in high-expectationenterprisewith a smaller – andmore uniform – percentageengaged in high-growth firms (Figure 2).

154

Section 1

Figure 2 GEM indicators of high-expectation and high-growth entrepreneurs as a percentageof the adult population

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

High expection High growth

Irelan

d UK

Switz

erlan

d

German

y

Czech

Repub

lic

Denmark

Polan

d

Netherl

ands

Slove

nia

Croatia

Swed

en Italy

Hunga

ry

Finlan

d

Franc

e

Belgium Sp

ain

Source: GEM (2007), Report on High Growth Entrepreneurship, Table 3, p. 22.

Figures 1 and 2 suggest that HGSMEs are only a smallminority within the broader population of SMEs (perhapsbetween 1:10 and 1:20) although having, of course, adisproportionate impact on job creation and marketdynamism.8 In terms of the policy programmes forHGSMEs discussed in the following sections, however, itis clear that definitions vary among countries and amongindividual policy programmes. The analysis thereforeadopts an inclusive approach and does not put forwardor adhere to any specific definition of an HGSME.9

1.3 Targeting Support for HGSMEs10

Several empirical studies confirm the importance ofhigh-growth firms for job creation. In the United Kingdom,4% of new start-up survivors were responsible for 50% of

jobs created by all new firms ten years later. In the UnitedStates, 3% of the fastest growing firms, so-called “gazelles”,generated over 70% of the new jobs created by new firmsbetween 1992 and 1996.The aim of support programmesfor HGSMEs is to enable recipient companies to achievehigh growthwhichwould not have been achievedwithoutthe programme. A key issue, however, is how to identifyfirms with the potential for high growth given that thepotential for high growth is neither visible normeasurable.As a result eligibility conditions vary, widely, amongcountries and include:

• Newness: The Australian CommercialisingEmerging Technologies scheme requires firms tobe less than five years old,11 while the SpanishSupport Programme for Innovative Young Firmshas a cut-off at eight years old;

• Size and growth: Some programmes insist thatfirms have already achieved a size (turnover)threshold, in some cases linked to an age limit.TheDanish Gazelle Growth scheme requiresmore thanEUR 268 520 turnover with potential for furthergrowth to EUR 13.42 million;

• Estimated growth potential: New Zealand’s GrowthServices Range requires potential growth of 20% ayear sustained over five years;

• R&D intensity: The Spanish Support Programmefor InnovativeYoung Firms requires at least 35% ofstaff engaged in R&D activities andminimumR&Dexpenditure criteria;

• Defined growth strategy: Turkish KOSGEB supportis conditional on a firm developing a strategic roadmap or business plan.

Overall, however, eligibility criteria vary widely andoften have a strong subjective element. It is also clearthat the nature of HGSMEsmeans that their resource andsupport needs vary throughout the life-cycle of thebusiness. One recent study, for example, identifies a four-stage life-cycle model and argues that the “high-growthpolicy domain” comprises the initial start-up andexpansion phases when resource needs and businessdevelopment are paramount. Underlying the start-upprocess, however, are entrepreneurial inclinations ormotivations and entrepreneurial behaviours on the partof the wider population (Figure 3). The challenge thisposes is not simply to identify HGSMEs but also toeffectivelymatch public support to firms’ life-cycle stage.

155

Figure 3 Life-cycle stages of innovation-driven growth and the HGSME policy domain

Key growthfactors

Contextualcharacteristics*Structuralcharacteristics

Start-up Expansion Maturity Diversification

Life-cycle stage

Sales and marketingProductionResource acquisition

R&DCommercialisationResource acquisition

Managerial capabilityInternal control

Identifying newmarkets

Young firm (4 years)

Simple organisation.Low formalisation,low specialisation,high centralisation

Adolescent firm (7years)Functional organisation.Developingformalisation, mediumspecialisation, highcentralisation

Adolescent firm (7years)Functionalorganisation. Lowformalisation, highspecialisation, highcentralisation

Mature firm (16 years)

Divisionalorganisation. Highformalisation, highspecialisation, lowcentralisation

High-growth policydomain

Entrepreneurialbehaviors

OpportunityrecognitionOpportunity framing

Opportunity framingOpportunity pursuit

Opportunity pursuitBusiness consolidation

BusinessconsolidationStrategic leverageOpportunityrecognition

Entrepreneurialbehaviors

OpportunityrecognitionOpportunity framing

Opportunity framingOpportunity pursuit

Opportunity pursuitBusiness consolidation

BusinessconsolidationStrategic leverageOpportunityrecognition

Entrepreneurialinclinations

Opportunity alertness

Entrepreneurial motivation

Managerial skill

Source: Autio, E., M. Kronlund and A. Kovalainen (2007), High-Growth SME Support Initiatives in Nine Countries: Analysis,

Categorisation, and Recommendations”, Report prepared for the Finnish Ministry of Trade and Industry.

The challenge of identifying potential HGSMEs ismade all the more difficult due to their diversity both interms of sector and origin. In the WBCs and othertransition economies, for example,many rapidly growingbusinesses have emerged in traditional sectors – e.g. food,textiles – where new market opportunities havedeveloped.Other high-growth SMEsmay result from spin-

outs, buy-outs or foreign direct investment. For HGSMEsin any sector issues around capital availability,partnerships, skills and export development are likely tobe important. For technology-based HGSMEs there is theadded complexity of intellectual property management,development and protection. Both are discussed insubsequent sections.

2.1 Levels of policy intervention

Recent research on creating advantage hasemphasised the positive role of public policy initiatives instimulating regional innovation and enterprise to boosteconomic development.12 A broad range of initiativesmay be important, however, in creating the frameworkconditions within which HGSMEs can start and prosper.Evidence from the United States suggests, for example,that regional new firm formation rates are linked tocultural creativity and social diversity.13 Other studieshave suggested that with appropriate policy support, it ispossible to stimulate the combination of markets,technological and business services, and appropriatefinancial structures that will encourage HGSME andcluster growth.14

Alternative levels of intervention are thereforepossible to support HGSMEs and different countries haveadopted different approaches to shaping the businessenvironment and, more broadly, to SME policy (Figure 4).

In Denmark, for example, a systemic approach has beenadopted focusing on establishing appropriateenvironmental conditions for enterprise rather thanproviding public support to individual SMEs. Moregenerally, however, countries have adopted a balance ofsupport to both shape environmental conditions whichare conducive to HGSME start-up and to foster subsequentgrowth and development.15

The focus here is on three elements of theenvironment within which HGSMEs develop included inthe SME Policy Index: measures to promoteentrepreneurial and innovation inclinations andbehaviours, or an enterprising and innovative culture(including the provision of training courses for prospectiveor nascent entrepreneurs, award schemes orcompetitions); availability of business services andinformation likely to be crucial during the start-up andexpansion phases of HGSMEs; and availability andaccessibility of business information.

156

Section 2

Policy Support for HGSMEs

Figure 4 Life-cycle stages of innovation-driven growth and the HGSME policy domain

SME policy

Innovation policy

Principal policy domain

Environment / National

Researchprograms

Entrepr. culture

Level of analysis

”Macro-level”Bureaucracy

IPR legislationBankruptcy laws

Culture Regulation Innovation

Sector

FirmResources

Growing marketsNew marketsPublic markets

International markets

CapitalSocial capital

Reputation / BrandBusiness expertise

Technological expertiseFirm-level innovation

Infrastructure

Innovation clustersBusiness networksFinancial networks

”Meso-level”

”Micro-level”

Network Opportunities

Entrepreneur

TrainingExperience

Risk/rewardAttitudes

Motivation Skill

Source: Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis,

Categorisation, and Recommendations”, Report prepared for the Finnish Ministry of Trade and Industry.

2.2 Enterprise promotion initiatives

The decision to start any business and, in particular,a HGSME requires a combination of opportunity, skillsand self-belief. Business information can help potentialentrepreneurs to identify and evaluate businessopportunities and this is discussed below.Here, the focusis on measures intended to encourage entrepreneurialand innovative inclinations and capabilities.

Perhaps the key starting point in developingentrepreneurial inclinations is a business andentrepreneurship-friendly atmosphere in which businesssuccess is seen as positive and there are positiveentrepreneurial role models. Creating this type ofenvironment is, of course, a relatively long-term projectrequiring engagement from a wide range of differentorganisations including the education system.Assessingthe situation across the WBCs in terms of measures toencourage an entrepreneurial and innovative culturesuggests substantial progress in recent years. Enterpriseand innovation events, competitions and fairs havebecome relatively common.At best, these initiatives haveinvolved a network of actors at regional and nationallevel and generated valuable co-ordination andpartnering activity. This collaborative or systemicapproach reflects examples of leading practice such asthe Finnish Y4 entrepreneurship development process(Promote Entrepreneurship in Society by Co-operation)which has involved broad-based partnerships oforganisations16 working together to create an enterprise-friendly society.17

In general terms, however, while welcome, theseinitiatives in the WBCs have been rather piecemeal anduncoordinated. Future policy implementation in this areacould take a more holistic perspective, adopting a multi-channel approach to increasing the awareness ofopportunities for enterprise or innovation.This approachis well illustrated by the “Gruender-mv.de” campaignimplemented in Mecklenburg-Western Pomerania. Thisaimed to increase the awareness of entrepreneurialopportunities by improving the image of entrepreneurshipas well as creating a more positive environment forbusiness start-up. The target audience for the initiativewas those in the 18-50 age group and activities includeda website providing information on start-ups andentrepreneurship, a telephone hotline radio and televisionspots, advertising and articles in newspapers andmagazines, as well as raising awareness at schools.Thesemedia initiatives were also supported by business planand e-commerce business competitions.

Such activitiesmay play an important role in raisingawareness of business activities; changing perceptionsof entrepreneurial activity; stimulating business networks;and exposing firms to national, regional and internationalcustomers. To date, however, the key focus of theseinitiatives in the WBCs has been on mainstream SMEsrather than having any specific focus on HGSMEs whichare likely to be either innovation-led or export-led firms.Interesting exceptions here are the awards for BestTechnological Innovation offered in Bosnia andHerzegovina, and Serbia. Even these awards, however,focus on pre-start activities. It may be worth the WBCsconsidering the introduction of awards initiativescelebrating the innovation and export achievement ofestablished firms. For example, in the United Kingdom, theQueen’s Awards for Innovation and Export Achievementare awarded annually to companies with outstandinginnovation and export performance. The awards arepromoted widely and help to highlight the importance ofboth activities to the economy.They also act as a focus forcelebrating excellence and inspirational role models toother firms in the United Kingdom.18

Alongside such general measures (which can betaken to promote a positive climate for enterprise), specificmeasures have been adopted in some countries toencourage start-up among different population groups. InIreland, for example, the Enterprise Start programme hasproved effective in encouraging those currently employedto move from employment to business start-up oftenwith high-growth potential.19 Other key measures haveinvolved moves to increase the level of enterpriseawareness and engagement at schools, universities andcolleges.This reflects the implementation of the EU OsloAgenda, designed to integrate enterprise learning intoeach stage of the educational process and where goodefforts by a number of theWestern Balkan countries havealready been noted in Chapter 1.20 A frameworkestablished by the Norwegian government, for example,provides a national policy agenda which sets out clearobjectives and progression in enterprise education acrossall stages of education.21

For HGSMEs in particular, promoting enterpriseactivity in higher education is likely to be of keyimportance. Here, EU recommendations for across-campus entrepreneurship education are timely22 whileinternational experience provides some very positiveexamples of practice with general lessons onwhatmakesthis effective (see Box 1). Strong institutional support iscentral to the effectiveness of these college or universityinitiatives that can be supported by regional competitions

157

or business plan competitions, such as that run by theBusiness Innovation Programme in Serbia.The outcomesof the Charter indicators for entrepreneurship in highereducation being piloted in 2009-2010 in the WesternBalkan and Southern Mediterranean regions beingsupported by the ETFwill be important to determine if andhowmore strategic entrepreneurship promotion in thirdlevel education can be achieved.

2.3 Supporting business serviceprovision and quality

High-quality business services provide a key input toHGSMEs particularly in the start-up and expansionphases. Such servicesmay be accessed privately by firmsor may provide the mechanism through which publiclyfunded support services are provided. In general, however,HGSMEs are likely to requiremore sophisticated servicesthan most start-up businesses and are more likely todraw on private, and often internationalised, business

services. In this sense, public support might best befocused on facilitating access to such services rather thandirect service provision.TheAustralian COMET initiative,for example, subsidises firms’ expenditure on a range ofbusiness development services such as marketing,commercialisation or IPR management. Key areas ofimportance to HGSMEs are likely to be broadly basedbusiness development services – dealing for examplewith legal or regulatory aspects of business start-up,technology-based services supporting R&D andinnovation, and support for internationalisation. Issuesaround IP may also be important for technology-basedHGSMEs and this is discussed below.

Business service provision suitable for the majorityof start-ups has developed rapidly in theWBCs in recentyears through, for example, business centre networks (theformerYugoslav Republic of Macedonia andMontenegro),regional development centres (Albania) and networks ofpublic and private consultants. The more sophisticatedservices required byHGSMEs (to support equity investment

158

Section 2

Box 1

Developing entrepreneurial graduates

A key driver of high-potential enterprise in theWestern Balkans is likely to be the level of graduate enterprise.Developing this resource calls for the creation of opportunities for students to develop entrepreneurial skills andattributes as part of their higher education. This will require “entrepreneurial universities” where the focus ison developing graduates who have the knowledge, skills, motivation and entrepreneurial capacity to addresseconomic and social needs.

Establishing the entrepreneurial university requires an enabling institutional environment, the engagement ofkey stakeholders inside and outside the institution, and the development of entrepreneurial approaches toteaching and learning.An enabling institutional environment is likely to require involvement from all membersof the university community and strong leadership commitment. Stakeholder engagement may involveinternational linkages and dedicated resources such as a commercialisation office or technology transfer team.Developing entrepreneurial teaching requires a shift from learning “about” to learning “for”,where students learnentrepreneurial techniques that can be applied to a broad range of entrepreneurial settings. Student placementsand other forms of business engagement are likely to be part of such entrepreneurial teaching that will also needto involve faculty, entrepreneurship educators and entrepreneurs.23

The University of Waterloo situated at the heart of Canada’s Technology Triangle provides an outstandingexample of an entrepreneurial university. Strongly embeddedwithin the regional community, dense co-operativenetworks on technology and enterprise between the university and local community are complemented by theuniversity’s co-operative education programme. “The rotation of students to industry and back to the classroomsolidified already tight relations with local industry.The reflexive relationship has allowed the curriculum to keepup with the ever changing technological frontiers of industry.”24 Over 250 spin-outs from the university haveresulted in part from the university policy of allowing ownership of intellectual property to rest with its creator(faculty or student), encouraging both creativity and enterprise.

or internationalisation for example) remain less developed.Formost HGSMEs the difficulty lies in being able to identifyand access the appropriate services quickly and effectively.Public sector agencies can play a key role here in brokeringboth public and private sector services to HGSMEs. TheFinnish Growth Firm Service is one example of such a

scheme, providing a one-stop shop service for HGSMEsand information on the services they might need. TheFinnish service is, however, limited, to providing access topublic support services while in other countries suchpublic services also provide information on private sectorproviders (See Box 2).

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Box 2

Growth Firm Service, Finland25

The Growth Firm Service was started in 2003 by the Finnish Ministry of Trade and

Industry.The programme identifies firms and entrepreneurs with a high-growth potential and act as a one-stopshop for public services relevant to growth firms. Consultants in all Finland’s public agencies concerned withbusiness support look for promising growth firms. When identified, the consultant offers a growth analysissession with the firm, and based on the growth analysis, specific needs for achieving growth are prioritised andappropriate services from the four participating institutions are enlisted. In total, there are approximately 100different support services that can be offered

The target group is HGSMEs althoughmost participating firms are technology companies. Participating firms havebeen very happy with the service; they appreciated being approached and provided with a single contact personinstead of one for each institution.

Box 3

The Prowess Flagship Award, United Kingdom26

The Prowess FlagshipAward is a best practice quality standard for excellence inwomen’s enterprise development.This nationally and internationally recognised quality mark has been achieved by organisations all over the UKSupported by UK government departments and regional agencies, the FlagshipAward incorporates three qualitymark standards for start-up support, support for established businesses and support for women’s businessnetworks.

Organisations working towards the Flagship Award are able to access national expertise to help develop theirbusiness support and advice services.This leads to completion of a self-assessment document and assessmentvisit before Flagship status is awarded. Periodic reviews of support procedures and personnel are then requiredfor renewal of the award.

For government departments supporting business development, the FlagshipAwards provide an effective qualitystandard in the business support supply chain. For business support organisations, the Flagship Awards providea development framework to measure, benchmark and improve services, and an indicator of the provision ofthe quality of service.

Other key issues relating to business serviceprovision in theWBCs emphasise the quality of businesssupport services. Here, there is no clearly establishedinternational best practice, although schemes toprofessionalise support have becomemore common both

at the level of the individual business advisor and thesupport organisation. A notable example is the FlagshipAward scheme run by Prowess in the United Kingdom,establishing quality standards for the support offered towomen to start and grow their businesses (see Box 3).

Progress towards the quality certification of businessservices across the WBCs has, to date, been relativelylimited, although a certification scheme for businessconsultants has been introduced in Croatia and moreinformal assessment schemes are operated by SMEagencies in otherWBCs.

2.4 Availability and accessibility ofinformation

Larger companies often have significant in-houseresearch capabilities. Smaller or newer firms are unlikelyto have access to these resources, creating scope forvaluable public provision. Business Information Centres(BICs) provide amix of online and documentary resourcematerial and research expertise; they are a key resourcefor SMEs businesses wanting to identify new markets orobtain information on legal or regulatory requirements.Typically regional development agencies across Europemaintain their own information centres focused on theneeds of local firms.

Many of these BICs or European Information Centres(EICs) will be members of the Enterprise Europe Network.Launched in 2008 by the European Commission, theEnterprise Europe Network combines and builds on theformer InnovationRelayCentres and European InformationCentres (established in 1995 and 1987 respectively). Keyservices provided by the BICs/EICs include business partnersearch for technology and business co-operation,databasesand rapid access to information on funding opportunities,and promotional and other material. Enterprise EuropeNetwork offers easy access and proximity to local servicesfor SMEs, thus creating regional business gateways.Regional consortia create a coherent support structure forlocal companies, boosting the region’s profile and itscompetitiveness. To date the only WBCs with membercentres are Croatia (with 11 centres) and the formerYugoslav Republic ofMacedonia (with fourmember centres,including the Ss. Cyril and Methodius University, theFoundation forManagement and Industrial Research, andtheAgency for the Promotion of Entrepreneurship). Bosniaand Herzegovina, Montenegro, and Serbia are also part ofthe Enterprise Europe Network.

Other European networks and initiatives also havesignificant potential to be of benefit to firms in theWBCsin terms of internationalisation and innovation, andmayin some cases reduce the need for country specificinitiatives.The EurOffice network, for example, providesaccess to a network of business incubators and other

support organisations internationally providing low costin-country business support services for firms seekingto develop their international presence.27 For innovativefirms, the IMPROVE platformwithin CIP allows companiesto benchmark their innovation management againstEurope-wide sectoral benchmarks and draw on innovationmanagement consultants for action plans to improvetheir innovation management.28 Both networks providepotentially valuable upgrading opportunities for firms intheWBC.

More locally, business service provision throughBusiness Information Centres has developed rapidly in theWBCs in recent years with perhaps the strongest profilesof business support services in Serbia, Montenegro andCroatia. In the former Yugoslav Republic of Macedoniaand parts of Bosnia and Herzegovina, the development ofbusiness centre networks has also been positive althoughonline information resources for SMEs remain under-developed.The recent launch in Bosnia and Herzegovinaof 22 First Stop Shops and supporting web resources isparticularly interesting. The initiative by the SerbianChamber of Commerce to create a web portal for SMEs(along with CD-based support) is also likely to widenaccess to valuable business information.

In two other economies (Kosovo under UNSCR1244/99 and the formerYugoslav Republic of Macedonia),voucher schemes have also been used to enable SMEs toaccess private sector support and consultancy services.Other countries (notably Serbia) have adopted moretraditional subsidy supports of up to 50% to enable firmsto access private support services. The value of bothinitiatives is underlined by international experience: stateprovision of business support services working throughlight-touch brokerage service combined with quality,validated private sector provision can be an effectivemodel of business support.29 Again, however, it is worthrecalling that these services are intended to meet theneeds of the general population of start-ups and SMEsrather than themore specific needs of HGSMEs regardingIP protection, finance (particularly equity) andinternationalisation. Even in countries where suchgeneralist business support services are well established,there has been a need to create a differentiated servicefor HGSMEs such as that in Finland (see Box 2).

A key issue here is how to identify those HGSMEs thatare to receive support from this specialist service. Here,a recent review of international best practice conductedfor the FinnishMinistry ofTrade and Industry is useful asit tried to identify the key lessons from international

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experience.30The suggestion is that the unit dealing withHGSMEs should be highly selective, particularly whenaddressing later stages of venture development and thata key criterion for selection would be a strong growthmotivation from the leaders of potential HGSMEs.

2.5 Finance for HGSMEs

While there is a general recognition that theavailability of adequate financing is crucial for businessgrowth and development, there is little internationalagreement onwhere finance gaps are felt most acutely.31

What is clear, however, is that HGSMEs have greater needandmake greater use of external sources of finance thanother SMEs, with both debt and equity funding beingimportant.32 Collateral is a particular problem for HGSMEs,particularly those with no established track record,although some researchers have argued that rather thana constraint on lending, collateral should be seen as away of strengthening long-term relationships betweenfirms and their investors.33

We focus here on two areas featured in the SMEPolicy Index and of relevance to HGSMEs: credit guaranteeschemes and venture capital/equity funding. Creditguarantee schemes have been seen as onemechanism forreducing collateral requirements and increasing theavailability of external finance to HGSMEs. Equity financecreates the potential for initial investment in newmarketofferings and scope for rapidly scaling of HGSMEs.Ensuring adequate availability of equity funding caninvolve both supply- and demand-side issues.

Credit guarantee schemes

Credit guarantee agencies and funds are commonacross most EU Member States. Most tend to operate insimilar ways, using public funding to guarantee privateloans to SMEs for investment, export development orleasing. Examples such as the Estonian Kredex schemesuggest, however, that for HGSMEswith significant capitalrequirements early in their development, loan or leasingguarantee schemesmay be quite valuable.The success ofthe Kredex initiative stands out due to similarities betweenthe Estonian context and that inmany of theWBCs, i.e. anestablished banking system but continued difficulties forhigher risk start-ups in accessing capital due to insufficientcollateral, limited equity or a limited credit history.

Kredex is also somewhat unusual in providingguarantees for a range of different types of loans and

leasing arrangements. For early stage firms, Kredexguarantees investment and working capital loans; formore established businesses, Kredex will support equityinvestment schemes, leasing arrangements and provideexport credit guarantees. In each case Kredex chargesboth a management and guarantee fee (typically 1.3-3.5%). These charges and a very low incidence ofguarantees being exercised have enabled Kredex tobecome self-financing within a few years. This is clearlypositive from a public finance standpoint but Kredex hasalso successfully established its credibility with thecommercial banking sector, due in part to continuedimprovement in its product portfolio and an un-bureaucratic approach.

An initiative like Kredex may well be applicable insome of theWBCs supporting HGSMEs regardless of sector.In this sense a Kredex-type initiative might be seen as acomplement to measures to support venture capitaldevelopments that are likely to focus primarily ontechnology-based businesses. Kredex has a number ofother advantages that could strengthen firms in theWBCs:it tackles the issues of limited security and collateral thatconstrain investment; it helps to lever additionaldevelopment-oriented capital into the business sector;and it directly involves the banks in working with clientSMEs in a more supportive and advisory capacity. Inaddition, through its support for export developmentKredex offers specific support for exporting companies,reducing dependence on local markets.

Substantial support has already been offered tonational banks in the WBCs through the CIP to supportthe development of credit guarantee schemes alongwithventure capital and seed funds. To date, however, theWBCs have had varied experiences with operationalisingcredit guarantee schemes, of which the mostcomprehensive and effective is the Guarantee Fund ofRepublic of Serbia. Introduced in 2003, this provides loansfor export development and other aspects of businessdevelopment. The Serbian scheme and the Kredexinitiative offer potentialmodels for the otherWBCswhichgenerally have more limited guarantee fundarrangements. Croatia, for example, has an export creditguarantee scheme although this is relatively small scale,with similar regional funds in Albania, Bosnia andHerzegovina, and the former Yugoslav Republic ofMacedonia. The experience of the former YugoslavRepublic of Macedonia in setting up guarantee funds isalso of interest, as funds have been hampered by overlycomplex application procedures, low guaranteeproportions and limited commitment of funding. The

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success of the Kredex initiative with its relatively simpleadministrative procedures is a marked contrast here.

It is important to realise too that there is strongcomplementarity between the development of businessand market information services, and export guaranteeschemes. Boosting export growth and internationalisationis likely to require both measures to be in place at thesame time and to be providing consistent support forsmall companies. In Serbia, for example, the SerbianChamber of Commerce and its regional agencies, and theoffices of theAgency for SME promotion provide contactsand information on externalmarket opportunities; exportcredit insurance is then available through AOFI.34

International experience also suggests the value ofloan guarantee measures, which may be critical giventhe volatility of the current economic climate. Indeed, anumber of EU countries have increased public provisionof loan guarantees as a way of increasing the availabilityof credit to firms in the current crisis. For HGSMEs,alongside export guarantees, loan guarantee schemesmay facilitate their potentially higher capitalrequirements and their need to invest in advancedtechnologies. Again, among the WBCs, only the Serbianguarantee scheme covers this type of lending althoughthere is also a Croatian scheme to support new technologyinvestments by firms in some areas of the country.Developing this type of more comprehensive loanguarantee provision is likely to be key in the otherWBCs,both to help firms maintain liquidity during the currentrecession and undertake future investment.

Venture capital and private equity

Private equity investment is central to HGSMEs,particularly in sectors where rapid growth is anticipatedand defensible (typically IP-based) such as in ICT andbiotechnology. Experience has shown that both supply-side and demand-side measures can be effective. On thedemand side,measures can be taken to strengthen firms’investment readiness,with a potential role for banks andagencies in helping businesses to assess and developtheir business plans and propositions.On the supply side,the policy focus has been on equity gaps (or marketfailures) and trying to ensure adequate financing forHGSMEs at different stages of development. Here, thereis a need to recognise the potential value for HGSMEs ofboth informal and formal private equity funding. Informalprivate equity funding (primarily through business angels)may be important for firms in the early stages ofdevelopment; policy can play a role in encouraging angelinvestment and facilitating angel networks.There is alsoa need to recognise that facilitating angel investmentmay require specific legislative frameworks.35

The current lack of availability of risk capital throughequity funding of SMEs andHGSMEs is perhaps one of thekey differences between the operating environment forHGSMEs in theWBCs andmore developed countries in theEU. Although all WBCs now have the basic legislation inplace to underpin equity investment it remains under-developed across the region, although there are isolatedexamples of angel and donor-funded activity:

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Box 4

The Access to Finance Programme, London

TheAccess to Finance Programme (2000-06) was designed to help companies located in London’s Objective 2 areasto access finance for growth and to help address problems of social and economic exclusion. The programmegrew out of specially commissioned research highlighting that small firms lack information about the types offinance available (and thus what would be suitable in a given circumstance), and an inability to present a goodcase to finance providers. Its success has led to attempts to extend its coverage to other parts of London.36

The programme helps firms to take advantage of existing sources of funds.A diagnostic tool is used to determinewhether companies could benefit from the programme. Intermediaries (typically local accountants) funded bythe local government agency provide intensive training and guidance to participating firms. Experience inLondon indicates that worthwhile leverage was obtained on the relatively low costs of running the programme,especially after its start-up costs had been met.

• InMontenegro, there have been some examples ofthe returns from property sales being reinvestedin the start-ups of family and friends;

• In Albania, both the EBRD and the AlbanianAmerican Fund provide equity funding for SMEs;

• In Serbia, isolated examples of individual SMEssecuring equity investments have been observedalthough the number remains small.

In addition to the overall lack of equity funding,evidence has suggested that where equity funding hasbeen attracted to the region it has tended to be part oflarger co-investment projects (Croatia, the formerYugoslav Republic of Macedonia) rather than supportingthe development of HGSMEs. One interesting initiativeto address this gap is the EUR 15 million projectVENCROrun by the Business Innovation Centre of Croatia. Basedon a public call, this co-financed initiative aims to supportinnovative technology-based start-up companies.38

For each of the countries of the WBC there arepotentially both demand-side and supply-side issues tobe addressed to increase the supply of equity funding.Onthe demand side, international initiatives have improvedthe investment readiness of HGSMEs and helped them todevelop approaches to relevant funding sources. Acustomised service is provided to each firm (essentiallymentoring) supported by a range of networked resources

on which mentors and the firms themselves can draw.These resourcesmay be provided online. In theAccess toFinance Programme, local accountants acted asintermediaries using a standard diagnostic toolkit (seeBox 4). In the Ready for Growth Programme, similarmentoringwas supported by online information resources(see Box 5). Both programmes had positive gains for theirclient companies andwere readily scalable once the initialsupport infrastructure (online support materials) hadbeen established.

On the supply side, policy initiatives are possible attwo levels: encouraging the development of informalequity or angel funding, and supporting the developmentofmore formal venture capitalmarkets. Programmes suchas the UK’s Ready2Invest, for example, have usedworkshops, case studies and social networks to encouragehigh-worth individuals to consider becoming businessangels and joining investor networks.39 Face-to-face eventswere supported by online resources, allowing individualsto assess their suitability to become a business angel andat the same time providing an indication of the potentialrisks to capital. In the Ready2Invest programme, a keypartnership was that between the regional developmentagency and an existing investor network. For the WBCsthere is definite potential clearly to expand informalventure capital or angel investment through thedevelopment of regional (or sectoral) angel networks.This

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Box 5

Ready for Growth Programme, United Kingdom, Spain and Greece37

This programme, operating in London and the South East of England, Spain and Greece, was targeted at smallbusinesses with high-growth potential operating in the e-content sector. It addressed a perceived lack ofinvestment readiness and the overall lack of investment in this sector. Because the bulk of the participant firmswere early stage and required relatively small amounts of investment in the equity gap, the emphasis on fundingsources was to tap business angel networks. Funding for the programme (2002-2004) came from the EU.

The key features of the programmewere intensive mentoring of each company, an intensive two-day workshopcovering the components of planning and developing a funding bid, techniques of pitching for funding andaccess to support for business plan development. A key feature of the programme was its online support: theuse of the website as a recruitment tool ensured a wider outreach and facilitated registration. A free diagnosticinvestment readiness tool enabled firms to assess their own investment readiness, and get feedback on theirstrengths, weaknesses and their ability to access equity finance.

During its two years of monitored operation, 502 companies participated: 60% - 70% rewrote their businessplans, 30% - 40% successfully accessed equity or other forms of finance, 30% - 40% identified new markets andcustomers, and 60% developed new business partnerships.

relatively low-costmeasure can bring new finance into thebusiness community and support HGSMEs.Such initiativesmaywork bestwhen informal venture capital networks arealigned with specific incubators, as in the example of theOxford Innovation Centre.

The public-private partnership underlying thesuccess of the Ready2Invest programme has been a keyelement of most policy programmes to expand venturecapital lending. As the history of the venture capitalindustry in Finland and Israel suggests, early publicinvestment can provide useful pump-priming for anascent venture capital industry geared to technology-based companies.40 Admittedly, in both of theseeconomies, the underlying level of technologicaladvance and investments in R&D were significantlygreater than those in the WBCs, but the initial successof the Croatian VENCRO programme does suggest thatsimilar co-financed initiatives might also be valuable inother WBCs.

2.6 Supporting innovative enterprises

Promoting innovation among SMEs is crucial to theirsuccess. Recent years have seen a shift in focus, however,from a narrow emphasis on technological innovation toa broader focus on support for both technological andnon-technical innovation. This reflects the growingimportance of the service sector to wealth creation andincreasingly R&D spending41 as well as a growingappreciation of the importance of non-technicalinnovation even inmanufacturing.42 ICT is a key enablerof much technical and non-technical innovation, and isan area where significant progress has beenmade in theWBCs in recent years.

We focus here on a number of aspects of supportfor innovative companies that feature in the SME PolicyIndex:

• Supporting training on technology (SME PolicyIndex item 8.1.1, see annex 2): The 2007 reportpointed to limited progress in this area, althoughsome pilot projects were in place. Developmenthad progressed most rapidly in the formerYugoslav Republic of Macedonia where technicaltraining programmes involving both public andprivate sector providers were operative.

• Supporting R&D and innovation: Although notincluded in the SME Policy Index explicitly this is

a significant area of policy intervention withrelatively high levels of publicly supportedcompany R&D in a number of Eastern Europeaneconomies (Slovakia, Czech Republic).

• Innovation and technology centres/ co-operation(SME Policy Index item 8.2.1): This coversinnovation and technology centres, technologytransfer initiatives and collaborative university-industry R&D.

• Inter-firm clusters and networks (SME PolicyIndex item 8.3.1): This covers programmesdesigned to stimulate industry or regional clusters.

• Business incubators (SME Policy Index item 9.1.1):Business incubators provide a supportiveenvironment for early stage businesses and maybe either freestanding or linked to universities orresearch institutes.

• Intellectual property rights (SME Policy Indexitem 8.2.2): IPR protection requires both anappropriate legal framework and effectiveenforcement.

• Electronic signature (SME Policy Index item 9.3.1):Electronic signature systems enable directinteraction with government services and createlegally enforceable contractswithin countries’ legalsystems.

Supporting training on technology

Support for technology training is an establishedarea of public policy support for SMEs in a number ofcountries with long-established programmes includingSouth Korea (SME Training Institute, 1978), New Zealand(IndustryTraining, 1992) and Belgium (1994). SME supportprogrammes generally focus on three specific types ofskills:

• Managerial skills, including the development ofmanagerial skills by those running technologicalspin-outs from universities;

• R&D related skills to improve firms’ knowledge-generation capacity but also their ability tocollaboratewith universities or other organisationson R&D collaboration;

• Exporting and internationalisation skills for firmswith an established local market presence andthat are seeking to develop further.

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Across the WBCs there is little consistent or large-scale provision of technological training of this sort. Oneissue highlighted by a number of countries is the lowlevel of commercial R&D activity in the WBCs andtherefore the lack of priority given by SMEs to technologymanagement and innovation-relatedmanagement issues(including IPRmanagement, development and protection).In both the former Yugoslav Republic of Macedonia andSerbia, for example, business R&D accounts for a smallproportion (5-10%) of total R&D spending, compared to anaverage of around 60-65% in the EU15.

In developing this area of policy it is worth notingthat two delivery models predominate internationally:grants or subsidies that enable SMEs to take advantage ofprivate training services; and the direct public provisionof training courses through training centres and othersupport infrastructure such as incubators, business orinnovation centres. The subsidy model can be effectivewhere private sector services are available locally. In someareas of theWBCs where private sector service provisionis weak, however, a centre-based model may be moreappropriate. Often in these programmes training may becombined with other aspects of capability development.Turkey’s Export Promotion Centre, for example, promotesexports through training alongside support for R&D, tradeinformation, publicity and marketing support, andnetwork building.43 Other initiatives such as thecompetence centres and business incubators discussedbelow also generally have a training element.

Supporting R&D and innovation

Programmes to support R&D and innovation in firmshave a relatively long history with the Canadian scientificresearch and experimental development programme, forexample, introduced in 1944.There is also strong evidencefrom a large number of studies of the effectiveness ofsuch public support on innovation activity and positiveeffects on business performance.44 This positive effectcan operate through a number of different organisationalmechanisms, however. First, and most obviously, publicsupport for private R&D may reduce the cost to firms ofbuilding up their knowledge stocks, enhancing businessperformance and firms’ ability to conduct future researchprojects.45 Second, public support for R&D activity maycontribute to developments in firms’ human resourcesand innovation activity.46 Third, public support for R&Dor innovation may improve firms’ ability to absorb R&Dresults or knowledge from elsewhere. Fourth, reputationalor “halo” effects may also stem from receipt of publicR&D support. Fifth, public funding of R&Dmay also create

the potential for R&D cost savings through collaborativeR&D and the sharing of research results.As a result, policyin this area is often linked strongly to skills developmentand the development of new R&D and innovation co-operation.

Traditional support programmes for R&D andinnovation have provided grant support. More recentlyother supportmechanisms have been used including thewidespread adoption of R&D tax credits, loans andguarantees (Austria, Spain) innovation vouchers (theNetherlands) and equity financing (Australia).47 R&D taxcredits have perhaps proved less effective in supportingR&D and innovation in SMEs due to low take-up. Equityfinancing, however, has advantages both for the enterpriseand the public support agency. The enterprise does nothave to worry about the payback as they will be asked fordividend only when they realise a profit. For the agencythere is the prospect of some return if the innovationproject is successful. Ownership dilution effects may,however,make equity support unattractive to some SMEowners. Innovation vouchers have proved an effectiveway of both encouraging R&D and stimulating newcollaborative relationships between SMEs and knowledgeproviders; these could be larger firms, public researchinstitutes or universities (see Box 6).This type of initiativemay be particularly valuable in theWBCs where levels ofuniversity-SME interaction are low.

Two other aspects of international programmes tosupport R&D and innovation are notable. First, policydevelopments have frequently linked R&D support withinternationalisation either to facilitate internationallycollaborative R&D (e.g. EU Framework Programmes) orlink R&D performers to potential markets (e.g. the Israel-US Bi-National Industrial Research and DevelopmentFund).48 Second, and more recently, policy developmenthas focused on supporting service sector innovation ofwhich a particularly interesting example is the TekesServe scheme (see Box 7).

For the WBCs there is a widely recognised need toexpand the level of R&D and innovative activity by firms,evident in recent steps in Serbia, for example, to introduceR&D and innovation grants. Such measures have thewidest applicability where (like theTekes Serve scheme)they cover both technical and non-technologicalinnovation (see Box 7). Building stronger university-industry links is also important, however, and the exampleof the Dutch innovation voucher schemes might beinteresting here (see Box 6). Both schemeswill contributeto firms’ R&D and innovation capacity andmay also help

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Box 6

The Dutch Innovation Voucher scheme

The Dutch Innovation Voucher scheme was originally introduced in 2004, building on a range of other regionalpilot projects.49The context for the voucher programmewas awidely held view that knowledge sharing betweenpublic research institutes and SMEs in the Netherlands was inadequate. Consequently, themain objective of theinnovation voucher scheme was to introduce SMEs to public research institutions and so stimulate R&D andinnovation in SMEs. The details of the scheme have changed in recent years but the key element is the issuingof an innovation voucher (worth typically EUR 7 500) to an SME to be redeemed for services at a public knowledgeprovider.The issuing of the voucher has two main impacts, both of which overcome major incentive barriers toengagement between SMEs and public knowledge providers. First, the voucher empowers the SME to approachknowledge providers with their problems, something that they might not have done in the absence of such anincentive. Secondly, the voucher provides an incentive for the public knowledge provider to workwith SMEswhentheir tendency might either have been to work with larger firms or to have no industry engagement.

Eligibility criteria for the Innovation Voucher programme are broad with only a light touch administration.Impacts have been significant, with high levels of additionality, positive effects on new collaboration and someevidence of impact on SME innovation outputs.50 Since 2004 the InnovationVoucher scheme has been extendedand enlarged in the Netherlands and similar schemes have been adopted in the UK, Ireland and Belgium.

Box 7

The Tekes Serve – Innovative Services Technology Programme, Finland51

The Tekes Serve - Innovative Services Technology Programme (2006-2010) encourages the development ofinnovative service concepts and service business models in companies, strengthens and diversifies service-related innovation activities (especially in SMEs), improves productivity and quality of service activities in variousindustries, and boosts academic research in the area of service innovation and service business.With a budgetof EUR 100million over five years (around 50% publicly funded), the programme is geared to challenging projects,where the novelty value is at least of national level. The project proposals are evaluated based primarily on thenovelty of the service innovation, not necessarily on the novelty of the applied technology.

Particularly interesting here are the broadly based definitions of service innovation and businessmodels adoptedin the programme and for which support is available:

Service innovation is a new or significantly improved service concept that is taken into practice. It can be forexample a new customer interaction channel, a distribution system, a technological concept, or a combinationthereof. A service innovation always includes replicable elements that can be identified and systematicallyreproduced in other cases or environments. The replicable element can be the service outcome or the serviceprocess as such or a part of them.A service innovation benefits both the service producer and customers and itimproves its developers’ competitive edge.

Service business models: A service innovation is a service product or service process that is based on sometechnology or systematic method. In services however, the innovation does not necessarily relate to the noveltyof the technology itself but the innovation often lies in the non-technological areas. Service innovations can forinstance be new solutions in the customer interface, new distribution methods, novel application of technologyin the service process, new forms of operationwith the supply chain, or newways to organise andmanage services.

to strengthen absorptive capacity,which is seen as crucialto effective open innovation.52 Other placement-basedmeasures may also be helpful in this respect. One studyhighlighted an example of the UK Teaching CompanyScheme, in which a graduate placement from a universitywas basedwith a company to undertake a specific project.In the case reviewed, a graduate placed with amanufacturing company instituted ten new innovationroutines of which sevenwere related to new informationgathering or absorption53 (see Box 9).

Innovation and technology centres, university-businessco-operation

University-SME linkages across the WBCs are notwell developed and a range of policy initiatives areunderway to strengthen this co-operation.Typically theseinvolve the establishment of technology centres withinuniversities with a mission for engaging in technologytransfer with SMEs. These centres and linkages remain

underdeveloped in all WBCs, however, with theuniversities and SME communities continuing in largely“separate worlds”. Many university academics in theregion continue to work in a traditional open sciencemodel, equating public funding of their work with a needto publish their results openly. Little awareness of IPdevelopment and protection on the part of manyreinforces this orientation. More recent internationaldevelopments have stressed the importance of theinnovation model of university orientation (see Box 8).

Internationally, measures to promote collaborativeR&D have a relatively long history, although measuresspecifically targeted at SMEs are of more recent origin. Anumber of different policy models have developed,however, including:

• Project-based collaboration programmes aregenerally focused and short term.TheTekes Servescheme discussed earlier (see Box 7) illustrates

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Box 8

Changing models of university business engagements54

The historical norm has been the open science model, where new knowledge is viewed as a public good, anduniversities place little priority on IP ownership. The EU (2004) argues that this open science model is mosteffective in stimulating commercialisation where “the technology has far reaching implications and where therisks ofmis-appropriation by private interests are detrimental to the public interest” (p.11).The incentive structurein the open science model suggests that universities are likely to adopt an essentially passive approach to IPdevelopment and exploitation, instead investing any available resources in additional research activity.Commercialisation then depends on the absorptive capacity of firms.

More recently, however, and most notably in United States since the Bayh-Dole Act, universities and publicresearch organisations have placed increasing emphasis on their private ownership of IP, and consequently havehad the incentive to adopt a more proactive role in IP development and exploitation. This gives rise to thelicensing model (EU, 2004). Here, universities engage in basic research, but are proactive. They devote resourcesto the identification, development and subsequent exploitation of IP, generally through patents and licensing.The EU believes that this approach can generate substantial benefits. “It is estimated that at least half the newproducts based on university patents would not have been developed if the results had been put in the publicdomain without patent protection” (p.11).

Mowery et al. (2004) argue that the increased focus on the commercialisation of university research has, however,at least in the United States gone beyond the licensingmodel, influencing the nature of university research itself.This has “changed the research culture of US universities, leading to increased secrecy, less sharing of researchresults, and a shift in the focus of academic research away from fundamental towardsmore applied topics” (p.1).In this innovation model, universities both adopt a proactive approach to IP development and exploitation andre-orient the type of R&D they are undertaking to bridge the gap between fundamental university research andits commercialisation. The EU contends that the social benefits resulting from the adoption of this innovationmodel may be larger, and more regionally focused, than those from the licensing model.

this type of measure. Key implementation issueshere relate to eligibility criteria and,where fundingis rationed, the process for project selection.

• Physical infrastructure projects such as researchcentres provide an upgrade to capacity and a focusfor long-term collaboration and training.

• Competence Research Centres (CRCs) bring togetherenterprises and research centres in a long-termcollaborative relationship aimed at a particulartechnology under independent governancearrangements. CRCs have proven to be a valuableinitiative, providing a focus for university-industryresearch collaboration. The best established ofthese programmes (in Sweden) has providedoverwhelming evidence of the value of this type ofinitiative, a result echoed in early evaluation resultsfrom Hungary and Estonia (see Box 9). In recentyears, CRCs have also been seen as playing amoresignificant role in internationalisation and SMEdevelopment. CRCs often act as a focal point orgateway for international R&D collaboration, andtheir relatively high profile can provide anattraction for SME participation. COMPERA, one ofthe ERA-Net networks, has an established role insharing best practice in the implementation ofCRC programmes (www.comp-era.net).

• Clusters are looser constellations of university andcorporate partners in a specific sector andgenerally have a geographical focus.

• R&D and innovation networks may be regional,national or international. San Diego’s CONNECTprogramme, for example, has both cluster (i.e.regional) and innovation network characteristics,sponsoring a range of activities (workshops,seminars, networking events and awardsprogrammes) designed to bring togetherknowledge creators fromuniversities and researchinstitutes with entrepreneurs and investors(www.connect.org).

Other forms of collaborative R&D scheme that haveproven highly effective are based on personnel transfer.These recognise the importance of individuals as “carriersof knowledge” and have helped bridge the gap betweenuniversities and small companies. One of the mostestablished of these is the UK’s Knowledge TransferPartnership programme (see Box 10) that has beenoperating in almost unchanged format for over 25 years.Evidence suggests it substantially benefits bothparticipating companies and broader economic growth.A similar approach (also supported by strong evaluationevidence) is the Innovation Assistants programme inBrandenburg in which a wage subsidy is offered to SMEs

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Box 9

Competence Research Centres: Linking research and innovation

Modelled on the Engineering Research Centres set up in the United States in the mid-1980s, CRCs have beensuccessfully established in a number of European countries since 1995. Among the most recently establishednetworks of CRCs have been the KKKCompetence Centres established in 2000 in Hungary and Competence Centresestablished in Estonia in 2003.

According to the COMPERA ERA-Net network a CRC is a “structured, long-term R&D collaboration in a strategicallyimportant area between academia, industry and the public sector.The aim is to bridge the gap between scientificand economic innovation by providing a collective environment.”55 Typically CRCs concentrate on a specifictechnological area and have some long-term (ten- year) public funding. In general CRCs comprise a university-based research facility undertaking collaborative research with a network of partner firms.

The longest established European CRCs are the Swedish Competence Centres which were established in 1995and evaluated in detail in 2003.56 The evaluation concluded “the Swedish competence centres programme is arelevant and effective instrument that builds the people and networks needed for industrial competitiveness,tunes universities towards socio-economic needs… and produces significant social and economic value… In sum:the argument for competence centres is overwhelming.”57 Key impacts were identified in knowledge creation,upgrading research skills, extended networks, innovation and attracting inward investment.

in the region to encourage innovation and effectivecommercialisation.58

Starting from a very low base, some efforts havebeen made in all of the WBCs to strengthen university-SME links in recent years. This is not an easy policyproblem, however, and presents continued challenges formore developed economies. Best practice dictates the

importance of enterprising universities oriented aroundthe innovation model, alternative technology transfermechanisms based on collaborative projects, vouchersand placements, and well developed intermediary andfocal institutions that can provide the focus for university-business collaboration. Intermediary organisations workbetween themore basic research units within universitiesand smaller companies, providing technology transfer

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Box 10

UK Knowledge Transfer Partnerships

The UK Knowledge Transfer Partnership (KTP) programme was originally established in 1975 as the TeachingCompany Scheme. The scheme is one of the UK’s flagship technology transfer mechanisms with over 1 000projects currently running.59 Each business involved in KTP identifies a strategically important project anddevelops a collaborative project plan with a partner university. A suitably qualified graduate will then work inthe company for between one and three years to implement the project. The graduate is closely supervised bystaff from the business and from the partner university. For SMEs, two-thirds of the cost of the project is paidby the UK government. KTP has proved popular with companies as a profitable investment and popular withgraduates (three-quarters of whom find jobs in their partner companies). Regular evaluations for the UKgovernment have also established that KTP provides value for money from a public finance standpoint.

The KTP scheme is supported by a network of regional advisors across the UK, with each university also havinga designated staff member or members who liaise with partner companies. Advisors and KTP project partnersare supported by a web portal (www.ktponline.org.uk), providing best practice case studies and information.

services or a combination of technology transfer andapplied research services. Perhaps the most prominentexample of this type of institution is the GermanFruanhofer Institutes.60 A different approach, that hasproved practical and positive in a range of differenteconomic contexts, is the notion of Competence ResearchCentres (see Box 9). Although these vary somewhat intheir structure and organisation, they have a number ofvery positive aspects thatmight be of value in the contextof theWBCs:

• They act as a focus for university-business andbusiness-to-business collaboration around aparticular technology and usually involve anextended network of firms;

• They act as a focus for international partnerships,helpful in thinking about applications forinternational research funding (e.g. frameworkprogrammes);

• They can act as a focus for training anddevelopment in a particular technology and in

particular developing an academic culture that isbusiness-oriented;

• They serve as a national focus for development ina particular technology and can be promoted as aflagship development.

Finally, it is worth noting that in the WBCs thegovernance of the R&D/innovation/commercialisationvalue chain is often divided betweenministries.This cancreate the potential for policy co-ordination difficulties(e.g. the former Yugoslav Republic of Macedonia, Kosovounder UNSCR 1244/99 and Serbia). In some advancedeconomies this has been addressed by creating statebodies with the responsibility for monitoring anddeveloping the innovation system.The key example hereis Vinnova, the Swedish agency (see Box 14).

Inter-firm clusters and networks

Promoting inter-firm clusters and networks can playa significant role in sharing technological and market

knowledge, and boosting business performance. Theearlier discussion of competence centres, for example,illustrates the potential power of inter-organisationalnetworks in R&D and technology commercialisation.Moregenerally the example of Silicon Valley and its imitatorsacross the globe suggest the potential for the emergenceof clusters of high-growth, technology-based businesses.Business networks also play an established role, however,in improvingmarket access61 and enhancing capabilitiesfor innovation and development.62

There has been some support for clusterdevelopment across the WBCs. In most countries theseclusters are focused on traditional resource-basedindustries linked to metals, wood processing, food andtextiles, although in Serbia and Croatia there are alsosome more high-tech clusters operating. Serbia has theclearest cluster strategy, one of the five pillars of its 2008SME Strategy, although the Croatian National Centre forClusters at the Croatian EmployersAssociation (part of thePro Inno Europe Network) also provides some co-ordination and support services to Croatian industryclusters. In the former Yugoslav Republic of Macedoniacluster development – with an emphasis on regional aswell as industrial clusters – has also been a significantelement of policy through 2007 and 2008. In most of theother WBCs, cluster development and support has beenless systematic and often donor-led with USAID active inthis area in Bosnia and Herzegovina, and Kosovo underUNSCR 1244/99.

Given their stage of development these clusterinitiatives (and the implicit focus on developing areas ofinternational specialisation) are probably relevant to theWBCs. In more developed economies, however, it is

important to recognise that policy hasmoved somewhataway from cluster development,while still acknowledgingthat industry networks and focused collaboration are ofconsiderable value. Instead of generalised industryclusters therefore policy initiatives have tended to bemore focused on building thematic networks for research,marketing or skills development.

Business incubators

Business incubation first emerged in the US in themid-1980s to support start-up development and tackleproblems associated with lack of capital, poormanagement and insufficient market understanding. Ingeneral terms, business incubators provide support fornew ventures to grow and survive during their early yearswhen they are most vulnerable. Typically “the role ofbusiness incubators is to provide a supportiveenvironment, where new entrepreneurs receive trainingand assistance in business management andmarketing,various other business services, and access to seedcapital.”63 It has been suggested that incubators add valueto their tenants in four areas: diagnosing business needs,selecting andmonitoring their tenants, providing accessto business networks and providing of access to capital.It has also been suggested that incubators may enhancethe entrepreneurial culture of an area and act as amagnetfor highly skilled individuals looking to benefit from theservices provided by the incubator.Analyses of the Israeliincubator network suggest that this attractor effect ofincubators may work even in rural and peripheral areas.This effect may be deceptive, however, as the same studyalso suggests that the subsequent success rate of firmsattracted may then be relatively low.

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Box 11

Oxford Innovation, United Kingdom

Oxford Innovation (OI) provides a leading practice example of the effective combination of incubation services,business support services and angel investment. Originally based solely in Oxford, the group now has 15incubation facilities in Southern England used by over 400 technology and knowledge-based businesses. Inaddition, OI offer a virtual office service (Oxiflex) formicro-businesses in search of business support andmeetingroom space.

The company also runs three business angel investor networks used by entrepreneurs from across the UKPerhaps the best known is the Oxfordshire Investment Opportunity Network which holds monthly investmentpresentationmeetings in Oxford.Typical meetings attract around 90 potential investors with up to six businessesseeking finance from EUR 282 000 toEUR 2.26 million.64 Over the last five years, it has raised more than EUR 21.5million of business angel and venture capital investment for 92 companies.65

Two key success factors emerge from the incubatorliterature. First, the context in which the incubator islocated is a very significant influence on its success. In theIsraeli case, for example, research has shown thatincubator success rates increase sharply where they areclosely related to venture capital provision.66The exampleof Oxford Innovation highlights a similar pointemphasising the importance of business incubation andsupport alongside the provision of appropriate capital(see Box 11).The implication is that incubators can forma valuable part of a systematic approach to supporting thegrowth and development of HGSMEs but are unlikely tosucceed in isolation. Second, the evidence suggests thatthe management and operation of the incubator itselfcan also be a significant determinant of its success withdifferent forms of incubation service of value to differenttypes of company.67 In Jyväskylä Science Park in Finland,for example, the regional development company hasdeveloped parallel incubator and light-touch mentoring

(company-clinic) approaches for HGSMEs with differentneeds (see Box 12).

Business incubation services remain patchy andunder-resourced acrossmost of theWBCs althoughmostWBCs have some strong examples (often the result ofstrong local support and donor finance). Croatia has anational incubator strategy and a national programmeto support their operation and establishment.Here,wherethe incubator system has been operating for longer thereis also some evidence of effective graduation. In themajority of the otherWBCs, incubators which began theiroperations 2007-2008 have yet to produce their firstgraduates. The state of knowledge around businessincubation across much of the region is strong, withleading incubators providing effective in-house supportto their client companies. International links from theincubators are also strong. Two key issues remain. Firstacross much of the region the incubator networks are

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Box 12

Incubation and light-touch mentoring, Jyväskylä Science Park, Finland68

A systemic approach to business incubation has been developed in Jyväskylä Science Park, Finland since the firstincubation facilities were offered in 1992. This involves a combination of formal incubator and light-touchprovision.

The formal incubation process includes both pre-incubator and post-incubator phases where assistance andcounseling are offered to firms.The pre-incubator phase represents the planning phase for business operations.Together with expert personnel from the business incubator, the future entrepreneur prepares a business planfor the company. It takes two to six months before a business plan (including a cash flow estimate for one yearand budget planning for three years) is ready. During this period the future entrepreneur has access to welldeveloped and tested budget and production planning tools of the business incubator.

Companies that successfully pass the pre-incubation period are allowed up to two years in the incubator. As aprinciple, premises and facilities are negotiated individually with each company, and the agreement also foreseesbusiness consulting services and individual counseling for the incubation period.

The post-incubation phase consists of a mentoring service that is offered for the company.The mentor advisesthe company and helps find business-related solutions.Thementor can serve as advisor to the company, outsideadvisor to the board, or a member of the board.

In addition to the physical incubator space, the Jyväskylä Regional Development Company Jykes Ltd., hasdeveloped a “light touch” company clinic service targeted at companies working in the field of knowledge-intensive business services.This does not provide physical incubator space but delivers consulting advice to helpfirms identify specific barriers to the survival and growth of participant companies.The services are also aimedat helping companies to better plan and manage their growth, which is of great relevance for growth-orientedcompanies. On a needs basis, tools to enhance the company’s capacities and capabilities are developed.

poorly resourced and are therefore able to provide supportfor only a limited number of potential start-ups. Donorfunding would be useful here to provide both capital andrevenue-based inputs to extend successful incubators.Second, the lack of equity funding across the region is aclear issue limiting the potential for growth, once firmsmature and leave the incubators.


It is clear that in the global economy SMEs aredisadvantaged in terms of their protection of intellectualproperty, both their ability to finance effective protectionfor intellectual assets and their ability to defend IP rightswhere these are infringed.69 Substantial progress hasbeenmade in theWBCs in recent years in establishing thelegal basis for the protection of intellectual property rightsalthough in some WBCs issues still exist around theenforcement of IP legislation. Internationally, policydevelopment in this area has been rapid in recent yearswith a focus on IP protection rather than the broadermanagement and development of firms’ intellectualassets.70

Perhaps the key learning point from the internationalexperience is the value of this broader perspective, inwhich firms are encouraged to focus on intellectualproperty as a central information resource andcommercial asset to be nurtured. Leading-edge supportprogrammes have therefore been targeted to help firmsappreciate the potential value of intellectual propertysystems as a source of business information and tomanage, develop and protect their intellectual assets ormore broadly their intellectual capital.71 This type of

broader IP management and development amongHGSMEs has been supported by a variety of differentprogrammes.The Finnish programme “INTO road show”,for example, aims to help SMEs to use the intellectualproperty system as a source of business information. Bytracking patents and citations for example, SMEs canidentify useful new technologies or partners and perhapsidentify areas in which development could beconcentrated.More business specific support is offered bythe Japanese Intellectual Asset-Based Managementprogramme introduced in 2005. It developed a manualfor SMEs called Intellectual asset–based management manualfor SMEs, and provided a range forums and seminars.Even more specific to the individual firm is a Koreanmeasure introduced in 2006 called Consulting forManaging Intellectual Assets for SMEs. It offerscustomised consulting services to help firms with IPmanagement, development and protection. Essentiallysimilar support is provided by the successful HungarianVIVACE programme initiated by the Hungarian PatentOffice (Box 13).

Crucial to the success of the Japanese, Korean andHungarian schemes is the availability of suitably qualifiedand skilled IP professionals within the public or privatesectors.As indicated earlier, private service developmentin some WBCs is still limited, especially in more ruralareas.Theremay be a need therefore for public investmentin training IP professionals, perhaps by higher education.

The legal basis for the protection of intellectualproperty in line with the Trade-Related Aspects ofInternational Property Rights agreement is now in placeacross theWBCs. This is a very significant achievement.

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Box 13

VIVACE Programme of the Hungary Patent Office72

Established in 2004 by the Hungary Patent Office and funded by the Hungarian government, this programme offersmentoring and advice on patenting and intellectual property to SMEs. The goal of the VIVACE programme is toheighten the awareness of the intellectual property system among SMEs and develop an IP culture among firmsin any life cycle stage.

Advisory services can include information on patents, supplementary protection certificates, plant varieties, utilitymodels, trademarks, geographical indicators, designs and copyrights. The programme also runs a telephonehelp line on IP protection, education schemes in intellectual property for attorneys and other courses, an e-learningpackage, as well as promotion activities for patenting. The scheme has illustrated the potential for directintervention to increase the patenting rate and has been successful in increasing firms’ awareness of theirintellectual property rights.

Enforcement of IP regulations is more patchy, however,with remaining issues of widespread piracy andcounterfeiting. Improving enforcement therefore remainsone of the key challenges in this area. Levels of awarenessof IP rights and protection remain low, limiting thewillingness of firms (and those in academia) to seekpatent protection.There is therefore a clear need formoretraining in the area of IP development,management andprotection. Chambers of commerce across the region areworking in this area and the state agencies responsiblefor IP protection are increasingly being more proactivein their training provision. Both are welcome steps takingthe WBCs some way towards the more comprehensiveVIVACE programme (see Box 13).

Electronic signatures and digital security

Digital security and the legal recognition of electronicsignatures provide the basis for effective e-business ande-government. In particular, electronic signatures can beimportant in enabling electronic contracting andprocurement. In the EU uniform and relatively effectivelegal provisions for electronic signatures have been inplace for some years, although the extent of their useremains uncertain.73 Legislative progress in this area insome of the WBCs has also been rapid moving rapidlytowardsmatching EU frameworks.A recent review of thesituation in Croatia for example, highlights Croatia’sElectronic SignatureAct (2002), the Electronic CommerceAct (2003) and the Electronic Document Act (2005).Together these provide the basis for all forms of e-signatures, the regulation of certification authorities, theliability of Internet service providers, and the basic rulesand regulation of e-commerce.74 The same review,however, highlights a number of areas in which theElectronic Commerce Act could usefully be extendedincluding developing e-contract attribution andacknowledgement-of-receipt rules, strengtheningconsumer protection for e-commerce buyers andestablishing specialist jurisdictions to resolve e-commercedisputes.

This type of effective legislative framework is clearlya central factor in enabling the development of e-business.Equally important, however, is the e-readiness of SMEs,or “the ability to successfully adopt, use, and benefit frominformation technologies such as e-commerce.”75

Governments have adopted a wide range of measures topromote e-readiness, and the European e-BusinessSupport Network highlights some useful examples ofnational best practice.76 For example, a number ofcountries have developed benchmarking tools to enable

SMEs to compare their e-readiness to other firms (e.g.the Danish ICT index, Ireland’s Self-Test of IT eBusinessKnowledge). Other countries have developed workbooksor web portals which offer advice on going digital (e.g.Netherlands), while some have developed case studiesof firms that have successfully implemented e-businessstrategies (e.g. Ireland, Greece, UK).

Ensuring the availability of e-business support hasalso been a major focus of action. Lithuania produced adatabase of consulting companies and freelanceconsultants offering e-business support. In Austria a keyinitiative was on training the trainers by providingworkshops for independent e-business trainers(undertaken jointly by the Salzburg ResearchForschungsgesellschaft and the Austrian ComputerSociety). In the UK, the National B2B Centre organisesnetwork events, educational events and supportsindividual firms with e-business projects.77

Basic legal provision for the recognition of e-signatures is in place across theWBCs but to date therehas been very limited use of this technology. Croatia andthe former Yugoslav Republic of Macedonia report somelimited implementation of e-signature systems in publiccontracting. Notably in Serbia, although the law onelectronic signatures was passed in 2002, it was only in2008 that the qualified certificate body was actuallydetermined allowing the use of this technology.Themaintask for theWBCs now therefore is to promote the widerusage and applicability of these technologies.

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3.1 Introduction

Policy support for SMEs has developed rapidly in theformerYugoslav Republic of Macedonia over recent yearsalthough it remains relatively low in terms of governmentpriorities. The emphasis of current SME policy is onpromoting business start-up as ameans of combating highunemployment,with limited support for firms’ subsequentgrowth.No specific supportmeasures are currently targetedspecifically at HGSMEs, although a number of specificinitiatives do have the potential to support firms withpotential high growth. These include business start-upcentres, incubators and some financing measures.

There are strong arguments, however, for suggestingthat from a national competitiveness perspective,investment in support of innovation and HGSMEs shouldbe given higher priority. Research from other countriessuggests it is the high-growth firms that generate themajority of new jobs and pioneer structural change,generating new products and markets and increasingexport earnings. In the longer term, particularly as theformer Yugoslav Republic of Macedonia seeks closerintegration into Europeanmarkets, innovation in productsand services will be important if its firms are to competesuccessfully in EUmarkets. Both innovation and supportfor SMEs (in general and those with potential for rapidgrowth) feature only peripherally in the government’scurrent four-year programme, annual working programmeand the ten measures that the formerYugoslav Republicof Macedonia government has outlined to tackle thecurrent recession. So in the longer term, effective supportfor HGSMEs will be important for the former YugoslavRepublic of Macedonia. In the short term of course thecurrent economic crisis is creating other immediatepressures on policy. In this sense many of the pressuresshaping policy in the former Yugoslav Republic ofMacedonia are also common to otherWBCs.78

Evidence from other countries suggests that high-growth firms, above all, those which are technology orIP-based and have an aspiration to trade internationally,have different and more complex support needs thanthose of slower-growing companies that aspire to tradelocally. Moreover, HGSMEs have different resource

requirements, in general needing much larger access tocapital than those of more domestically oriented SMEs.Both specialised support services and a conduciveenvironment for HGSMEs are missing in the formerYugoslav Republic of Macedonia at present. This sectionassesses the current situation in terms of some areas ofthe SME Index and provides some recommendations forpolicy development and upgrading. Some of thesemeasures could be adopted with minimal publicinvestment, such as improving the integration of SMEsupport from different government departments andsupporting business angel networks. Others – such as thesetting up of public-private venture capital funds ortechnology transfer support initiatives - will requiremorepublic investment andmay therefore bemore problematicgiven the current pressure on public finance.

3.2 Creating an enabling environment forHGSMEs

The former Yugoslav Republic of Macedonia hasmade strides in creating a positive environment forbusiness start-up with a notable simplification in theprocess of starting a business and tax reform. This wasrecognised in theDoing Business 2008 report, published bythe World Bank and International Finance Corporation,which placed the formerYugoslav Republic of Macedoniafourth among ten reformers in terms of economicdevelopment.79 Other measures have been adopted tosupport ICT development, including simplifications tothe tax system and the introduction of new educationalinitiatives. These include the adoption of ICT as acompulsory element of the secondary school curriculum.

Other more specific aspects of SME policy haveprogressed rapidly in recent years with the creation of theAgency for the Promotion of Entrepreneurship. Themandate of the Agency has been social rather thaneconomic,with a focus on the promotion of enterprise asan alternative to unemployment. The Agency hasdeveloped a network of 23 business centres following themodel developed in Slovenia. This is a relatively newaccomplishment, however, with 12 of these centres onlybeginning their operations in 2008. By and large these

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Section 3

Policy Support for HGSMEs: The FormerYugoslav Republic of Macedonia

provide face-to-face advice for developing business plans,with the provision of online information still relativelyweak. The key focus of the business centres is thepromotion of self-employment or enterprise as analternative to unemployment, although even here theirimpact is restricted by few internal resources, limitedaccess to schemes such as the national vouchersprogramme and the difficulty of obtaining appropriatebank finance.

In addition the Agency for the Promotion ofEntrepreneurship has also engaged in other enterprisedevelopment activities, notably compiling a database ofgeneral and specialist business consultants, andorganising training sessions for consultants in areas suchas business process re-engineering.The Agency has alsotaken a lead in the compilation of national statistics onenterprise and enterprise development. It recentlyconducted a national training needs survey and compiledthe Annual Report 2007 for the SME Sector.

Other elements of business environment to supportgrowth and development in existing firms are relativelywell established in the former Yugoslav Republic ofMacedonia.Three chambers of commerce deliver a widerange of training and support services to their memberson a commercial basis, and provide international links.The chambers also have effective industry sections andregional groupings which might provide the frameworkwithin which more intensive efforts to support high-growth firms might be undertaken. The EconomicChamber of the former Republic of Macedonia, forexample, has 50 industry groups and 15 regional chamberswithin the former Yugoslav Republic of Macedonia.

Donor-led initiatives have also made a positivecontribution to the development of business support andsupport services for SMEs in the formerYugoslav RepublicofMacedonia.Organisations such as the Dutch-supportedMacedonian Enterprise Development Foundation, for example,have made progress in providing micro-credit loans tofarmers and micro-businesses through intermediariesand undertaking other enterprise development activities(including pioneering voucher schemes, loan guaranteeschemes and enterprise competitions).80These activities,however, remain geared to social objectives (poverty andunemployment reduction) rather than maximising theeconomic benefits of intervention by investment in high-growth firms.81

The Regional Business Centres, the EuropeanInformation Centre and the various donor-led business

support activities in the former Yugoslav Republic ofMacedonia are only weakly co-ordinated at present.Theylook at the social benefits of enterprise promotion, andhave little individual capability to provide the moreconcentrated support necessary for firms with high-growth potential. This difficulty of co-ordination ofmultiple agencies is a common problem in differentcountries and has generally been solved by developinginstitutions for system governance and specialist systemsof support for HGSMEs.

In terms of system governance, there is a need tobetter co-ordinate the initiatives of those concernedwithdifferent aspects of SME support and development.Particularly important perhaps is the interface betweenthe ministries of education and economy which caninfluence the relationship between enterprise educationand promotion in secondary schools and university-business collaboration. This suggests a need to adopt amore systemic approach to enterprise support systemsboth for SMEs in general and HGSMEs in particular. Facingsimilar issues of co-ordination, other countries haveincreasinglymoved to link universities and responsibilityfor innovation in a single ministry or organisation (e.g.DIUS in the UK, Tekes in Finland) and establishorganisations which can effectively champion the causeof innovation and enterprise development in the economy.One valuable model here might beVinnova, the Swedishagency which, while having a more specific focus oninnovation, combines research, advocacy and policyintervention to support Sweden’s innovation system (seeBox 14). Ideally, this organisation might undertake aninitial mapping of existing initiatives (and possibilities),help to identify system weaknesses and gaps, and helpto co-ordinate donor and inter-departmental responses.

In terms of specific support for HGSMEs perhaps themost interesting policymodel here is the Finnish growthfirm service, in which consultants in all Finland’s publicagencies concerned with business support search forpromising growth firms.When identified, the consultantoffers a growth analysis session with the firm, and basedon the growth analysis, specific needs for achievinggrowth are prioritised and appropriate services are offered(see Box 2).


The availability of business finance is an obstaclefor most SMEs in the former Yugoslav Republic ofMacedonia and particularly HGSMEs that are likely to

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require higher levels of start-up capital and face higherrisks. The recent history of the Macedonian Bank forReconstruction and Development has been difficult, withover-complex procedures and high rates of defaultnecessitating on-going reforms which should becompleted in mid-2009. In the medium term this shouldmake it easier for SMEs to obtain debt finance althoughthis is unlikely to make any difference to the availabilityof equity finance (often important for HGSMEs).

Other commercial lenders are of course operatingin the former Yugoslav Republic of Macedonia and thecommercial market has developed relatively rapidly inrecent years. Pro-Credit Bank for example, entered theformer Yugoslav Republic of Macedonia market in 2004and has expanded to 40 branches across the countryproviding consumer banking services and small businessloans.This and similar developments have contributed togreater availability of loan finance for start-up businessesin the former Yugoslav Republic of Macedonia but theseoften remain conditional on the supply of collateral andan established business profile.

A clear weakness in business finance system in theformer Yugoslav Republic of Macedonia is the lack ofequity or risk capital.To date there is no on-going businessangel activity, no business angel networks and verylimited venture capital investment. This is not simply asupply-side issue, however, reflecting both the limitedinvestment readiness of the formerYugoslav Republic of

Macedonia companies with the potential for high-growthas well as the availability of equity finance. Action isnecessary on both the demand and supply sides. On thedemand side there is a need to promote the potentialvalue to businesses of equity investment (both in termsof the potential capital injection and accompanyingexpertise) and to increase investment readiness.Here theUK Access to Finance Programme (Box 4) and the Readyfor Growth Programme implemented in the UnitedKingdom, Spain and Greece83 (Box 5) provide useful policymodels. On the supply side, there is the potential forpublic support or facilitation of business angel networksthat could inject additional private capital into theenterprise support system. Supporting angel networksalongside business incubators and the Business Start-upCentre might be a useful first step, for example.Programmes such as the UK’s Ready2Invest have usedworkshops, case studies and social networks to encouragehigh-worth individuals to consider becoming businessangels and joining investor networks.84 Initially, at least,such initiatives may need to be underpinned by someform of equity guarantee scheme such as the EstonianKredex scheme (see Section 2.5.1).


Generally, university-business links in the formerYugoslav Republic of Macedonia are under-developedwith few spin-out companies and little emphasis on

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Section 3

Box 14

Vinnova: Stimulating linkages, focusing international innovation82

Vinnova, the Swedish Governmental Agency for Innovation Systems, is an arm’s-length government bodypromoting growth and prosperity in Sweden by researching and then investing to develop the nation’s researchand innovation capabilities. Vinnova’s approach is systemic and evidence-based. Vinnova has a watching briefon the development of the innovation system in Sweden and its potential for creating advantage.Vinnova is alsoa direct funder of R&D and innovation programmes designed to address innovation system failures.

Since 2001,Vinnova has developed a detailed understanding of the capabilities of the Swedish innovation system,identifying system failures and then investing to support collaborative innovation projects on a network, sectoralor geographical basis. Increasingly, Vinnova is a focal point for international collaboration among Swedishresearchers and innovators and international partners.

Much of Vinnova’s direct support for collaborative R&D and innovation is co-funded, with support accountingfor around 6% of Swedish R&D investment.Achievements over recent years have involved collaborative competencecentre initiatives and support for regional innovationmilieus, involving long-term network agreements betweendiverse but regionally co-located partners.

undertaking collaborative R&D projects. The formerYugoslav Republic of Macedonia faces an obstacle: thepreponderance of small companies in the economy andthe relatively small number of larger firmswhich generallypartner with universities.The problem is compounded bylownational levels of R&D spending and a particularly lowproportion of the R&D undertaken in the corporate sector.In 2004, for example, only 0.25% GDPwas invested in R&Din the formerYugoslav Republic of Macedonia comparedto an EU average of 1.95%.More significant, however, only5.7% of this R&Dwas in the corporate sector compared to65.3% in the EU15.85

This has two key implications. First, knowledgecreation is being given a low priority by all system actorsin the formerYugoslav Republic ofMacedonia, and second,the corporate sector in the former Yugoslav Republic ofMacedonia is significantly underestimating newknowledge and new technology. It is also clear that lowlevels of R&D spending in the corporate sector are likelyto be reducing firms’ absorptive capacity, or their abilityto assess, assimilate and exploit external knowledge.Thisis turn will reduce firms’ ability and willingness to workwith universities in partnerships or collaboration.86Thereare also issues around the knowledge which firms in theformer Yugoslav Republic of Macedonia have about thepotential services or support which universities can offer.

Low levels of investment in R&D by domestic firmsin the formerYugoslav Republic ofMacedonia are reflectedin relatively low levels of R&D employment in industry,and also in an improving but limited level of domesticpatenting activity. Over the period 2002-05, for example,around 80-85% of patents registered in the formerYugoslav Republic ofMacedoniawere registered by foreigncompanies with foreign firms accounting for a similarproportion of trademark and design registrations. TheOffice for Industrial Property has taken some steps toimprove this situation but, unless these are supportedby higher and more widespread private investments inR&D, these are unlikely to succeed.Moreover, efforts havebeen focused largely on encouraging IP awareness andprotection.There is a need to extend policy to encouragefirms (particularly in high-tech sectors) to also use theinternational IP system as a source of businessinformation. Issues arise here, however, about theavailability of services for such technology analysis inthe former Yugoslav Republic of Macedonia and firms’willingness to pay for such services.

The low level of domestic business R&D in the formerYugoslav Republic of Macedonia underscores the

importance of accessing external knowledge as a sourceof competitive advantage. In terms of internationallinkages, potentially important here is the EuropeanInformation Centre discussed above. It providesinformation on potential partners across Europe as wellas links to other EICs elsewhere. In terms of more local,university-business links, perhaps the best developedexample in the formerYugoslav Republic of Macedonia isthe Business Start-up Centre at the Ss. Cyril andMethodius University (supported by the AustrianDevelopmentAgency).This has provided valuable supportfor the development of enterprise education for studentsand training for enterprise educators, and has contributedto an important increase in the proportion of studentsreceiving enterprise education as part of their degreecourses.The Business Start-up Centre has also supportedstudent business plan competitions and facilitated theestablishment of 20 start-up companies, the majority ofwhich are in ICT or related business services. None ofthese enterprises is a “spin-out” in the sense of havingcodified or defensible IP whichmight provide the basis forattracting equity investment.More surprising, perhaps, isthat there is also little evidence of the effectivecommercialisation of R&D being undertaken within themechanical engineering faculty. In the medium term, anew initiative (supported by the Japan International Co-operation Agency) designed to upgrade thecommercialisation capabilities of Business Start-UpCentreswill helpwith this andwill also help to strengthenthe centres’ knowledge of business needs.

Some progress has also been made in thedevelopment of business incubators; there are now nineoperative in the country, including five in Skopje. Of theseperhaps the most notable is the Youth EntrepreneurialService incubator. The incubator opened in 2007 withsupport of the Ministry of the Economy and now houses16 companies and has two graduate companies. Like theBusiness Start-up Centre, the goal is supporting studententerprise focusing particularly on the ICT sector. TheYES incubator provides a standard range of training andsupport services to firms with limited staff and financialresources. It recognises the weakness of its supportservices available to firms, particularly in areas of IPmanagement and development. The key differencebetween theYES incubator and those in other areas is thelack of any focus on moving companies to the point ofinvestment-readiness where they might attract equityinvestment. In part this reflects lack of availability of suchfunding in the former Yugoslav Republic of Macedonia,something which clearly limits the growth potential ofcompanies.The importance of theYES incubator is two-

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fold. First, it certainly provides an important andsupportive environment for its client companies. Secondly,it provides a transferrablemodel of business incubationswhich, with additional resources, could readily beextended to other university campuses across the formerYugoslav Republic of Macedonia.

There is a clear need to strengthen university-business linkages and commercialisation activities in theformerYugoslav Republic ofMacedonia.One internationalmodel that has proved successful here is the idea of theCompetence Research Centre. It brings togetherenterprises and research centres in a long-termcollaborative relationship targeted at a particulartechnology. CRCs have been a valuable initiative, providinga focus for university-industry research collaboration (seeBox 9). In recent years, CRCs have also played a moresignificant role in internationalisation and SMEdevelopment, likely to be crucial to HGSMEs in the formerYugoslav Republic of Macedonia. CRCs often act as agateway for international R&D collaboration, and theirrelatively high profile can attract SME participation.

3.5 Final remarks

Significant steps have been taken in recent years todevelop the support frameworks for SMEs in the formerYugoslav Republic of Macedonia. Future growth anddevelopment will be influenced significantly by thenation’s ability to support high-growth, internationallytrading companies. Supporting these companies willrequire something of a re-orientation of SME policy fromsolving the social problems of the past (primarilyunemployment) to creating opportunities for futuregrowth.

Given the scale of the current crisis, resourceconstraints are clearly an issuewithin the formerYugoslavRepublic of Macedonia. The proposals here to supportbusiness angel networks, develop firms’ investmentreadiness and establish a specialist support group forhigh-growth firms are all relatively low-cost options.Moreexpensive, and perhaps calling for donor support, wouldbe the establishment of Competence Research Centres,possibly built around existing initiatives at Ss. Cyril andMethodius University.

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Section 3

4.1 Introduction

Although current economic conditions have changedthe situation dramatically, the Serbian economy hasgrown rapidly over recent years, achieving real annualGDP growth rates of 5.7- 8.4% over 2004-2007. Primarilydue to the growth in telecommunications,wholesale andretail trade, construction and finance, this economicgrowthwas accompanied by rapid structural change,withsignificant inward investment in banking, finance andother consumer-related services. Fundamental macro-economic problems remain, however, including asignificant trade deficit, relatively high unemploymentand a continuing dependence on exports of agricultural,textile and basic metal products.87 These issues have, ofcourse, been exacerbated by the current internationaleconomic recession.

Processes of privatisation and transition continuein Serbia and have contributed to an economy with fewmedium-sized firms.While some larger firms havemadea successful transition from the public to private sectorstheir medium-sized suppliers have often fared less well.This has led to an industrial structure dominated by small(oftenmicro) firmswith relatively fewmedium and largercompanies. In 2007, for example, therewere only 598 largefirms in Serbia, 2 752 medium-sized enterprises and 283640 micro firms (including sole proprietors).88 Thisstructure underscores the need to promote small businessgrowth and development, and in particular those SMEswith high-growth potential.

To date there have been no specific policy initiativestargeted at HGSMEs in Serbia although HGSMEs has beena theme for discussion at the new inter-ministerialNational Competitiveness Council.There have, however,been significant developments in the institutionalinfrastructure which could support such a strategy, andthere are specific and very positive initiatives to supportinnovation-led SMEs (e.g. incubators, innovation centres,technological innovation competitions). Serious issuesremain, however, around the lack of co-ordination of suchinitiatives, under-developed university-industry links andthe availability of risk capital that might support thedevelopment of HGSMEs. Some of these issues arecommon to other WBCs, however, for Serbia the under-developed state of university-industry links is particularlydisappointing given the strength of some aspects of the

research base. Addressing this issue might help to boostthe number of innovation-led HGSMEs and attract newinvestment into the university system.

4.2 Creating an enabling environment forHGSMEs

In terms of the general environment within whichbusinesses operate, the World Bank Doing Business 2008report places Serbia 86 out of 178 countries, significantlybehind Hungary (45) and Romania (48) but in a similarposition to the former Yugoslav Republic of Macedonia(75), Montenegro (81) and Croatia (97). Notably, one areainwhich the position of Serbia has improved significantlyis the availability of credit (loan finance).The necessity forfurther change in the business environment in Serbia iswidely recognised, however, and is a key agenda item forthe inter-ministerial National Competitiveness Council.Changes in the general environment for small businessesin Serbia are recognised in the 2008 Strategy forDeveloping Competitive and Innovative SMEs and 2009Action Plan, identifying five key pillars where policydevelopment is necessary: incubators as an aid tobusiness start-up, skills and human resources, financeand taxation including the development of equityfinancing, clusters and business networks, and theregulatory environment.

Promotion of a culture of enterprise and innovationis a key element of current policy, and significant progresshas beenmade here.One high-profile step in this directionwas the establishment of the Competition for the BestTechnological Innovation (2005) by the Faculty ofTechnicalSciences in Novi Sad in partnership with the Ministry ofScience and Chamber of Commerce Republic of Serbia. Itattracted 188 entries from awide range of student groups,university faculty and other individuals, and has ledultimately to the formation of 35 new start-upcompanies.89 Other more broadly based enterprisepromotion events are organised by the SerbianAgency forthe Development of SMEs and Entrepreneurship, includingthe annual International Trade Fair of Entrepreneurship“Business Base”,90 regional and local enterprise events,and the regular publication of thewidely distributed “SMENews”.91 Other donor organisations also organiseenterprise promotion activities among high-school anduniversity students.92

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Section 4

Policy Support for HGSMEs: Serbia

Gains have beenmade in recent years in the supportto potential entrepreneurs or business founders throughthe network of regional offices of the Serbian Agency forthe Development of SMEs and Entrepreneurship and itspartners.These services are targeted at SMEs in general,however, and provide guidance on company registrationprocedures, legal issues and support in business planningand obtainingmicro-finance. It is not clear that themorespecific support requirements of innovation-led HGSMEs(regarding IP protection, finance and internationalisation)are beingmet, and it may therefore be worth consideringthe development of a specialist (national) unit to providethis integrated support.This need is perhaps particularlysignificant in Serbia where the availability of privateconsulting services providing advisory support on IPprotection, innovation and internationalisation strategyremains limited.93This type of structure has been usefuleven in countries where generalist business centres arewell established such as in Finland (see Box 3). Onepossibility is that the current innovation unit within theSerbian Agency for the Development of SMEs andEntrepreneurship might be developed to provide a moreholistic service targeted at HGSMEs. (Currently, potentialHGSMEs are carefully identified and referred to a specialistadvice centre.) International experience on this pointsuggests that any unit dealing with HGSMEs should behighly selective, particularly when addressing later stagesof venture development and that a key criterion forselection would be a strong growth motivation from theleaders of potential HGSMEs.94


Since 2001, private and business banking serviceshave developed rapidly in Serbia, a factor recognised inthe country’s improving position in theWorld Bank DoingBusiness report.Although the National Bank of Serbia hasimposed relatively rigorous asset requirements on lendersin order to reduce inflationary risks, this has meant thatloan finance (from micro-finance to multi-million Euroloan packages) and leasing finance have become availablelocally. Interest rates remain high though, particularlyfor smaller firms. Specialist SME lenders such Pro-creditBank have established profitable operations in Serbia andcreated nation-wide branch networks.

In addition to private sector provision, the availabilityof business finance in Serbia has also been enhancedthrough a number of state- and donor-funded financeinitiatives supporting particular aspects of businessdevelopment.95Themost significant of these, the Republic

of Serbia Development Fund, is administered by theNational Bank and operated through commercial banks.It provides subsidised loans (approximately EUR 6 104toEUR 24 417) to meet the investment needs of businessstart-up and development. Help is also available throughthe Republic of Serbia Guarantee Fund and other agenciessuch asAOFI96 that offers a range of export and financialsupports, primarily to larger firms. Key areas of AOFI’sfinancial activity include financing working capital forexport contracts, insurance for export contracts and arecently (2006) introduced factoring service.

For the vast majority of small firms, the type of loanor debt finance currently available in Serbia (in additionto internally generated funds) is generally adequate forworking capital, investment etc. For the 4-6% of smallfirms in the high-growth category, however, the availabilityof equity or risk capital may also provide a valuablestimulus to growth. And, in more developed EUeconomies, perhaps half of all HGSMEs (primarily thosewith some defensible intellectual property or uniqueasset) attract some equity investment finance, i.e. 2-3% ofall start-ups. Currently in Serbia, little or no equity or riskcapital is available and this is a recognised gap in thebusiness environment for HGSMEs.The lack of availabilityof equity funding in Serbia is not unique of course amongthe WBCs. It closely reflects, for example, the situationdiscussed earlier for the former Yugoslav Republic ofMacedonia, although debt financing there is also morerestrictive than in Serbia.

Addressing the lack of equity funding in Serbia isnot simple; it will probably require intervention on boththe demand and supply side. On the demand side, thereis a need to promote the potential value to start-upbusinesses of equity investment (in terms of the potentialcapital injection and accompanying expertise) and toincrease investment readiness. Here the UK Access toFinance Programme (see Box 5) and the Ready for GrowthProgramme implemented in the United Kingdom, Spainand Greece99 (see Box 6) provide useful policy models.On the supply side, there is the potential for public supportor facilitation of business angel networks which mightbring additional private capital into Serbia’s enterprisesupport system. Programmes such as the UK’sReady2Invest have used workshops, case studies andsocial networks to encourage high-worth individuals toconsider becoming business angels and joining investornetworks.98 Initially, at least, such initiativesmay need tobe underpinned by some form of equity guarantee schemesuch as the Estonian Kredex scheme (see Section 2.5.1).In addition, it might be useful to consider relating such

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Section 4

schemes to other specific initiatives, such as businessincubators or technology centres, as in the case of theOxford innovation centre (see Box 11).

Intervention to encourage formal venture capitalfunding into the Serbian market is probably a moremedium-term policy; action here might usefully bedelayed until financial conditions ease somewhat.International experience has illustrated, however, thepotentially positive role of co-funding of venture capitalfunds with the Finland and Israeli cases often cited.99

Admittedly, in both of these economies, the underlyinglevel of technological advance and investment in R&Dwere significantly greater than those in the WBCs, butthe initial success of the Croatian VENCRO programmedoes suggest that similar, smaller scale, co-financedinitiatives might also be valuable in Serbia and the otherWBCs.


A number of government-supported and donor-funded organisations are involved in facilitating capabilityupgrading in Serbia, although themajority of these focuson established businesses. The Serbian Chamber ofCommerce, for example, provides a range of informationand training services tomember firms in addition tomorespecialist consultancy services,while the SerbianAgencyfor the Development of SMEs and Entrepreneurship alsoprovides a variety of general and specialist trainingcourses for SME owners and potential entrepreneurs. Forestablished firms, the EBRD’s TurnAround Management(TAM)/Business Advisory Services (BAS) programmeprovides consultancy advice to Serbian enterprises tohelp boost exporting, profitability and growth. To datearound 153 TAM projects have been conducted in Serbiawith the vastmajority funded by the EuropeanAgency forReconstruction.100 Other organisations such as Serbia’sbusiness incubators also provide some business trainingservices geared to help start-up among students andacademic faculty.

In terms of innovation or technology-led HGSMEs, thekey issue therefore in Serbia is not somuch the availabilityof services to support business upgrading anddevelopment but the under-developed linkages betweenknowledge generators (i.e. universities and researchinstitutes) and SMEs. This is, of course, not a uniquelySerbian problem, and even inmore advanced economiesrelationships between SMEs and the higher educationsector often remain limited.101 For Serbia, however, this

linkage is particularly important for two reasons. First,Serbia has number of internationally recognised researchdepartments and institutes capable of generatingsignificant IP with commercial potential and subsequentincome streams. Second, the level of business in R&D inSerbia (as in the rest of WBCs) remains very low byinternational standards. This means that the dominantsource of new technologies originating within Serbia islikely to be the academic research community.Successfully exploiting these technologies is therefore ofsignificant national importance.

Three key issues need to be addressed if strongerlinks between the research and business communitiesare to be created in Serbia. These relate to the rathertraditional orientation of the academic researchcommunity in Serbia, the paucity of enterprise educationwithin the Serbian university sector and the absorptivecapacity of many Serbian SMEs. It is important to notethat, notwithstanding these issues, there are in Serbiasome outstanding examples of effective commer-cialisation and university-industry collaboration. Mostimpressive perhaps is the group of firms associated withNovi Sad Technical University, some of which haveestablished an international market presence andgenerated significant high-level employment.102

Serbia has a strong academic history inwhich the keypriority has been the publication of scientific results ratherthan their commercialisation. This open science model,however, contrasts strongly with changes in the UnitedStates andWestern Europe, which have increasingly putforth the innovation model of university-businessinteraction (see Box 8). Moving towards the innovationmodel will require the building of a stronger IP culturewithin higher education institutions and researchinstitutes in Serbia, and potentially changing promotioncriteria and incentive mechanisms for scientists.Increasingly, for example, in European universitiespromotion criteria include the standard research, teachingand administrative criteria alongside criteria related towider societal impact (e.g. patents, commercialisationand social engagement). Despite some gains in changingmindsets in Serbia, the traditionalmentality continues todominate with the majority of university scientists andindustry inhabiting largely separate worlds. Linking theseworlds without compromising on research quality is akey challenge for the future.

Another aspect of this issue is the lack of enterpriseeducation or teaching on entrepreneurship in Serbianuniversities and research institutes. Increasingly, providing

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students with an introduction to enterprise is seen ascritical, and a key part of the activities of theentrepreneurial university (see Box 1). In Serbia, somepreliminary practical steps in this direction have beentaken through theAgency for the Promotion of SMEs andthe various university-based business incubators thathave run uncertified business start-up courses. TheBusiness Technology Incubator of Technical Faculties,Belgrade, for example, has hosted training programmesfor over 200 students. (This is only a small proportion,however, of the 900 students who graduate from theTechnical Faculties each year). Although proposals havebeen submitted to the Ministry of Education to expandenterprise education in Serbia, to date they have madelittle progress.

Under-developed university-industry links in Serbiaare not simply an academic problem. Change is alsonecessary in SMEs’ ability and willingness to establishpartnerships with universities, something which ismadeparticularly difficult due to the limited absorptive capacityof Serbian firms.As in a number of otherWBCs, aggregatelevels of R&D in Serbia are low by international standardsand overall R&D spending is dominated by highereducation. Only around 10% of R&D spending in Serbia isin the corporate sector, compared to an average of around60-65% in the EU15.This has twomain implications. First,the level of discovery in Serbian firms is very limited,meaning innovation has to come from outside the firm.And, second, the pool of research-trained employeeswithin Serbian companies is small, limiting theirabsorptive capacity (i.e. their ability to evaluate and absorbexternal knowledge). Measures such as the recentInnovationAct, and support from theMinistry of Economyto provide grant support to help companies fund R&Dand innovation projects may go some way towardsreducing this problem.Other approaches are also possible,however, including student placement schemes (usedsuccessfully in a number of EU countries). Perhaps themost successful and longstanding of these measures isthe UK’s Knowledge Transfer Partnership scheme, insupport of two-year placements for science students withSMEs to stimulate collaborative innovation and technologytransfer (see Box 10).

Finally, it is worth noting that progress in developingmore systemic linkages between the academiccommunity and industry in Serbia is hampered to someextent by different elements of the commercialisationprocess being covered by differentministries.As indicatedearlier, the Ministry of Education is responsible forenterprise education, the Ministry of Science is

responsible for supporting scientific research, and theMinistry of Economy and Regional Development hasresponsibility for the economic exploitation ofinnovations.This division in the governance of the valuechain from investment to research results tocommercialisation inevitablymakes policy co-ordinationdifficult. In those countries where innovation is mostsuccessful, and university-business collaboration ismostintense, responsibility for the R&D and commercialisationvalue chain (at least) has been brought together in a singledecision-making unit. Perhaps the best example, here isthe Finnish government agency Tekes, which hasresponsibility for competitively awarded applied researchfunding in both universities and companies in Finland,one result of which is a high level of university-industrycollaboration.

4.5 Final remarks

Since taking its first steps in SME policy in 2002 Serbiahas demonstrated a significant capacity for policyinnovation and development. This bodes well for thefuture. General elements of the business supportinfrastructure are now in place,with SMEs generally ableto access advisory support and loan capital. Major stepshave also been taken in promoting an enterprise andinnovation culture, both of whichwill bemore importantin the future.These achievements could be supported bythe development of more specialist advisory services forHGSMEs, most probably on a national level.

Crucial short-term issues for Serbia (as for othereconomies) revolve aroundmaintaining business liquidityand viability. In the longer term, however, importantstructural and cultural issues remain, and are reducing theeffectiveness of firms’ innovation and thecommercialisation process. Key concerns include theavailability of equity or risk capital, creating a moreinnovation-oriented culture within Serbia’s researchinstitutes and universities, encouraging firms’investments in R&D and innovation, and extending thecoverage of enterprise education. It is important to realisealso that addressing these issues together will generatepositive synergies, with private equity (or angel funding)working most effectively when linked to a businessincubator or particular cluster, faculty or institute.Similarly, changing faculty incentives for promotion toencourage an innovation culture is likely to be mostpowerful in combination with incubation, IP servicesand/or enterprise education.

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Section 4

The previous sections have outlined some specificpolicy options for the development of policy support forHGSMEs in the WBCs. These policy options reflect thespecific development and resource needs of HGSMEs interms of IP development, capital requirements andinternationalisation. A recent review of internationalpractice in terms of HGSME policy, conducted for theFinnishMinistry ofTrade and Industry, tried to identify theprinciples which should govern policy for HGSMEs.103 Itsuggested policy should:

• Be highly selective, particularly when addressinglater stages of venture development;

• Require strong growth motivation fromparticipants;

• Be proactive in trying to identify prospectivegrowth firms;

• Consistently address managerial motivation andskills;

• Involve close collaboration with private-sectorservice providers;

• Nurture an image of professionalism, competence,and a certain degree of exclusivity;

• Implement sustained and focused developmentefforts;

• Involve highly tailoredmanagement developmentactivities that involve experience sharing and applyan interactive approach;

• Link grants and participation to growth aspirationand achievement of milestones;

• Be prepared to accept casualties;• Involve seasonedmanagers who have experiencein rapid growth.

There is, of course, the danger of generating an overlycomplex set of SME and HGSME policy initiatives, and anumber of countries (Japan, Mexico and the UK) are

moving towards simplified frameworks for businesssupport.104 More generally there is a move towards theone-stop-shop approachwhere a single agency or contactpoint can provide access to the full range of public (orpublic and private) support services.

It is also worth noting the very significant benefitsof increasedWBC engagement with EUwide networks.Atthe level of the individual firm networks or initiativessuch as the EurOffices Network or IMPROVE may assistwith internationalisation or innovation.At amore officiallevel engagement with ERA-NET type initiatives such asCOMPERAmay help to both identify and implement newpolicy initiatives which might benefit HGSMEs.

Finally, it is clear that to date few publicly funded SMEprogrammes in theWBCs have been subject to any verysystematic evaluation of their effectiveness. (The situationwith donor-funded programmes is somewhat differentas evidence of effectiveness is usually a criterion forcontinued support). In part, the lack of any evaluation ofpublicly funded SME programmes in the WBCs reflectstheir rapid development over recent years. Inmany casesthese programmes represent significant publicinvestments and good public policy practice thereforesuggests the need for monitoring and ex post evaluation.In general evaluation costs are generally 2-5% ofprogramme budget although might be as little as 1%where programmes are large.105 Previous OECD reportsincluding the OECD Framework for the Evaluation of SMEand Entrepreneurship Policies and Programmes providea useful guide to possible evaluation approaches.Adoptingsome form of policy evaluation and upgrading process islikely to be important for theWBCs as they seek to developthe effectiveness of SME andHGSME policy, and the policy-making process itself.

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Section 5

Upgrading the SME Policy Process

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Notes

1 OECD (2008), Working Party on SMEs and Entrepreneurship (WPSMEE) Review of HGSMEs, Innovation and Intellectual Property, OECD, Paris, p. 23.

2 Llisterri, J. and J. Garcia-Alba (2008) “HGSMEs in Latin American Emerging Economies”, paper prepared for the OECD Kansas City Workshop.

3 OECD/European Commission (2007), SME Policy Index 2007 – Report on the Implementation of the European Charter for Small Enterprises in the WesternBalkans, OECD, Paris.

4 OECD (2009), HGSMEs and Innovation, Working Party on SMEs and Entrepreneurship (WPSMEE), forthcoming.

5 OECD (2008), “Measuring Entrepreneurship – A digest of indicators”, OECD-Eurostat EEIP Programme, p. 18.

6 Using an employment-based definition of high-growth enterprises suggests a slightly lower proportion of high-growth firms (1-9%) although the patternof international relativities is much the same as that suggested by Figure 1. Source: op. cit. p. 19.

7 Global Entrepreneurship Monitor (2007), 2007 Global Report on High Growth Entrepreneurship, Directed by Erik Autio, with Babson College, LondonBusiness School and Global Entrepreneurship Research Consortium (GERA). Available at: http://www.gemconsortium.org

8 An essentially similar picture emerges from a recent review of academic studies of high-growth firms. See Henrekson, M. and D. Johansson (2008), “Gazellesas Job Creators – A Survey and Interpretation of the Evidence”, IFN Working Paper No. 733, IFN, Stockholm.

9 This inclusive approach reflects that adopted by the OECD Working Party on SMEs and Entrepreneurship (WPSMEE) in their 2008 review of HGSMEs, innovationand intellectual property. See p. 3.

10 This section draws on material in OECD (2009), HGSMEs and Innovation, Working Party on SMEs and Entrepreneurship (WPSMEE), forthcoming.

11 See http://www.ausindustry.gov.au/index.cfm and also Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in NineCountries: Analysis, Categorisation, and Recommendations”, Report prepared for the Finnish Ministry of Trade and Industry, pp. 34-35.

12 Cooke, P, and L. Leydesdorff (2006), “Regional development in the knowledge-based economy: the construction of advantage”, Journal of TechnologyTransfer, 31:5-15.

13 Lee, S. Y., R. Florida, and Z. J. Acs (2004), “Creativity and entrepreneurship: A regional analysis of new firm formation”, Regional Studies 38 (8):879-891.Falck, O. and S. Heblich (2008) “Modern Location Factors in Dynamic Regions”, European Planning Studies 16 (10):1385-1403.

14 Avnimelech, G., D. Schwartz, and R. Bar-El (2007) “Entrepreneurial high-tech cluster development: Israel’s experience with venture capital and technologicalincubators”, European Planning Studies 15 (9):1181-1198.

15 See, for example, Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis, Categorisation,and Recommendations”, Report prepared for the Finnish Ministry of Trade and Industry.

16 Including local companies, business associations, the Chamber of Commerce, local governments, elected officials, civil servants, schools, vocational andprofessional training institutions, public and private employment services, trade unions and employer organisations.

17 OECD (2006), “Entrepreneurship in the Districts Mittweida and Altenburger Land”, OECD LEED Local Entrepreneurship Series, October 2006.

18 For details see: http://www.queensawards.org.uk/.

19 See www.enterprise-ireland.com and discussion of the programme athttp://www.oecd.org/secure/pdfDocument/0,2834,en_21571361_38013663_39137502_1_1_1_1,00.pdf

20 European Commission (2006), “Entrepreneurship Education in Europe: Fostering entrepreneurial mindsets through education and learning”, EuropeanCommission, Oslo.

21 Norwegian directorate for education and training (2006), “Norwegian Strategy Plan for Entrepreneurship in Education”, Norwegian directorate for educationand training, Oslo.

22 European Commission (2008), Final report of EU expert group for “Entrepreneurship within higher Education, especially within non-business studies”,European Commission, Brussels, March 2008.

23 NESTA (2008), “Developing Entrepreneurial graduates – putting entrepreneurship at the centre of higher education”, CIHE-NCGE-NESTA, London.

24 Bramwell,A., J. Nelles and D.A.Wolfe (2008), “Knowledge, Innovation and Institutions: Global and Local Dimensions of the ICT Cluster in Waterloo, Canada”,Regional Studies, 42,1, p. 105.

25 Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis, Categorisation, and Recommendations”,Report prepared for the Finnish Ministry of Trade and Industry, p. 41-43.

26 See http://www.prowess.org.uk/flagship/whatisflagship.asp.

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27 See http://www.euroffice-services.eu/index.php

28 See http://www.improve-innovation.eu/opencms/opencms/en/index.html

29 See for example http://www.durham-ent.org/bennett-1.pdf

30 Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis, Categorisation, and Recommendations”,Report prepared for the Finnish Ministry of Trade and Industry, p.76.

31 OECD (2008), “Working Party on SMEs and Entrepreneurship (WPSMEE) Review of HGSMEs, innovation and intellectual property – Draft Synthesis Report”,p. 17.

32 Cassar, G. and S. Holmes (2003), “Capital Structure and the financing of SMEs: Australian evidence”, Accounting and Finance, 43, pp 123-147. Bhaird, C.and B. Lucey (2006), “An Explanatory Cross-Sectional Study of the Capital Structures of Irish SMEs”, paper presented at the International Conference onthe Financing of SMEs at CSME, Warwick Business School.

33 Ono, A. and I. Uesugi (2005), “The role of collateral and personal guarantees in relationship lending: evidence from Japan’s small business loan market”,paper presented at the International Conference on Financing of SMEs in Developed Countries, CSME, Warwick Business School.

34 AOFI is the publicly funded Export Credit and Insurance Agency of the Republic of Serbia. See www.aofi.rs.

35 See, for example, Robinson, M. J. and T. J. Cotterell (2007), “Investment patterns of informal investors in the Alberta private equity market”, Journal ofSmall Business Management, 45, 1, pp. 47-67.

36 See www.gos.gov.uk/gol/European_funding/Objective_2/Obj2_accesstofinance.Also OECD (2007), “Strengthening Entrepreneurship in Marzahn-Hellersdorf”,OECD LEED Local Entrepreneurship Series, April 2007.

37 OECD (2007), “ Entrepreneurship Environment and Policies: Exploiting the Science and Technology Base in the Region of Halle”, OECD LEED LocalEntrepreneurship Series, January 2007.

38 For information on BICRO see www.bicro.hr. A good overview of the VENCRO scheme can be found at: http://www.cepor.hr/venture/VENCRO%20-%20EIZ1_Mamic_Ante.pdf

39 OECD (2006), “Entrepreneurship in the Districts Uckermark (Brandenburg) and Parchim (Mecklenburg-Western Pomerania)”, OECD LEED LocalEntrepreneurship Series, October 2006.

40 On the Israeli example see www.insme.org/documenti/Yozma_presentation.pdf

41 OECD (2008), Working Party on SMEs and Entrepreneurship (WPSMEE) in 2008 review of HGSMEs, innovation and intellectual property, p. 15.

42 “Hidden Innovation – How innovation happens in six ‘low innovation’ sectors”, National Endowment for Science Technology and the Arts (NESTA), London,June 2007.

43 OECD (2008), Working Party on SMEs and Entrepreneurship (WPSMEE) Review of HGSMEs, innovation and intellectual property, p. 29.

44 Griliches, Z. (1995), “R&D and Productivity: Econometric Results and Measurement Issues”, in Stoneman, P. (ed.) ‘Handbook of the Economics of Innovationand Technological Change’, Blackwell, Oxford. Manuneas T. P. and M. I. Nadiri (1984), “Public R&D policies and cost behaviour of US manufacturing industries”,Journal of Public Economics, 63, 57-81.

45 Klette, T.J. and F. Johansen (1998), “Accumulation of R&D capital and dynamic firm performance: a not- so-fixed effect model”, Annales d’économie et destatistique, 49-50, 389-419. Trajtenberg, M. (2000), “R&D Policy in Israel: An Overview and Reassessment”, NBER Working Paper No. 7930, October 2000.

46 Freel, M.S. (2005), “Patterns of innovation and skills in small firms”, Technovation, 25, 2, 123-134.

47 Other approaches have also been suggested such at the ‘Sales contingent contracts’ - innovation loans repayable on success - highlighted by Kaivanto, K.and P. Stoneman (2006), “Public provisions of sales contingent claims back finance to SMEs: A policy alternative”, paper presented at the InternationalConference of financing of SMEs in developed countries, CSME,Warwick.An essentially similar approach using repayable R&D grants has been extensivelyused in Israel. See Trajtenberg (2000).

48 See http://www.birdf.com.

49 See: Cornet, M., B. Vroomen and M. van der Steeg (2006), “Do innovation vouchers help SMEs to cross the bridge towards science?”, No 58 CBP DiscussionPaper, and http://www.senternovem.nl/english/products_services/encouraging_innovation/innovation_vouchers.asp

50 Cornet, M., M. van der Steeg and B. Vroomen (2007), “De effectiviteit van de innovatievoucher 2004 en 2005 Effect op innovatieve input en innovatieveoutput van bedrijven”, edited by C. D. P. N. 140.

51 See: http://akseli.tekes.fi/opencms/opencms/OhjelmaPortaali/ohjelmat/Serve/en/etusivu.html

52 See Chesborough, H. W. (2003), Open Innovation, Harvard University Press.

53 The new routines introduced were literature scan, customer contacts, trade shows, idea capture form, competitor price check, customer input, supplier input.The three new routines not directly related to absorptive capacity were new product development committee, reverse engineering and prototype development.See: Jones O. and M. Craven (2001), “Beyond the Routine: Innovation Management and the Teaching Company Scheme”, Technovation, 21, 5, 267-279.

54 Sources: European Union (2004), Management of Intellectual Property in Publicly-Funded Research Organisations: Towards European Guidelines, ExpertGroup, European Commission, Luxembourg. Mowery, D., et al. (2004), Ivory Tower and Industrial Innovation: University-Industry Technology Transferbefore and After the Bayh-Dole Act, Stanford Business Books, Stanford.

55 Monteny, F. (2008), “COMPERA – Some Experiences”, presentation to the Compera Workshop on CRCs, Dusseldorf, February 2009.

56 Vinnova (2004), “Impacts of the Swedish Competence Centres Programme 1995-2003”, VA 2004:03. Available at: www.vinnova.se.

57 Vinnova (2004), “Impacts of the Swedish Competence Centres Programme 1995-2003: Summary Report”,VA 2004:05, pp. 21-22.Available at: www.vinnova.se.

58 The Innovation Assistant programme was a finalist in the RegioStars 2008 awards. See for example: http://ec.europa.eu/regional_policy/co-operation/interregional/ecochange/goodpractice/1knowledge/2links/stars08/048.pdf

59 Technology Strategy Board (2008) Knowledge Transfer Partnerships Annual Report 2006/7. Available at:http://www.ktponline.org.uk/content/libraryMaterial/200607AnnualReport.pdf

60 See: http://www.fraunhofer.de/EN/institutes/index.jsp

61 Andersen, P. H. (2006), “Listening to the global grapevine: SME export managers’ personal contacts as a vehicle for export information generation”,Journal of World Business 41 (1):81-96.

62 Damaskopoulos, T., R. Gatautis and E. Vitkauskaite (2008), “Extended and dynamic clustering of SMEs”, Inzinerine Ekonomika-Engineering Economics(1):11-21.

63 Avnimelech, G., D. Schwartz and R. Bar-El (2007), “Entrepreneurial high-tech cluster development: Israel’s experience with venture capital and technologicalincubators”, European planning studies, 15, 9, p, 1185.

64 Profile of Oxford Innovation Ltd by David Kingham, CEO, http://www.sbs.ox.ac.uk/NR/rdonlyres/3D85103E-AE5E-42A6-BC74-96516D05B960/0/David_Kingham.pdf. See also: http://www.oxin.co.uk.

65 http://www.oion.co.uk, accessed on 6 February 2009.

66 Avnimelech, G., D. Schwartz and R. Bar-El (2007), “Entrepreneurial high-tech cluster development: Israel’s experience with venture capital and technologicalincubators”, European planning studies, 15, 9, p. 1185.

67 Duff, A. (1994), Best Practice in Business Incubator Management, AUSTEP Strategic Partnering Pty Ltd, at:http://www.eifn.ipacv.ro/include/documentations_files/bestpracrpt.pdf.

68 OECD (2006), “Entrepreneurship in the Districts Mittweida and Altenburger Land”, OECD LEED Local Entrepreneurship Series, October 2006.

68 Lanjouw, J O, and M Schankerman (2003), “Protecting Intellectual Property Rights: Are Small Firms Handicapped”, Journal of Law and Economics 47 (1):45-74.


71 Choo, C. W. and N. Bontis (2002), The Strategic Management of Intellectual Capital and Organisational Knowledge, Oxford University Press, Oxford.

72 See www.hpo.hu/English and Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis,Categorisation, and Recommendations”, Report prepared for the Finnish Ministry of Trade and Industry.

73 Dumortier, J., et al. (2003), “The legal and market aspects of electronic signatures”, Katholieke Universiteit Leuven. Available at:http://ec.europa.eu/information_society/eeurope/2005/all_about/security/electronic_sig_report.pdf

74 Blythe, S. E. (2008), “Croatia’s computer laws: promotion of growth in E-commerce via greater cyber-security”, European Journal of Law and Economics26 (1):75-103.

75 Fathian, M., P. Akhavan and M. Hoorali (2008), “E-readiness assessment of non-profit ICT SMEs in a developing country: The case of Iran”, Technovation28 (9), p. 578.

76 See http://ec.europa.eu/enterprise/e-bsn/bestpractices/national/index_en.html

77 See http://www.nb2bc.co.uk/about.

78 Polenakovik, R. and T.R. Pinto (2009), “The National Innovation System and Its relation to small enterprises – the Case of the Republic of Macedonia”,World Review of Science Technology and Sustainable Development, forthcoming.

79 Ministry of Economy, the former Yugoslav Republic of Macedonia (2008), Annual Report 2007 for the SME Sector, p.10.

80 MEDF (2008) “Macedonian Enterprise Development Foundation - 10 years”, MEDF, Skopje.

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81 The vision of the MEDF is specific in this sense: “poverty and unemployment reduction and established social cohesion”, Ibid. p.1.

82 Vinnova website: www.vinnova.se, and review of activities in 2007, “Innovation and Leading Research”.

83 OECD (2007), “Entrepreneurship Environment and Policies: Exploiting the Science and Technology Base in the Region of Halle”, OECD LEED LocalEntrepreneurship Series, January 2007.

84 OECD (2006), “Entrepreneurship in the Districts Uckermark (Brandenburg) and Parchim (Mecklenburg-Western Pomerania)“, OECD LEED LocalEntrepreneurship Series, October 2006.

85 Polenakovik, R. and T.R. Pinto (2009), “The National Innovation System and its relation to small enterprises – the Case of the Republic of Macedonia”,World Review of Science Technology and Sustainable Development, forthcoming.

86 For countries such as the former Yugoslav Republic of Macedonia and other small countries which generally do not produce the technology they exploitthis is particularly important. Effective international technology transfer, however, requires both absorptive capacity and relevant external linkages. See:Polenakovik, R. and T. R. Pinto (2009), “The National Innovation System and its relation to small enterprises – the Case of the Republic of Macedonia”,World Review of Science Technology and Sustainable Development, forthcoming.

87 Serbian Agency for the Development of Small and Medium-Sized Enterprises and Entrepreneurship (2007), Annual Report 2007, pp.5-13.

88 Ministry of Economy and Regional Development (2007), Report on Small and Medium-Sized Enterprises 2007, Belgrade, Table 19, p. 24.

89 The 2009 competition has recently been announced (February 2009) with a prize fund in excess of approximately EUR 9 million and five different awards:realised innovations, energy efficiency, innovative ideas, potentials and innovative municipalities.

90 The “Business Base” trade fair has been organised annually in Belgrade since 2002 by the Serbian Agency for the Development of SMEs and Entrepreneurship.

91 See, for example, the discussion of various enterprise and business plan competitions in the Serbian Agency for the Development of SMEs and Entrepreneurship,Annual Report 2007.

92 See for example the activities of the Business Innovation Programs (BIP) in Serbia. Available at: http://www.bips.no/serbia.html.

93 Serbian Agency for the Development of SMEs and Entrepreneurship (2007), Annual Report 2007, p. 62.

94 Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis, Categorisation, and Recommendations”,Report prepared for the Finnish Ministry of Trade and Industry, p.76.

95 See for example, http://compete.rs/files/Access_Finance_SerbianSMEs_Aug15.pdf.

96 Export Credit and Insurance Agency of the Republic of Serbia. See www.aofi.rs.

97 OECD (2007), “Entrepreneurship Environment and Policies: Exploiting the Science and Technology Base in the Region of Halle”, OECD LEED LocalEntrepreneurship Series, January 2007.

98 OECD (2006), “Entrepreneurship in the Districts Uckermark (Brandenburg) and Parchim (Mecklenburg-Western Pomerania)”, OECD LEED LocalEntrepreneurship Series, October 2006.

99 On the Israeli example see: www.insme.org/documenti/Yozma_presentation.pdf.

100 See TAM/BAS Programme Team (2008), “Boosting Serbian SME Exports to Europe”, May 2008, Belgrade.

101 On Scotland, for example, see “The Scottish Innovation System: Actors, Roles and Actions” at http://www.scotland.gov.uk/Publications/2006/01/18151934/0.

102 Tekic, et al. (2007), “University spinouts in Serbia—problems and difficulties”,Annals of DAAAM & Proceedings, at http://www.articlearchives.com/company-activities-management/company-structures-ownership/885415-1.html.

103 Autio, E., M. Kronlund and A. Kovalainen (2007), “High-Growth SME Support Initiatives in Nine Countries: Analysis, Categorisation, and Recommendations”,Report prepared for the Finnish Ministry of Trade and Industry, p. 76.


105 OECD (2007), “Framework for the Evaluation of SME and Entrepreneurship Policies and Programmes”, OECD, Paris.

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Part III

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PART III

Profilesof the Western

Balkan Countriesand Kosovo underUNSCR 1244/99

Part II of this report is divided into chaptersspecifically on eachWestern Balkan country and Kosovounder UNSCR 1244/99 (“country chapters”), providingadditional insight on the implementation of the Charter.Each country chapter has been divided into six sections:

1. Country overview (including a sub-section on theeffects of the global financial and economic crisis)

2. SME policy and public-private consultation3. Operational environment4. Services for enterprises5. Human capital6. The way forward

Section 1 provides an overview of the SME sector ineach country, tracking key reforms that have influencedthe design of policy in the country. It also contains a sub-section on the effects of the global financial and economiccrisis on each country. This section relies on data fromgovernment sources and international organisations.

Section 2 covers dimension 3 (Better legislation andregulation) and dimension 10 (Developing stronger and moreeffective representation of small enterprises’ interests) of theCharter.These two Charter areas are complementary andthus are grouped together to examine thecomprehensiveness of the SME policy framework in therespective country. This includes examining the contextin which enterprise policy is designed and the nature of

public–private consultations in the design of enterprisepolicy.

Section 3 provides an overview of the operationalenvironment for enterprises, covering dimension 2(Cheaper and faster start-up), dimension 6 (Getting more outof the Single Market), dimension 7 (Taxation and financialmatters), and dimension 8 (Strengthening the technologicalcapacity of SMEs) of the Charter. These four Charterdimensions study the policy tools, facilities, legislation andregulatory framework in place which facilitate operationsfor an enterprise.

Section 4 covers two Charter dimensions on servicesfor enterprises: dimension 5 (Improving online access) anddimension 9 (Successful e-business models and top-classbusiness support). As these areas of the Charter reinforceone another, they have been considered together.

Section 5 considers the human capital dimensionsof the Charter by examining the following: dimension 1(Education and training for entrepreneurship) and dimension4 (Availability of skills).

Finally, each country chapter concludes with asection on the way forward, examining the individualareas of improvement for each country and Kosovo underUNSCR 1244/99.

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Introduction

1. Overview

Micro, small and medium-sized enterprises (SMEs)dominate Albania’s economy, representing 99.6% of allregistered businesses.The share of the SME sector in GDPis 72.9% of GDP, and the sector employs 71.4% of allworkers. SMEs inAlbania concentrate on the localmarketand lack export competitiveness. Less than 1.3% of thesmall and less than 5.3% of the medium companies inAlbania have undertaken joint ventures with foreignpartners over the last three years.

SME development in Albania is below regionalaverage.The main challenge remains the relatively poorinvestment climate. Poor law enforcement, very weakcorporate governance (both at the macro and at theenterprise levels), lack of management skills and poorinfrastructure constitute the major impediments to SMEdevelopment.

SMEs in Albania are classified according to thenumber of their employees and turnover and/or balancesheet in compliance with the law nr. 1042 (22/12/2008)on small and medium-sized enterprises:

The EU definition of small and medium-sizedenterprises consists of firms that employ fewer than 250people, and have an annual turnover not exceeding EUR50million and/or a balance sheet total not exceeding EUR43 million. The Albanian definition is not perfectlyconsistent with the EU one.

Micro companies dominate theAlbanian SME sectorin number, turnover and total value added, but inproportion to their number, small and medium-sizedenterprises make the largest contribution. Accordingly,economic efficiency increases with enterprise size in theSME sector. Growth in turnover bymicro enterprises lagsbehind that of both small andmedium-sized enterprises.

Medium-sized enterprises concentrate more onendogenous growth with an investment structure closerto that of large enterprises.

From a sectoral perspective, SMEs are concentratedin the trade sector. The sectors of services and trade aredominated by micro and small enterprises whereas thesectors of industry and construction are dominated bymedium-sized businesses. The highest value added isprovided bymicro enterprises in the trade sector, closelyfollowed bymedium-sized enterprises in the constructionsector. Micro enterprises have significantly increasedadded value in construction, whereas little progress hasbeenmade in sectors with already high value added ratessuch as services Small enterprises are performing best intrade and construction, but display relatively low ornegative year-on-year growth in value added. Mediumenterprises increased value added in transport andcommunication, but have a negative year-on-year growthperformance in the sectors of trade and services.

The highest concentration of SMEs is in theAlbaniancapital Tirana, central Albania and in the coastal areas.More than half of SMEs are operating on theTirana-Durrescorridor, which is emerging as a potentially powerfuleconomic pool. Other regions with strong SME presenceare the cities of Korce, Fier andVlora.There is a very weakbusiness activity particularly in the northern part of thecountry. Donor programmes, which until now havefocused their activities on the capital, are increasinglytargeting the regions. Programmes need to be adapted asfirms in the regions face less competition, a less-developed business environment and a lack of qualifiedworkforce.

Impact of the global economic crisis

The global financial crisis has not yet had asignificant direct impact on theAlbanian financial sectorand economy. In all likelihood the impact of the crisis isstill to come,mainly from the lower level of exports to EUcountries and lower remittances (on which the economyis heavily reliant). Local garment companies – the majorexporting industry in the country – have already startedto experience financial difficulties, forcing a number of

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Albania

Albania’s SME classification

Micro Up to 9 persons

Small 10-49 persons

Medium 50-249 persons

manufacturers to shut down,while others are being forcedto cut prices or dismiss employees. For example, therewasa temporary halt to production on 16 February 2008 at theferrochromiumplant in Elbasan ofAlbanian ChromeACR,the largest chrome mining and production company inAlbania, due to shrinking internationalmarkets.ACR hadrecently announced plans for a EUR 2.5million investmentaiming to upgrade the Elbasan plant, where some 140workers are currently employed.

As far as the financial sector is concerned, themainimpact has been the loss of confidence in commercialbanks. With deposits accounting for almost all ofcommercial banks’ funding, a reduction (or at least slowergrowth) in deposits is beginning to have a negative effecton domestic credit growth.While local banks seem wellpositioned to overcome the current crisis due to strongcapitalisation, limited reliance onwholesale funding andstill low loan-to-deposit ratios, they are adopting moreconservative procedures for new loans (including shortertenors and highermargins), increasing their on-sight cashreserves. However, non-performing loans have risen.Foreign-owned banks, following directions from theirparent bank, have adopted extremely prudent behaviour.

2. SME policy and public-privateconsultation

Institutional policy framework

The institutional structure for the SME policy inAlbania remained unchanged from the previous report onthe Charter’s implementation. The institution in chargeof the SME policy elaboration is theMinistry of Economy,Trade and Energy (METE) through the Department forBusiness Development. However, specific issues of theSME policy are under the Departments for RegulatoryReform and for Industrial Zones Planning.

The policy is implemented by AlbInvest, thegovernment’s Agency for Business and Investment. TheSME policy is only one part of AlbInvest’s activities as in2006 this agency was established by merging the ForeignInvestment Agency, the Export Promotion Agency andtheAgency for SMEs.AlbInvest is workingwith central andlocal authorities, business communities and internationalpartners.

AlbInvest collaboratedwithMETE in the preparationof strategic documents for the SME sector.Also, there arepieces of evidence of inter-government co-ordination in

the case of new legislation, as METE should be consultedby the line ministries before proposing any primary orsecondary legislation affecting the business environmentfor adoption to the Council of Ministers. Furthermore,within the Business Advisory Committee, bothgovernment institutions and business representativeswork together on new legislation (for further informationsee the section on public-private consultation).

Albania created its strategic framework for SMEdevelopment in 2007, when a long-term strategy, theBusiness and Investment Development Strategy for theperiod 2007-2013,was adopted, as well as amedium-termprogramme for the SME development, (the SMEDevelopment Strategic Programme for the period 2007-2009). There is a strong consistency between the twodocuments in terms of objectives and measures to betaken, and Albania has made significant progress inimplementing it. The estimated cost related to theimplementation of the strategic programmeover the 2007-2009 period is estimated at approximately EUR 150million.

In order to achieve its objectives and considering thegovernment’s low financing capacity,Albania is countingon donor help. In this context, establishing a donors’forum was a good measure.

In October 2007 the Memorandum establishing theSME Donors Forum was signed, creating a nationalplatform for monitoring and assessing theimplementation of the SME Strategic Programme, withAlbInvest as the central point. The forum should meettwice a year.

Public-private consultation framework

The representation of the business communityimproved in Albania since the last report. The BusinessAdvisory Council was established in 2006 in order toinstitutionalise the public-private dialogue; it is aconsultative body both for the government and theParliament. It is chaired by theMinister of Economy,Tradeand Energy, and consists of 18 members, 11 of whom arerepresentatives of the business community.There shouldbe at least four meetings per year. In 2007, 19 draft lawswere discussed and 4 recommendations of legislationwere put forward to the Council of Ministers. However,participation of business associations in legislative processcould be enhanced.

Within the 2006-2008 period, therewere two revisionsof the legislative framework for the chambers of

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commerce.The first one reduced their number from 36 to12, according to the number of regions inAlbania, and thesecond one eliminated compulsory membership of thechambers of commerce. Apart from the lobby activitythey are also developing different services for theirmembers, but their capacity is still limited.

A group of business associations was developed,blanketing the entire territory and including SMEs.Theyoperate mainly as lobby bodies, and are involved in theconsultations on the SME policy.

Simplifying existing legislation and reducing theadministrative burden

Regulatory reform is a priority for Albania, and astrategy on this topic was adopted in 2006. A Task Forcefor the Reduction of Administrative Barriers, chaired bythe Prime Minister, was established in the framework ofregulatory reform.Togetherwith several technical workinggroups, it will operate in the following fields: businessregistration, licensing, customs, taxation, landconstruction, inspections and administrative appeal.

Thework progressedwell in the first two fields,wherebusiness registration can be currently completed in oneday.Many licenseswere abolished and some converted inself-declarations.The new licensing philosophy is going tobe based on the following principles: self-declaration andpost control, proportionality and silence-is-consent.

In the first half of 2009,Albania intends to introducea one-stop-shop for licenses at the national level in orderto reduce procedures and standardise the process. TheNational Business Licensing Centre will be establishedwith the help of the USAIDMillenniumChallengeAccountThreshold Programme and it should reduce the averagelicence approval time from 331 days to fewer than 120days, and also to reduce the steps from 24 to fewer than10. It is expected to be in place in May 2009.

The silence-is-consent principle is already applied forbusiness registration and the government intends toexpand its application also to permits and licenses.


Albania is currently in an initial phase of developinga regulatory impact analysis framework. The RIAguidelines were to be completed by the end of 2008, withthe help of theWorld Bank BERIS project.The resulting lawon RIA is planned to be adopted before September 2009.

3. Operational environment

Company registration

Over the last two years, Albania has radicallyreformed the company registration process, with thefinancial and technical support of the US-sponsoredMillennium Challenge Corporation, and co-ordinated bytheMinistry of Energy, Economy andTrade.The reform isremarkable for its scope, its speedy implementation andthe quality of the results. Under the previous system,company registration could only be performed at theTirana court. The system was cumbersome, particularlyfor entrepreneurs based outside the capital, and data inthe company register was not easily accessible. Thestarting point of the reform process was the passing inMay 2007 of the Law onNational Registration Centre (NRC)that transferred competence over the companyregistration from the Tirana court to a new dedicatedpublic agency. The new agency was in charge ofimplementing a one-stop business registration system,performing all the notification functions andmaintainingthe national electronic company register.TheNRC becameoperational in early September 2007. At end of October2008, a network of 18 company registration centres acrossthe country was established,with the goal of a total of 30local centres by the end of 2008. In the year after theestablishment of the NRC, there has been a significantsurge of new company registrations, surpassing thethreshold of 15 000 new applications, in 2008 there wasan increase in company registrations by 29% compared to2007. The centre is also updating the records of existingcompanies, including those records in the new electronicregister. It is processing the large backlog of companyrecord modifications accumulated under the previoussystem.

As a result of the reform, Albania has been able tobuild amodern and efficient company register that couldbe a very valuable source of information for the publicadministration and for INSTAT (the Albanian Institute ofStatistics).

The reform has successfully cut the processing timeand costs associatedwith company registration.However,some stakeholders noted that the impact of the reformhas not affected equally all class of enterprises. Forinstance incorporation procedures for limited liabilitycompanies remain relatively complex, in additionconcerns have been expressed that the reduction ofnumber of procedures does not take into account theirrelevance and quality (such as regulations concerning

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social and environmental aspects). Licensing and post-licensing process requires further simplification andremoval of licenses needs to be accompanied by astrengthening of the supervisory capacities of publicagencies in order to guarantee standards that safeguardconsumer rights.

Enhancing SME competitiveness and strengtheningthe technological capacity of SMEs

Albania had a traditionally weak policy in supportingexport-oriented and innovative companies. Thegovernment has focused on horizontal measures forimproving the general operational environment morethan targeted support to specific categories of enterprises.However, over the last two years the government hasstarted to introduce measures targeted at the mostdynamic enterprises. In 2007 the government establishedtheAlbanian Competitiveness Fundwith an initial budgetof approximately EUR 200 000. The Fund is intended tocover both export promotion and technical standardsadoption and it is expected to be supplemented by thelaunching of a new competitiveness-enhancingprogramme under the new IPA programme. AlbInvest isin charge of managing the fund; it has approved 63projects with a value of EUR 391 200 approximately.

Albania does have not yet a structured export supportsystem, integrating export promotion activities, marketintelligence, export financing and export credit insurance.Government support has been limited to the introductionof cost-sharing schemes supporting the participation ofAlbanian companies in trade exhibitions, trademissionsand other marketing activities. Albania does not havetrade offices in the main export markets. HoweverAlbInvest provides personalised assistance to foreigncompanies in sourcing for Albanian suppliers and theExport Credit Guarantee Fund is operational since thebeginning of 2008.

Support to technological innovation in SMEs, throughskills development, technology exchange centres andbusiness incubators, is still extremely limited.Nevertheless, the government has taken the first steps inlaying the foundation for amore active innovation policy.In 2008 Albania joined the first pillar of Competitivenessand Innovation. In the meantime the Albaniangovernment has formulated a comprehensive innovationsupport programme, covering both technological andnon-technological innovation, to be co-financedwith theEuropean Commission. The multi-year programmeincludes the establishment of a Business Innovation and

Relay Centre inAlbania, the completion of training needsanalysis for the SME sector, and the elaboration of anInnovation and Technology Strategy. The programme isnot yet active, due to delays in the completion of the ECprocurement process.


The legislative framework on IPRs has been furtherupgradedwith the introduction of a new Law on IndustrialProperty, in line with the acquis communautaire. Thegovernment has also amended the provisions on theapplication of the Customs Code, in order to improve thecountry IPR enforcement capacity. However enforcementremains problematic, due to the limited resources of theAlbanian Copyright Office. Inspection activity has beenstepped up, but relatively few cases IPR violation havebeen pursued in court.

Access to finance

Albania’s banking sector generally remains solvent,liquid and profitable, although the development of thesector is still at an early stage, with no sophisticatedfinancial products in place. Over 70% of credits to thenon-government sector are denominated in foreigncurrency (mainly Euros), exposing banks to potentialcurrency risk. New legislation from the Albanian CentralBank, however, encourages borrowing in local currency.A merger in January 2008 reduced the number ofcommercial banks operating in Albania from 17 to 16, ofwhich 14 are fully or partly foreign-owned. Thecommercial banking sector is dominated by a few largebanks (such as Raiffeisen International, Intesa Sanpaoloand Société Générale) but there is room for additionalmergers to increase competition.The implementation ofthe banking law has led to improvements in surveillanceand supervision, licensing, foreign branch regulations aswell as risk and prudential management. Furtherimprovement in the transparency of the banking systemresulted from the establishment of a new Credit Registryat the Bank of Albania, which came into operation on1 January 2008.

There are some banks offering credit to the SMEssector. Procredit provides micro lending even to theinformal sector but obliges companies in the greyeconomy to register before further loan tranches areextended.

Commercial banks are requested by the Central Bankto upload data on new loans daily, and on loan repayment

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status monthly. The Register contains information onborrowers (loan amount, repayments, amount of arrears,collateral used, data on credit lines where the borroweris a connected person, and loan status history over lasttwo years); it is retained for five years andmade availableto financial institutions, but not to the general public.

The non-bank financial sector is still in its infancy.However, the securities markets legislation has beenstrengthened and there was progress is implementing

measures to enhance the supervisory capacity of theFinancial Supervisory Authority. Legislation regulatingthe leasing industry was approved on 29 October 2007.

There is no active equities market in Albania. TheTirana Stock Exchange has been functioning only as amoney market for trading in Albanian treasury bills. Nostock trading is expected in the near future. Making thestock exchange functional requires substantial progressin basic legislation on disclosure obligations of issuers,

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Source: Bank of Albania

2005 2006 2007 2008

Real growth in credit to the private sector 71.7% 54.8% 45.1% 29.9%

Domestic credit to private sector to GDP, official data 14.9% 21.8% 29.6% 36%

Bank lending to enterprises, share in GDP 9.9% 14.2% 18.6% 22.7%

Bank lending to households, share in GDP 4.9% 7.6% 11% 13.2%

Share of total non-performing loans of banks in total loans 2.3% 3.1% 3.4% 6.6%

Average capital ratio of all banks (capital/ total assets) 5.6% 6.2% 6.2% N/A

Asset share of foreign-owned banks 92.3% 90.5% 94.2% N/A

accounting and auditing standards, and the developmentof a sound regulatory framework for securities tradingon secondary markets.

The private equity market in Albania is essentiallynon-existent. There is currently only one (government-subsidised) private equity fund in the country, theAlbanian American Enterprise Fund (AAEF). AAEF is anequity fund established by USAID, however it has onlybeen engaged in very few large investments over the lastten years. The market has recently attracted moreattention as the Southeast Europe Equity Fund 2 and theBalkanAccession Fund have invested in local companies,telecoms and other services. A number of internationalfunds have been scouting the property sector.TheAlbaniaReconstruction Equity Fund invested approximately EUR3.6million in 11 investments (10 of whichwere for aroundEUR 3.4 million from mid-2001 to mid-2003). Lowutilisation was mainly related to local and regionalpolitical conditions. The EBRD started operating theWestern Balkans Local Enterprise Facility (an in-houseequity-driven investment facility) in 2007, to facilitatesmaller direct investments, and has thus far signed five

equity investments (in financial institutions, constructionmaterials, agribusiness, packaging and natural resources)for about EUR 16 million.

Albania in Doing Business 2009 ranks 181 (last) in theclosing of a business. In order to speed upimplementation, the authorities revised the relevantlegislation in May 2008. The revised law foresees thatbusinesses which have a negative balance sheet for twoyears (against three years foreseen in the previous law)shall be automatically declared bankrupt. TheInternational Monetary Fund is pressing for rapidadoption of bankruptcy and collateral executionlegislation. During 2008 almost 3 600 businesses weretaken out of the register and declared as closed.

4. Service for SMEs

Improving online access

Since 2007,Albania hasmade significant progress inimplementing e-government measures that encourage

small enterprises to adopt electronic forms ofcommunication by linking them with an increasingnumber of government support services. Since July 2008the taxpayers registered in the Tirana tax office and inDurres; since October 2008 the taxpayers in Vlore, Lezhe,Elbasan, and Shkoder; and since November 2008 in Korceand Fier can pay value added tax, income tax and profittax online. They can also file social security returns andprocurement procedure online. In the case of paying tax,the relevant forms can be downloaded directly from thewebsite,which includes a guide published by the GeneralDirectorate ofTax on how to proceedwith the tax paymentonline. These developments in e-government are part ofthe US-funded Millennium Challenge Account Support.The key problem, nevertheless, remains the e-signaturesystemwhich lacks a functioning accreditation body andthe electronically available forms therefore still have to besigned and handed to the relevant public body in person.

The Albanian Investment Agency also deals withSME development. It has established a professional andwell-designed website inAlbanian and English. Its focus,however, is almost entirely on servicing foreign investors,with few information and links for SMEs specifically.

E-business and SME support

Apart from the recently approved law on electronicsignature (February 2008), Albania has achieved limitedprogress in the field of e-business and SME supportsystems. Furthermore, the actual use of the electronicsignature is constrained by the lack of a functioningaccreditation body.

Business incubators are still sparse, as is the rangeof publicly funded business services available to SMEs,although AlbInvest has been developing a database ofconsultants and trainers which can be found on itswebsite. Nevertheless, Albania does not yet have anetwork of business information centres across thecountry.

5. Human capital

Turning to the human capital dimensions of theCharter, the assessment focused on Albania’s efforts topromote lifelong entrepreneurship education and training(dimension 1) as well as enterprise training activities(dimension 4), both considered key to the promotion of amore entrepreneurial and skills-effective enterpriseenvironment.

Good efforts are underway by a range of stakeholderson more direct policy dialogue and perspective settingfor entrepreneurial learning. In the interest of ensuringa more systematic lifelong entrepreneurial learningsequence, amore developed engagement and ownershipof the process by the education authorities is still required.Thiswould additionallymakeway for a less project-drivenenvironment.

A national education strategy is being implementedthrough the Education for Excellence and EquityProgramme, using a sector-wide approach to educationreform. It presents a good opportunity for the authoritiesto determine how curriculum, teacher training andmoreflexible teaching/learning processes could address theentrepreneurship key competence within reform plans.The policy dialogue related to the implementation of thestrategy could also allow for a national entrepreneuriallearning strategy (all formal education levels, includingnon-formal learning) with amonitoring system, perhapsby way of a more structured and recognised cross-stakeholder entrepreneurial learning partnership. Fullengagement of the higher education sector will beimportant. This could build on the tripartite ministerialdialogue (education, labour, economy) which the Charterprocess has initiated.

Good efforts are being made by a range ofentrepreneurial learning stakeholders to shareinformation and good practice. A more proactiveengagement particularly by the education and trainingpractitioners in the knowledge-sharing process isrecommended.

Turning to improved skills for enterprises,performance on this dimension, as in the 2007 report, isgenerally hampered due to lack of systematic data ontraining for the enterprise environment. In particular,while data on training for start-up and growth enterprisescan be gleaned from ad hoc surveys, SME programmesand donor-supported initiatives, this data does not providethemore comprehensive intelligence important for policypurposes, and particularly the better targeting of publicfinance for training and general business support services.

On a more positive note, a 2008 study on trainingneeds analysis at national level highlights the limitationsof ad hoc arrangements in determining howhuman capitalwithin theAlbanian enterprise sector is addressed. It alsopoints to the need for a more structured and systematicintelligence framework to bring forward enterprisetraining. If this issue could be addressed as a priority and

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integrated into the enterprise policy improvementdialogue, to include clearly articulated options to ensureits realisation, a significant milestone on the Charter’sdimension 4 developments would be accomplished.

Finally, the assessment finds a number of initiativesto determine how quality of training services can beimproved with a proposal for a national accreditationsystem for training providers. This proposal should betaken further in the interests of increasing confidence ofthe enterprise community in a developing trainingmarket.

6. The way forward

E-business and SME support: There is an urgentneed to complete the regulatory framework forintroducing the electronic signature and establish afunctioning and legitimate accreditation body. This is a

precondition to developing electronic commerce andmoreadvanced online business-to-business functions, as wellas for making the most of online government services.

Improving online access: In order tomake the searchfor online information and services for SMEs lesscumbersome, SME-relevant information and links shouldbe bundled on a single SME-specific online portal, whichis regularly updated and allows for interaction betweenSMEs and the administration.

Human capital: With a view to lifelongentrepreneurial learning system building, a moredeveloped engagement by the education authorities andthe university system in entrepreneurial learningdevelopments will be important. Meanwhile, improveddata on human capital within enterprises will be needed,with further efforts to establish a quality assuranceframework for the training market.

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Notes

1 Although this report is published in 2009, data collection took place in 2008. For the SME Policy Index Report 2007, data were collected in 2006. All SMEPolicy Index scores have been rounded up or down to the nearest 0.25

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SME Policy Index scores for Albania per Charter dimension (2009)1

1. Overview

The economy has exhibited robust growth in thelast years. GDP growthwas 6.8% in 2007 and continued ata similar pace in 2008with 6%.However, imbalances haveemerged: the widening current account deficit andincreasing inflation as well as pro-cyclical fiscal policyhave led to macroeconomic imbalances. Moreover, largepublic sector wage increases threaten to spill over toprivate sector settlements, thus exacerbating inflationpressures and weighting on competitiveness. SME inparticular find it hard to attract and retain qualifiedpersonnel under such strongwage pressure.The financialcrisis is having an increasingly adverse impact onmacroeconomic stability in Bosnia and Herzegovina.Overall growth in 2009 is expected to be significantlylower, albeit still positive. Credit growth has started toslow down and tightened credit conditions have resultedin a fall in bank profitability and conservative lendingpolicies.

Data collection is very scarce in Bosnia andHerzegovina. However, thanks to a pilot project onstatistical data collection, data on SMEs is available for thesectors of hotels and restaurants, transport andcommunications.The findings below thus do not reflectthe complete SME sector but just a small part of it. Bosniaand Herzegovina does not have an official definition ofSMEs.

On the whole, 87 332 enterprises operate in Bosniaand Herzegovina1 (26 674 enterprises and 60 658entrepreneurs).The hotels and restaurants, transport andcommunication sectors are dominated by microenterprises (82.2% of total SMEs), followed by small (9.3%of total SMEs) and medium-sized enterprises (8.5% oftotal SMEs).

Micro companies dominate the sector in number,but small andmedium-sized enterprisesmake the largestcontribution to employment, turnover and value added.Accordingly, economic efficiency increaseswith enterprisesize in the SME sector. Medium enterprises concentratemore on endogenous growthwith an investment structurecloser to that of large enterprises.


Economic performance remained relativelyfavourable in the first part of 2008, but the global crisisbegan to adversely affect the economy towards the endof the year. No official GDP figures are available for 2008but data on industrial production suggest that real GDPgrew by around 5-6%. Foreign direct investment in 2008was well down on the previous year’s record level, butstill was respectable at about EUR 700 million, and therehave been no high-profile cancellations or pull-outs ofmajor investors.However, in late January the Czech energycompany CEZ announced it would pull out of a majorinvestment (up to EUR 1.4 billion) in the Republika SrpskaRS energy sector, because of an alleged breach of contractby the local partner.Also, production in theArcelor MittalPrijedorMine, one of the biggest companies in RS,was 20%lower in 2008 than planned (1.2million tons compared tothe envisaged 1.5 million tons). The sale of AluminiumMostar remains deadlocked because the bank guaranteedeposited by potential buyers expired. Previously Glencoreoffered EUR 130million for an 88% stakewith the promiseof further investments of EUR 170 million.The companyemploys 930 people and is the country’s leading exporter,with 123 000 tonnes of metals produced last year worthEUR 349 million.

So far the financial sector has been directly hit bythe global financial crisis through the increase in externallong-term interest rates. The banks and the non-bankfinancial institutions have been slowly adjusting theirlending policies and interest rates in order to reflect thechanges in the global financial system.As a result, theirclients are starting to face higher interest rates for newloans and a general lack of funding for SMEs andcorporate clients. Credit growth has slowed downsignificantly and some deposit withdrawal (around EUR400 million) occurred between October and December2008, but the main banks appear to be weathering thecrisis so far.

Bosnia and Herzegovina has a well capitalisedbanking system able to withstand this crisis. All of thebanks had plenty of liquidity to withstand withdrawalsof deposits that occurred in late 2008. It is estimated that

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Bosnia and Herzegovina

retail clients havewithdrawn about 5-10% of their depositsfrom the main commercial banks. Subsequently, on 14October 2008 the central bank decreased the mandatoryreserve requirement by 4 percentage points, from 18% to14%. This injected around EUR 371.7 million into thesystem to allow banks to deal with further withdrawalrequests and to allow for further lending to clients. Thegovernment has increased the amount of guaranteeddeposits of citizens, entrepreneurs and small andmedium-sized enterprises to EUR 10 000 from EUR 4 000.A further increase to EUR 20 000 is being discussed.

Microfinance organisations are less likely than banksto be affected by the crisis for the following reasons: asubstantial part of their funding is from donors/international financial institutions (both expected tocontinue their support during the crisis), they will not bethreatened by deposit withdrawals as they do not holddeposits, and their clients are less vulnerable to the crisisthan larger companies which borrow traditionally frombanks.

The stock market started its decline along with theglobal stockmarkets last year. Initially, the catalyst for thedecline was the exit of speculative foreign investors andfunds in late 2007.This was followed in 2008 by a generaldecline of trading by local investors as the banks tightenedcredit for retail clients who used to borrow to buy shares.As a result, the liquidity on the stock market has mostlydried up, reflected in a significant drop in daily tradingvolumes.



No progress was made since the last report in thisfield when analysing the developments at the centrallevel.

The SME policy at the state level and the co-ordinationwith the other entities and Brcko District comeunder the responsibility of the Department for EconomicDevelopment and Entrepreneurship of the Ministry forForeign Trade and Economic Relations. According to theLaw on Ministries and Other Bodies of Administration ofBosnia and Herzegovina, the ministry has competenciesin the following fields: business environment, singleeconomic space, and development and promotion ofentrepreneurship.

A new strategy for the development of the SME sectorwas developed in 2008 by a working group formed ofrepresentatives of the national institutions, the two entitiesand Brcko District with the support of the EC Delegations,after the one elaborated in 2005 failed to be adopted.Theadoption of the new SMEDevelopment Strategy in Bosniaand Herzegovina for the period 2009-2011 would providefor the creation of a SME agency at the national levelaiming at co-ordinating the strategic framework and theestablishment of the Development and EntrepreneurshipFund and of an SME Council, the situation of Bosnia andHerzegovina would improve significantly.The Strategy isa comprehensive document, with clear measures to betaken and time frame, but for the moment its adoptionseems to be blocked. The Republika Srpska and BrckoDistrict adopted their own strategic framework for thedevelopment of SMEs and the Federation of Bosnia andHerzegovina is developing one.

Also in terms of institutional framework for SMEpolicy, the three entities have their own structures inplace.Themost advanced is the Republika Srpska,whichhas in place both an SME Department in the Ministry ofEconomy, Energy and Development elaborating the SMEpolicy and an Agency for the Development of SME, with14 employees, 2 regional centres and 17 local agencies.Republika Srpska also plans to create an Advisory Bodyto co-ordinate the SME policy at the entity level. Both theFederation of Bosnia and Herzegovina and Brcko Districthave bodies for the elaboration and co-ordination of theSME policy within the Ministry of Development,Entrepreneurship and Craft, and the Department forEconomic Development, Sport and Culture, respectively.The Federation of Bosnia andHerzegovina is also planningto establish an agency.


It seems that SMEs’ interests are notwell representedin Bosnia and Herzegovina.There are twomain bodies atthe national level: theAssociation of Employers in BosniaandHerzegovina and the ForeignTrade Chamber, but theyare focused mainly on medium and large enterprises.Also membership in the Chamber is mandatory. Apartfrom these, there are various associations atnational/entity/regional level but with limitedrepresentation capacity for SMEs. This system iscomplemented by the chambers of commerce at the entitylevel.The Chamber of Commerce in Republika Srpska hasundergone a reform process restoring the mandatorymembership.The cantonal chambers of the Federation ofBosnia and Herzegovina have limited advocacy capacity.

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There are different experiences regarding the public-private dialogue at the different entities/district levels.Thestrongest public-private consultation takes place in BrckoDistrict which has in place an Economic and SocialCouncil. At the national level there is no formalconsultation system in place and consultations take placeon ad hoc basis, while at the entity level Social andEconomic Councils are present. With the adoption andimplementation of the draft Strategy for SMEDevelopment at the national level, the establishment ofthe Council for the SME Development should occur,improving the situation in Bosnia and Herzegovina inthis area.


In 2006, Bosnia and Herzegovina adopted the PublicAdministration Reform Strategy,which intends to improvethe policy-making framework both at the state level aswell as at the entities level and reduce the administrativeburden. Due to the constitution of the country, a betterregulation process is very important; the legislativeenvironment of Bosnia and Herzegovina is verycomplicated. Due to lack of harmonisation of policies,SMEs cannot operate under the same conditions atvarious locations across the country.

According to the survey conducted by USAIDStreamlining Permits and Inspection Regimes Activityproject in 2007, entrepreneurs complained that thecomplicated and excessive number of regulations andthe length of the registration process are the greatestchallenges faced by small businesses in Bosnia andHerzegovina. Therefore, the entrepreneurs believe thatthe focus of reform efforts should be on the reduction ofexcessive regulations and reduction of delays for obtainingpermits.2

However, this cannot be achieved without aconcentrated effort both at national and entity levels.Furthermore, the co-operation between theentities/district and the national administration isessential in order to create an internal market in Bosniaand Herzegovina.

Republika Srpska is again the most advanced interms of the process of review and simplification of thecurrent legislation, as it has completed the review of thelegislation in 2007. The Federation intends to introducethis process with the help of theWorld Bank.


RIA has not yet been introduced in Bosnia andHerzegovina or in a systematic way in the entities/district,but there are plans to introduce it at the national level asit is one of the commitments in the European PartnershipAgreement.3 In December 2007 a pilot project was carriedout with the help of theWorld Bank Foreign InvestmentAdvisory Service project as the basis for changing theLaw on Foreign Direct Investment.

Republika Srpska also carried out a pilot project ontwo draft laws with the help of USAID and the WorldBank. The systematic introduction of RIA in RepublikaSrpska is slated for the end of 2009.

The silence-is-consent principle is not at all appliedeither in Bosnia and Herzegovina or at entities/districtlevel. No information on the introduction plans isavailable.



Bosnia and Herzegovina is the onlyWestern Balkancountry that has not implemented a systematic reformof the company registration process.As noted in the 2007Charter report, in 2004 Bosnia and Herzegovina hadapproved a major reform of the company registrationprocess at state level. The reform included theharmonisation of the procedures at entity level and theestablishment of an electronic database allowing thesharing of information collected by the different companyregisters. However, the reform has been only partiallyimplemented. Some procedures have been harmonised,such as the notarisation and standardisation of thefounding act, but the electronic database is not operationaland there is no system of data sharing in place among thedifferent company registers.

Today there are 16 courts in Bosnia and Herzegovinawhich act as company register.The entire business start-up process is cumbersome, costly and lengthy in each ofthe three phases (registration, notification andcompliance) when compared to that of the otherWesternBalkan countries. Several performance indicators, basedon data collected for the Charter assessment process aswell as based on the Doing Business survey, point to adeterioration of the situation. It takes 5 to 15 days and 5to 7 steps, according to entity regulations, to obtain a

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company certificate in Bosnia and Herzegovina.Registration fees range between EUR 150 and EUR 750, ascourt and administrative fees are nor harmonised at entitylevel.Notification includes registrationwith three differentauthorities, in addition to the registry court (tax, customsand statistical office) and the issue of three differentidentification numbers. Compliance includes applicationfor license and permits atmunicipal and canton level.Thesystem is more complex in the Federation of Bosnia andHerzegovina, that operates onmulti-layers administrativesystem (56 days to complete the overall start-up processaccording a recent survey4), and relatively more efficientin the Republika Srpska (33 days) and the Bcrko District.The RS is also conducting pilot projects in twomunicipalities, as part of the SPIRA initiative, sponsoredby USAID, to complete the company registration phase inone day.The recent performance data highlight the needto resume the implementation of the 2004 reform,movingtowards a full harmonisation of the system on bestpractices experimented at entity level.


Under the current administrative framework, policyelaboration and implementation in the areas of the SMEcompetitiveness and technological capacity is placedmainly at entity level, while trade policy is conducted atstate level. In addition, the five regional developmentagencies (RDAs) set up in 2003 are conducting projects inboth areas and a number of other projects have beenlaunched by donors, often in co-operationwith the entitiesand the RDAs. The result is a plurality of initiativesstructured on sector and regional bases, responding tospecific needs and demands, but operating on a limitedscale. There is therefore no strategic view at state level,no mechanisms of co-ordination, or even structure tofacilitate the exchange of experiences amongimplementation agencies and private sector associationsfrom different entities. In this respect there have been nosignificant changes over the last two years, although anumber of projects have moved from the pilot to theimplementation phase.

In the export promotion area, the two most activeinstitutions are the Bosnia and Herzegovina Chamber ofForeign Trade and the Bosnia and Herzegovina ExportCouncil. Membership in the Chamber is compulsory forexporting and importing companies.The Chamber has 14000 members and provides a range of standard servicesto its members through the Bosnia and HerzegovinaExport PromotionAgency, including information on trade

regulation, standards andmarket information.The ExportCouncil, set up in 2006, includesmembers from the publicand the private sector and it is designed to operate as aco-ordination and policy advice body. There are severalprojects to promote SME competitiveness, mostlyconducted with donor support and targeted to specificsectors (IT, agro-business,metal processing,woodworkingand car components). A number of these projects take acomprehensive approach, addressing themain barriers tocompany growth, from the regulatory framework to accessto finance, standard adoption, export promotions andskill development.They often include actions to foster thetechnological absorption capacity of SMEs.The RDAs arealso active in this area, working on the links betweenenterprises and universities. For instance, the NortheastRegional Development Association is co-operating withtheWelding Institute inTuzla and the local university, aspart of a programme supporting themetal working sector.The REZ Association has established a partnershipbetween the University of Zenica and the Center forExcellence in Wood Processing. At entity level, in theRepublika Srpska, the Banja Luka University hasestablished a co-operation agreementwith theAgency forSME Development to help SMEs launch technological-oriented projects.

The same dynamic applies to cluster development.State support has been negligible, while the role of theregional development agencies, donors (in particular GTZ,USAID and the European Commission), and entities andcantons has been more significant. Their actions haveled to the establishment of active clusters in woodprocessing, automotive components, plastic componentsand tourism.


In Bosnia andHerzegovina, the legal and institutionalframework remains at an early stage of development,although basic legislation has been put in place and theInstitute of Intellectual Property is operational, withheadquarters in Sarajevo, a branch inMostar and a secondbranch in Banja Luka (not yet operational). One of themain outstanding issues concerns the area of industrialproperty rights, due to deficiency in legislation and inthe procedures for handling new applications, resultingin long delays.The secondmain area of concern is relatedto law enforcement.The inspectorate bodies in charge ofIPR enforcements operate under the two entities and theBrcko district.The state is in charge of enforcing criminallaw in relation to IPR violations.The IndirectTaxAuthorityis in charge of IPR enforcement at borders. The result of

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this fragmentation of competencies andmandate is thatthere is no unified track record of enforcement and, asnoted in the EC 2008 Progress Report, in Bosnia and

Herzegovina a “high level of counterfeiting and piracypersist and the country remains a point of distribution tothe rest of Europe.”5

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Source: EBRD.

2005 2006 2007 2008

Real growth in credit to the private sector 25.7% 20.9% 17.1% -3.0%

Domestic credit to private sector to GDP, official data 20.9% 23.4% 25.4% 27.3%

Bank lending to enterprises, share in GDP 19.0% 21.2% 24.5% N/A

Bank lending to households, share in GDP 17.6% 19.6% 20.6% N/A

Share of total non-performing loans of banks in total loans 5.4% 4.1% 3.0% N/A



Access to finance

The banking sector continued to strengthen in Bosniaand Herzegovina during the first half of 2007.Assets andcapital grew significantly in 2007 and several new bankswere established (although the total number of banks atthe end of 2007 remained at 32, the same as the previousyear). Overall bank profitability fell in the first quarter of2008 and the cost of funding has increased. The entitybanking agencies still operate independently of each otherbut they have both signed a Memorandum ofUnderstanding on co-ordinating with the central bank. Inaddition, they have begun to supervise micro credit andleasing companies, which have significantly expandedtheir activities in recent years.A law regulating the leasingindustry was expected to be approved by Parliament byend 2008.

The new Microfinance Law was approved in August2006 and implemented in 2007.As of the first half of 2008there were 57 non-bank microfinance institutions(NBMFIs) in Bosnia and Herzegovina, of which 35 wereregistered in the Federation and the remaining 22 wereregistered in Republika Srpska.NBMFIs have beenmostlyfounded by international non-governmental organisationsestablished in Bosnia andHerzegovina from 1995 onwardsto provide support to the local entrepreneurs/individualsand ensure their sustainable return to their pre-warhomes and activities. Consolidated information on the

overall volume ofmicro finance operations in the countrydoes not exist. However, the Association of MicrofinanceInstitutions collects information from its memberorganisations. In accordance with the new MicrofinanceLaw, both NBMFIs and auditors are obliged to adhere tothe provisioning policy as defined by the BankingAgency(i.e. 2% general loan loss provision on standard loans).

The definition of collateral is flexible and micro-loans can be extended in the absence of collateral. USAIDsponsored a project to set up a registry formovable assets,which became operational three years ago, on a state-wide basis and regulated by a state-level law. In thisregistry anyone who is in Bosnia and Herzegovina canenter information about pledgedmovable assets.A creditregistry exists and is well functioning, althoughindividuals’ access to their own credit data is notguaranteed by law.

Access of the private sector to capital markets isvery limited. Major international financial institutionshave committed over EUR 500 million to the Bosnianbanking sector since 1997. Capital markets are regulatedat the entity level.There are two stock exchanges, one foreach entity. Regulation is very similar in both entities,however, there is still very little cross-entity investmentflow, in spite of the fact that there are currently nolimitations inmaking cross-entity investments. In general,bothmarkets are shallow and trading is on a small scale.

Average daily trading is usually less than EUR 2 millionand recently has been even less than EUR 500 000. Theentity governments are slowly testing the sale of smallerenterprises through the stock exchange. Recently thegovernment in the Federation of Bosnia and Herzegovinasold a small stake of a local logistics company through thestock exchange.The success prompted it to consider plansto sell other smaller stakes the same way.

The first fund to enter the market was a closedprivate equity fund Horizonte Venture Management.Horizonte was closely followed by Palace InvestmentGroup (specialising in real estate investments) and theSlovenian-owned Poteza Fund Management (activelyinvesting in the banking sector through Nova Banka andPostanska Banka). In addition, a number of Slovenianfunds (such as KD and Triglav) have been major holdersof the Privatisation Investment Funds in Bosnia andHerzegovina. Recently British-based Salford entered themarket by investing in the Banja Luka brewery.A secondtype of funds, such as Gustavson, East Capital, DanskeCapital and Porr, has been active recently by taking smallstakes of up to 10% in several publicly traded companiesincluding Privatisation Investment Funds. A law oninvestments funds is now in place and the PrivatisationInvestment Funds have been transformed into investmentfunds. In addition, the first two closed-endmutual fundshave been established with the Bosnian and regionalmarket investmentmandate.They are expected to add tomarket liquidity over the long term.

4. Services for SMEs


The area of e-government is one of Bosnia andHerzegovina’s weakest areas within the Charter and onlymarginal improvements have beenmade since 2007.TheCouncil ofMinisters adopted the Strategy for Developmentof the Information Society of Bosnia and Herzegovina inNovember 2004,which includes an e-government strategy.The strategy and the Action Plan for the PublicAdministration Reform now include this e-governmentstrategy, foreseeing eight online public services forbusinesses:

• Social insurance contributions for employees;• Taxes paid by businesses (filing, informing);• VAT (filing, informing)• Registration of new companies;• Data delivery to bureaus of statistics;

• Declaring merchandise for customs clearance;• Permits pursuant to the law on living environment(including reporting);

• Public procurement.

In terms of implementation, however, only theRepublika Srpska has progressed somewhat andrequirements for tax returns can be sent online.

Regarding online information for SMEs, there isvariety of portals/websites, containing some relevant (butrarely updated) information for SMEs. There no singleSME portal, and SMEs have described their difficulties inobtaining relevant information quickly. Only RDA REDAHhas established an entrepreneurs-dedicatedweb portal ofthe regional information centre.


In Bosnia and Herzegovina, all three entities havemade independent progress in establishing businessincubators, each entity holding a number of operationalincubators. A national strategy was adopted at theNational IncubatorsMeeting on 16 and 17November 2006,defining common activities to foster new incubators.

Regarding business services, the overall choice andquality is relatively limited, but regional and local agencieshave received assistance from a range of donors and localpublic sector support.There is a network of public-fundedbusiness service providers, but the co-operation amongthem is lacking.There is no public system of certification,and only some fragmented initiatives exist.The CBI Project(Centre for the Promotion of Imports from developingcountries) has certified local consultants for exportpromotion and RDAs provide services, such as the REDAHVoucher System for training and counselling for SMEs tocreate a network of business service providers. Inparticular, the Republika Srpska has taken steps towardsservice providers’ certification and establishment of aregister. REDAH, for instance, adopted procedures forquality and furthermore, a Committee for accreditationof consultants was formed.

Information for SMEs is sparse in Bosnia andHerzegovina. Business information centres have beenestablished sporadically at local and regional level.Chambers of commerce exist at all three entity levelsproviding enterprises with patches of information. Bosniaand Herzegovina also has a Euro Info CorrespondenceCentre, but SMEs have reported a limited use of it.

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The law for the use of electronic signature wasadopted in Bosnia and Herzegovina in 2006.Implementation regulations are currently being prepared,as the Ministry of Communication is waiting on theopinion from theMinistry of Finance andTreasure beforethe regulationswill be sent for adoption in the Parliament.

5. Human capital

This section focuses on the human capitaldimensions of the Charter: entrepreneurship educationand training, and availability of skills for enterprises.

With respect to partnership building for lifelongentrepreneurial learning, the authorities of Bosnia andHerzegovina have taken first, concrete steps to establishpolicy linkages between education and economy at statelevel, through discussions between the Ministry of CivilAffairs (education) and the Ministry of ForeignTrade andEconomic Relations. Further, all ministries of education(state, entities and cantons) participate in aworking groupwith the aim to bring forward discussions onentrepreneurial learning strategy building.These essentialinstitutional foundations provide for direction, coherenceand good potential for lifelong entrepreneurial learningacross the country. Further, EU support in 2009 is timely.This foresees investment in the partnership buildingprocess, including strategy development with initialinputs into primary and secondary level entrepreneuriallearning.The strategy process,which should include non-formal entrepreneurial learning (e.g. student clubs,mini-enterprises) and third level education, could createmore defined policy orientations and a programme ofmeasures with monitoring and evaluation built in, anddetermine the resources to meet the priority actions.

Turning to entrepreneurship promotion in lower andupper secondary education, progress has been slow sincethe 2007 report, although there are good examples ofentrepreneurship promotion particularly withinvocational education. Still missing in the reform processis entrepreneurship as a key competence. More specificentrepreneurship knowledge and skills by way of electivesubjects have been given good attention. For example,some 75% of vocational schools in Republika Srpska havealready included entrepreneurship as amodulewithin thecurriculum, with a similar figure for schools within theFederation (71%).

Evidence for teacher training on entrepreneurship isconfined to vocational education. With EU support

earmarked for development of entrepreneurshipeducation at primary and secondary levels, the relevantauthorities should consider how the entrepreneurshipkey competence curriculum, including pre-service andin-service training of teachers, should be addressed. Oneoutcome of the EU-supported teacher training measuresshould ideally include perspectives for a roll-out oftraining on key competence developments for all teachersto be supported by the relevant authorities.

With respect to the enterprise skills dimension ofthe Charter, the assessment finds that data available onenterprise training, including start-ups and growingenterprises, is confined to projects, primarily supported byinternational donors.The Charter specifically recommendsthat more systematic data on enterprise training bedeveloped (e.g. by public authorities in partnership withemployer organisations) to ensure a more concertedcontribution of the human capital dimension to economicdevelopment. However, EU support in 2009 forentrepreneurial learning foresees a multi-stakeholderdiscussion process for data development. Assuming thiscan result in concrete follow-up actions, Bosnia andHerzegovina should be able to move forward on thoseindicators with quantitative criteria.

Regarding quality assurance in the trainingmarket, acertification framework for SME training and advisoryservices (EUTAC), including certified service providers andtraining offer, provides an excellent reference point forenterprises to access information on the training market.A risk, however, is that EUTAC is project-based and notsustainable. Assuming that the EUTAC accreditationdevelopments could be integratedwithinmoremainstreamquality assurance developments, it has good potential tobe extended to cover the wider training provider market.

Finally, should the proposed Entrepreneurship andDevelopment Council, foreseen within a national SMEstrategy, involve a specific task force on human capital,this would create a further opportunity to advance thehuman capital dimensions of Charter.

6. The way forward

Institutional framework: The adoption of the SMEDevelopment Strategy and the establishment of the SMEDevelopment authority would help Bosnia andHerzegovina to progress in the implementation of theCharter.The implementation of the strategy should leadto a common basic frameworkwhichwould bring together

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the stakeholders for the SME policy from theentities/district in order to co-operate in ensuring acoherent approach towards implementing the SME policyas a homogeneous process

Company registration: Bosnia and Herzegovina isthe country with the poorest performance in companyregistration from the region, were the situation furtherdeteriorated over the assessed period. Therefore, Bosniaand Herzegovina should fully implement the reformadopted in 2004, harmonising all the procedures, puttingthe electronic database in place and allowing the sharing

information between different company registered, andmost importantly reducing the duration and the cost ofregistration.

Human capital: Planned EU support for lifelongentrepreneurial learning strategy building should giveparticular emphasis to entrepreneurship key competencedevelopments (curriculum and teacher trainingimplications) and include provisions for systematicmonitoring and evaluation of the entrepreneurial learningeffort. Development ofmore structured data on enterprisetraining will be important.

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SME Policy Index scores for Bosnia and Herzegovina per Charter dimension (2009)6

Notes

1 Source of the SME data: agency for Statistics of Bosnia and Herzegovina.

2 Source : “An SME Perspective of Public Services”,at http://www.usaidspira.ba/UserFiles/File/SME%20Perspective%20of%20Public%20Services%20-%20Survey%20Report.pdf

3 Source: Sigma.

4 USAID (2008), SME Perspective of public services.

5 Commission Staff Working Document, “Bosnia and Herzegovina 2008 Progress Report”, (COM(2008)674), p. 40.


1. Overview

Although real GDP grew by 5.6% in 2007, the highestrate since 2002, Croatia has significant vulnerabilities: alarge current account deficit and high external debt,alongside balance-sheet exposure to currency risk, andhigher inflation due to surging food and utility prices.The financial crisis is having an increasingly adverseimpact on Croatia. Tourism, foreign direct investmentinflows and exports are likely to decline sharply in 2009.Real GDP growth was significantly lower in 2008 with2.1% and is forecasted to be negative in 2009.

The importance of the SME sector1 in Croatia hasincreased in recent years, in terms of the sector’scontribution to GDP and employment. In 2006, the SMEsector accounted for 99.4% of all registered businessentities, generated about 44% of the country’s GDP, andaccounted for 60% of total exports and 65% of totalemployment.Within the European Union, SMEs represent60% of total EU GDP. The large administrative burdenconstitutes a major impediment to SME development.

SMEs in Croatia are classified according to thenumber of their employees:

The EU definition of small and medium-sizedenterprises consists of firms that employ fewer than 250people, and have an annual turnover not exceeding EUR50million and/or a balance sheet total not exceeding EUR43million.The definition of SMEs in Croatia is consistentwith the EU definition in terms of employees.The numberof employees is the main criteria employed in bothdefinitions, seconded by turnover and balance sheetfigures.

The 2005 Business Environment and EnterprisePerformance Survey provides evidence on theperformance of the SME sector over the 2002-2005 period.Sales figures only rose by about 5% for small and by about8% for medium-sized companies, while export figures

remained virtually unchanged with an increase of 3% forsmall and a decline of 2% for medium-sized enterprises.More substantial changes could be observedwith respectto employment where both small and medium-sizedenterprises experienced surges of about 17%.With respectto technological and innovation activity, about 40% ofsmall and more than 50% of medium-sized companiesadopted a new technology in the surveyed period.Furthermore,more than 80% of both small andmedium-sized enterprises upgraded an existing product line orservice, while 37% of small and 54% of medium-sizedcompanies successfully developed a major new productline or service. But only less than 14% of all surveyedSMEs obtained a new product licensing agreement.

Within the SME sector, small companies dominatethe Croatian SME sector in number, while medium-sizedenterprises dominate in terms of value added.Accordingly,economic efficiency increases with enterprise size in theSME sector.

From a sectoral perspective, SMEs are concentratedin the wholesale and retail trade and repair (34.9%), realestate, renting and business activities (16.9%), andmanufacturing (13.28%). The sectors of services, tradeand real estate are dominated by micro enterpriseswhereas the sectors of manufacturing, construction andeducation are dominated by small and medium-sizedbusinesses.

Croatia still exhibits large regional discrepancies.The government has identified some “Areas of SpecialState Concern,”mostly the war-affected areas in the Eastand the South of the country and some othereconomically depressed regions. Donor programmes,which until now have focused their activities on thecapital, are increasingly targeting these regions.Programmes need to be adapted as firms in the regionsface less competition, a less developed businessenvironment and a lack of qualified workforce.


Croatia has been negatively affected by the growingglobal risk aversion. Its main vulnerabilities are its highexternal debt (estimated at 88% of GDP in 2008) andcurrent account deficit (estimated at 9-10% of GDP in

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Croatia

Croatia’s SME classification


Small 10-49 persons


2008). Croatia is seeing a significant fall in industrialoutput with an over 14% year-on-year drop in December2008. Foreign direct investment is likely to drop sharplythis year and further delays inmajor investments (notablyin the power sector) are expected as investors find itdifficult to raise the required funding. No privatisationtender has been announced yet for the shipyards, asCroatia is still negotiatingwith the European Commissionon the terms of the tenders. Due to an upper limit of 12%on credit growthwhich has been in place since 2007, year-on-year credit growth dropped only slightly from 12.9 to12.6% as of December 2008.

The crisis has had a major impact on the chemicaland power industry. In November 2008, HEP introducedmajor delays for projects envisaged in the 2006-2013energy investment plan.Nexe Grupa, for example, reducedproduction to around 60% and only in one shift. Figuresavailable up to November 2008 suggest a significantmoderation in employment growth. Total employmenthas declined since July 2008 (for usual seasonal reasons)and the number of jobseekers is up, but employment stillrecorded positive year-on-year growth rates of 0.3% inNovember 2008.

Commercial banks increased interest rates ondeposits and have stopped lending to new clients. TheZagreb Stock Exchange index, CROBEX, has fallen from 4500 points in spring 2008, to 1 734 points with low liquidityand small turnover of stocks. The interbank market ishighly illiquid given the high overnight rate of 20%.Thebanking sector is well capitalised with average CapitalAdequacy Ratio (CAR) 2 of 15.4%.Althoughmostly foreign-owned (90.8 %), it is not dependent on parent bank fundingto a large extent, given the restrictions of the CroatianNational Bank,which in the past two years have resultedin its increased focus on attracting domestic deposits.However, in response to the global financial crisis, thecentral bank also has recently increased the CARthreshold from 10% to 12% in January 2009. From 9October2008, cash held by banks in the vault will no longer beincluded in liquid HRK claims that can be used tomaintain the HRK part of the mandatory reserves. Thischange was another step in harmonising the mandatoryreserves system with the practice of European centralbanks. It also reflected the need to sterilise surplusliquidity, so as not to create additional inflationarypressures. The Marginal Reserve Requirement Decisionwas revoked in October 2008, thereby giving commercialbanks back approximately EUR 355 million and EUR 97million in order to ensure additional foreign liquidity andundisturbedmeeting of commitments to all clients. On 10

December 2008, the minimum reserve requirement waslowered from 17% to 14%.



The twomain institutions in charge of the SME policyin Croatia are the Ministry of Economy, Labour andEntrepreneurship (MELE), through the Direction for SMEs;and the Croatian Agency for Small Business (HAMAG).The former is the institution elaborating the policy andthe latter is the implementing body. This structure hasremained unchanged since the previous report.

The Directorate for SME at MELE also has the role ofco-ordinating the SME policywith the otherministries andstakeholders, the process taking place on an ad hoc basis.No information was available on the frequency ofconsultation or the structure. There are two bodies inplace for consultations between the government and theprivate community. Those are:

• National Competitiveness Council, founded in2002, as a forum for policy dialogue amonggovernment, trade unions, businessrepresentatives and academia, on issues affectingthe competitiveness of the Croat economy;

• Business Advisory Council, founded in order tobring into the regulatory reform the input of thebusiness community.

HAMAG was established in 2002 by the SmallBusiness Encouragement Act and based on theamendments of this Act of 2007, it overtook mostoperational projects of MELE, in accordance with theAnnual Operational SME Programme. The main roles ofthe agency are to manage the financial incentivesschemes and to provide expert assistance to SMEs throughbusiness advisory services. Although, according to itsestablishment act it should be independent, the agencyis actually operating as a subordinated unit of MELE,without clear objectives.The agency employs 40 personsand does not have a network of local offices.

However, the division of activities andresponsibilities, in practice, is not yet very clear.Furthermore, there are tensions between the twoinstitutions and the agency was not very active, or evenpresent, in the different meetings held on the business

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environment.Work on the restructuring and refocusingof HAMAG is underway.

The strategic document for the SME policy is theProgramme of Incentives to SMEs for 2008-2012, adoptedin April 2008.The programme is accompanied by annualoperational plans containing the specific measures forthe respective year. Although the strategic document iscomprehensive, further attention should be paid to itsimplementation, especially considering the division oftasks between the two bodies involved in the SME policy.An alert signwas drawn for the previous SME Programmeby the respondents of the GEM Survey. In 2007, accordingto the GEM Survey3 of entrepreneurs, Croatia was 26 outof 31 countries for the quality of policy instruments and17 for the quality of government programmes focusedon SMEs.


The representation of the business community inCroatia was among the best in the Western Balkansaccording to the 2007 Report. However, although thereare numerous business associations with voluntary andmandatorymembership, the capacity of most of them tomake their voices heard by the government is relativelylow.There are several large organisations and with wideregional coverage such as the Chamber of Economy, theChamber of Crafts and the Croatian EmployersAssociation. Furthermore, in October 2008, the Public-Private Partnership Act was adopted creating the legalbasis for a stronger public-private dialogue.

The system of chamber of commerce in Croatia isbased on mandatory membership, and although theChamber of Economy argues in favour of this system inorder to provide high-quality services to as manybusinesses as possible, there are discussions with thebusiness community on changing the system.

Although the Chamber of Economy underwent areform process, its advocacy role for SMEs is still not fullyrecognised by this community. Services should be moretailored towards this type of businesses.

A result of the 2005 PHARE project, SME PolicyEnhancement and Delivery (SMEPED), was theestablishment of the Forum for public-private dialogue onSME policies in June 2008. This Forum is focused on theSME policy and strategy, and legal and regulatory aspectsrelevant for SMEs. This body should have quarterlymeetings, and in 2008 it already met four times.


Croatia was the pioneer in implementing regulatoryreform in the Western Balkan region. With the help ofthe pre-accession instruments financing two projects,BiZimpact and SMEPED, Croatia started to work both onregulatory guillotine and the regulatory impact analysis.

In 2006 the government of Croatia launched theregulatory reformprogramme,HITROREZ, and establisheda special unit to co-ordinate the process and to mobiliseboth the regulatory bodies and the business community.The review of the current legislation under the guillotineproject was completed in 2007.As a result of this process1 451 pieces of legislationwere reviewed, out of which 799were to be simplified (374) or abolished (425). Animplementation planwas adopted in 2008 across differentsectors.Out of the proposal, the government retained only522 pieces of legislation for simplification (237) andelimination (295). The main reasons invocated by thegovernment for removing 277 pieces of legislation from thelist were the risk of distorting the regulatory framework,the lack of human resources to be involved in thesimplification process and the fact that this lawwould beeliminated in the future as a result of harmonisationwiththe EU acquis. Furthermore, there are doubts about theactual implementation of the regulatory guillotine forthose pieces of legislation remaining in the list.

The silence-is-consent principle is not applied inCroatia. Although it seems to be a priority of the reformprocess, no clear suggestions were registered yet.


The first pilot project for RIA in Croatia was initiatedin 2004. In 2005, through the amendments to the Rules ofProcedure of the Government, RIA became mandatory.Since then, in 2007, the government amended again theRules of Procedure and established the RIA Co-ordinationOffice in order to provide co-ordination of economic, socialand environmental impact assessments. As a result, RIAshould be systematically applied to all new pieces oflegislation and should assess the impact of the legislationon the following aspects:

• Financial impact (Ministry of Finance);• Social impact (Ministry of Health and SocialWelfare);

• Environmental impact (Ministry of EnvironmentalProtection, Physical Planning and Construction);

210

• Impact on competition and grants (Ministry ofEconomy, Labour and Entrepreneurship).

Due to the complexity of RIA, the Ministry forEconomy, Labour and Entrepreneurship established aDepartment for the Evaluation of Regulatory Impact, setup to train the staff in the concerned ministries on RIA.However, for themoment, the department itself is lackingstaff.

However, it seems that RIA is not yet systematicallyapplied in Croatia and out of the four mandatorycomponents only the financial impact is estimated foreach piece of legislation.Also, there are some overlaps inthe system,wheremore precise tasks and benchmarks arerequired. The main reason for that is the low level ofresources at the ministries’ level and the reduced powerthat the RIA Office has in order to push for RIA.



Croatia has a dual registration system, one for craftand one for companies. Craft registration is based on astreamlined process within the HITRO.HR programme,4

hosted by FINA, the Croatian Financial Agency.HITRO.HRoperates here as a one-stop shop. Craft registration iscompleted within five days for an average fee of aroundEUR 70.Company registration is also handled byHITRO.HRand FINA, but it is a more complex and costly process, asCroatia has maintained a number of pre-incorporationcontrol procedures and a requirement of the incorporationact for limited liability companies is registration with theCommercial Court. However, over the last two years, thegovernment has initiated a programme to transformHITRO.HR into a one-stop shop here, reducing the needfor the new entrepreneur to interact with other branchesof the public administration without dropping thestandards of the control procedures. Over the last twoyears there has been a marginal reduction of theprocessing time and company registration fees.Companies still need to obtain two registration numbers(same requirement for crafts): the company identificationnumber and tax registration number. In additioncompanies conducting import-export operation need toregister separately with the customs administration.However the government is planning to introduce a singleregistration number by the end of 2009. Croatia is theonly country in the Western Balkans that hasimplemented pilot projects for online registration.At the

moment the facility is available for two counties:VarazdinandMedjimurje, but the government has plans to extendit nation-wide.

Enhancing SME competitiveness and strengthening thetechnological capacity of SMEs

Croatia has taken a leading position, among theWestern Balkan countries, in elaborating andimplementing programmes to enhance SMEcompetitiveness and promote innovations among theSMEs.At the end of 2006 it had already advanced on policyelaboration; it established a number of specialisedinstitutions and launched a multi-year supportprogramme. Over the last two years Croatia did notsignificantly change its policy approach, butmovedmoredecisively into policy implementation.

In the area of export promotion, Croatia madeprogress in the implementation of the country exportpromotion strategy for 2007-2010, implemented by APIU,the Croatian export and investment promotion agency,with the support of the Croatian Chamber of Economy, theCraft Chamber, the Croatian Employer Association andExport Association, and the Croatian Bank forReconstruction and Development. The strategy aims toexpand the export base and increase the share of highvalue added products and services on total exports.

Croatia has been one of the first Western Balkancountries to look at competitiveness issues.The NationalCompetitiveness Council (NCC) was set up 2002,representing all the key private and public stakeholders.Between 2004 and 2006 it identified a set of 55 measuresdirected at enhancing the country’s medium-termcompetitiveness, covering areas such as education forgrowth and development, compliancewith EU standards,cost and price competitiveness, development ofinnovativeness and technology, strengthening small andmedium-sized enterprises, regional development andcluster development, and the creation of positivemindsetand leadership. It also introduced a monitoring process,through the publication of an annual NationalCompetitiveness Reports. A critical issue for Croatia ishow to fully develop synergies between variousprogrammes (export promotion, innovation, financing ofinnovative enterprises and skill development), and inparticular how to ensure a good level of communicationand co-operation between the Ministry of Economy,Labour and Entrepreneurship, and the Ministry ofEducation and Science.

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BICRO, the Business Innovation Centre of Croatia,plays a central role in supporting innovative SMEs. Thecentre runs a number of programmes, ranging from R&Dsupport to equity financing. The Koncro programmestrengthens the technical and managerial skills ofinnovative SMEs, through the co-funding of consultancyservices. The programme has been recently expanded,however training activities are conducted mainly usingBICRO network of technology centres, not involvingdirectly universities and research institutes.

Access to finance

Croatia has the highest level of financialintermediation within the group of Western Balkancountries. Apart from that, a number of government-funded subsidised loan schemes and guarantee funds forSMEs have resulted in a significant number of loans beingextended to SMEs in recent years.This was supported bythe improvement of Croatia’s collateral regulations andthe availability of credit information, which in May 2007provided data on 72% of physical persons. The reformand digitalisation of Croatia’s cadastre system has beensupported by the World Bank from 2004-2008. Onlineaccess to the cadastre is possible for most cities. Afunctioning online registration system formovable assetshas been in place since 2006. New guarantee schemeswere introduced in order to support new technologies,entrepreneurs and export-oriented sectors. Several recentreports5 highlight, though, that Croatian SMEs still facesome constraints with respect to long-term bankingfinance.The government provides generous interest-ratesubsidies for loans extended by the Croatian Bank for

Reconstruction andDevelopment to SMEs.However, smallcompanies which do not qualify for these loans facerelatively high rates of interest and inflexible collateralrequirements from commercial banks (with an average of150% and mortgage as the most commonly acceptedcollateral). In July 2006, the Law on Bankruptcy wasmodified, thus significantly reducing the duration of theproceedings. Educational and professional requirementswere introduced for bankruptcy trustees, However, someimprovements of the judicial system’s implementationcapacity would still be beneficial.

Next to bank loans, leasing is the second majorsource of finance for SMEs in Croatia. The leasing lawwill be fully implemented once some regulatory issueshave been resolved between the Croatia National Bankand the Financial SupervisoryAuthority HANFA.The loanssyndication market in Croatia is becoming increasinglymature, with many borrowers signing loans with anumber of international banks in the last few years.However, the syndicated loansmarket has been reservedfor prime borrowers, mostly banks and large statecompanies. In the last two years, international financialinstitutions have mostly been financing banks and roadconstruction in Croatia with very few private corporatedeals signed.

The Zagreb Stock Exchange is the main stockexchange established in 1991. It is the central place fortrade in various securities, shares and bonds.At the endof September 2008, only 15 companies were listed on theofficial market segment.Many other liquid companies aretraded on other market segments, and are either

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Source: EBRD.

2005 2006 2007 2008








ineligible or uninterested to be listed on the officialmarket segment. Market capitalisation of the stockexchange dropped by 45% compared to end 2007. Sincethe financial crisis started in summer 2008, the share ofCroatian equities held by foreign investors has droppedfrom 39% (June 2007) to 32% (Sept 2008), due to surgingrisk aversion.

The investment fund industry has been growing atextremely high rates (over 30%) in the past few years andit has become one of the main growth drivers of theCroatian equity market. There are several private equityfunds in Croatia: Croatia Capital Partnership LP (whereEBRD is also a shareholder) with around EUR 18.8millionequity fully invested, SEAF, Vienna Capital Partners LP,Quaestus Private Equity Partners Ltd., Jupiter InvestmentManagement Ltd. and Nexus Private Equity Partners.There are few regional funds active in Croatia: AdventCentral and Eastern Europe (I and II) fund finance andmanagement assistance to companies in the privatesector with an investment range of approximately EUR 3.7to EUR 15 million, AIG New Europe Fund with direct andindirect investments in various companies to financecapital programmes or working capital needs withinvestment size between around EUR 7.5 to 22.5 million,and Jupiter (which has placed a joint venture bid intourism).



Croatia has developed the leading e-governmentsystem in the Western Balkans. It covers various keyservices (tax returns, social security returns, pensionsand cadastres) and works successfully due in part to theeffective implementation of the electronic signature.

Extensive online information for SMEs is available.The presentation of the information, however, has severalshortcomings, including a lack of translation into English,information distributed over several websites, and limitedpromotion of these websites across SMEs in Croatia.


Croatia has established numerous incubators,manyfunded by national and sub-national programmes.Currently there are 27 incubators operating across thecountry and several, such as BIOS Osijek and Prima Split,have proven to be particularly innovative.

There is a well-developed market for businessservices, including a high presence of internationalconsulting firms. HAMAG has implemented a projectpromoting the accreditation of business consultants,based upon regular participation by Croatian consultantsin tailored training programmes for business serviceproviders. In 2007, 58 certified consultants resulted fromthis project.

A national directory of business service providers isavailable on the MELE website, through its Poslovninavigator, although it is not always perfectly functional.Furthermore, a broad web of 51 reliable BusinessInformation Centres exists across the country.

5. Human capital

This section addresses the human capitaldimensions: entrepreneurship education and training,and availability of skills for enterprises.

Overall, Croatia had demonstrated steady progresson all areas of entrepreneurship education and trainingsince the 2007 report. With respect to institutionalpartnership for lifelong entrepreneurial learning, acomprehensive cross-stakeholder partnership (Educationfor Entrepreneurship) involving economy, labour andeducation authorities as well as the Chamber of Economy,provides an institutional and policy framework forentrepreneurship education. While the existingpartnership arrangements are reinforced by a number offinancing instruments (e.g. a grant scheme for promotingawareness of entrepreneurship in primary and secondaryeducation, and financing for student firms), a moreconcerted engagement by the public education authoritieswill be necessary if the objective of a lifelongentrepreneurial learning framework is to be achieved.Further, the assessment finds that more attention willbe required to engage the higher education establishment(relevant ministerial departments as well as rectors’conference) in entrepreneurship learning developments.Meanwhile, Croatia demonstrates very good promotion ofentrepreneurship through non-formal education with arange of high-profile events and excellent examples ofpublic-private partnership.

Regarding entrepreneurship in lower and uppersecondary education, the Council for National Curriculumand the Ministry of Science, Education and Sports havetaken steps in integrating entrepreneurship as a keycompetence within school curriculum. This is an

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important foundation to develop learning outcomes andto define teacher training implications.To move forwardon school-based entrepreneurial learning, a monitoringsystem will be needed that tracks the extent to whichentrepreneurship is being promoted across the schoolnetwork.

An initiative by Croatia to bring forwarddevelopments in entrepreneurial learning with countriesfrom the pre-accession region (including Turkey)highlights a commitment and recognition by the countryto cross-regional co-operation.A regional resource centre(South East European Centre for Entrepreneurial Learning)financed by the Croatian government and the EuropeanUnion will support practitioners in developingentrepreneurial learning with specific reference to theobjectives and targets of the Charter policy index. Specificemphasis on entrepreneurship in higher educationprovides an opportunity for more strategic reflection onhow more commercial value can generated through theregion’s university network, an area requiring moreserious policy attention.

Turning to enterprise skills, the assessment finds asolid range of training provision, including structuredinformation and sign-posting services for enterprises,allowing for improved access to training services (e.g.HITPOP portal). Co-operation between the Ministry ofEconomy and Chamber of Economy on strategic TNAdevelopments is paying off, thanks to good efforts toestablish a regular tracking of human capital developmentwithin the small enterprise sector. Public finance allocatedformore strategic development ofTNA in the period 2009-2011 should provide formore systematic build-up of dataon enterprise management and trade skills. This shouldallow for better identification of training needs and futureskill requirements.

With respect to training for start-ups and growingbusinesses, the assessment is compromised by lack ofdata required by the respective indicators which involvequantitative evidence. Assuming the enterprise trainingtracking system agreed between theMinistry of Economy,Labour and Entrepreneurship and the Chamber ofEconomy is operationalised, data on training for newventures and growth enterprises should be more readilyavailable and satisfy the data requirements of theindicators.

6. The way forward

Although Croatia has made further good progressin implementing the European Charter for SmallEnterprises, there is still room for improvement,particularly in two areas:

Human capital (dimensions 1 and 4): A fullerengagement by the education authorities and universitieswithin the cross-stakeholder partnership arrangementsfor entrepreneurial learning will be necessary in thedevelopment of a lifelong entrepreneurial learningframework. This should include a monitoring system todetermine the extent to which entrepreneurship is beingpromoted across the school network. Developments inintelligence on enterprise training, including start-upsand growth enterprises, should be continued.

Better legislation and regulation (dimension 3):Despite Croatia’s rigorous approach to and progress inthe field of regulatory reform, progress in actuallyeliminating cumbersome and redundant legislation andregulations has been limited.There is a pressing need totake this step, after excellent progress has been achievedin reviewing and identifying obsolete legislation andregulations.

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SME Policy Index scores for Croatia per Charter dimension (2009)6

Notes

1 Source of SME-data: Croatian chamber of Economy: Industry and Technology department.

2 Ratio of total capital divided by risk-weighted assets and risk-weighted off-balance sheet items. A bank is expected to meet a minimum capital ratio of8.0% unless a higher ratio is specifically prescribed by the Superintendent of Financial Institutions.

3 Singer S. et al (2009) What makes Croatia an entrepreneurial country? GEM Results 2007-2008, CEPOR, Zagreb

4 HITRO.HR is a service of the Government of the Republic of Croatia which provides faster communication of citizens and business subjects with stateadministration. The purpose of this project is to increase the quality level of services by increasing the speed, efficiency, flexibility and transparency in theoperations of state administration. In addition to the HITRO.HR services intended for establishing a company or craft, HITRO.HR also offers e-PDV (VAT)services, e-KATASTAR (Cadastre) and e-REGOS services.

5 Cuckovic and Bartlett (2007), OECD & USAID (2007).


1. Overview

The global economic environment negatively affectsKosovo under UNSCR 1244/99’s macroeconomic growth.It is expected to slow down from its 2008 level of 5.4% toa lower, however, still positive level. Exports of severalkey categories suffered clear contractions. Sharply slowingeconomic growth and tight liquidity lead to deep externalshortfalls in financing for the economy. Indeed, Kosovounder UNSCR 1244/99 is reliant on remittances frompeople from Kosovo under UNSCR 1244/99 that areworking abroad to sustain its economy and these maydecline in 2009, as the international crisis intensifies.Kosovo under UNSCR 1244/99 needs to improve itsregulatory framework in order to create a stableenvironment for private investment. In a bid to attractforeign direct investment, the government has applied tojoin theWorld Bank and the International Monetary Fund.However, both applications are likely to face seriouschallenges, making membership in the short termproblematic.

SMEs account for 99.8% of active business entities1

registered with the Central Registry in 2006. There is nodata on SME contribution to employment or GDP.

SMEs in Kosovo under UNSCR 1244/99 are classifiedaccording to the number of their employees:

The definition of SMEs in Kosovo under UNSCR1244/99 is based on the same criteria in terms ofemployees as the EU definition, thresholds for turnoverand balance sheets differ in absolute terms because ofKosovo under UNSCR 1244/99’s economy size andperformance. The number of employees is the maincriteria employed in both definitions, seconded byturnover and balance sheet figures.

Micro enterprises dominate the SME sector with98.3%. Of total registered enterprises in 2006, only 1.4%were small and only 0.2%weremedium-sized businesses.

In terms of sectoral breakdown, SMEs are mostlyconcentrated in mass and retail sales (around 50%),followed by transport, storage and traffic (14%), foodproducts, beverages and tobacco (9%) and hotels andrestaurants (9%). The sectoral distribution is stable overtime.


As opposed to its neighbouring countries, there hasnot been a liquidity crisis in Kosovo under UNSCR 1244/99,as bank clients did notwithdraw their deposits despite theglobal financial crisis. Kosovo under UNSCR 1244/99 hassuffered other consequences of the global crisis.Remittances from migrants living abroad – accountingfor a 17% of the country’s GDP (2007) – are falling, as is thedemand for its exports. Exports of several key categories,such as raw materials, primary metals, machinery andtransport equipment, and manufactured goods, allsuffered clear contractions from January 2008. Exportrevenues in January 2009 plunged nearly 50% comparedto one year ago, from EUR 11.4 million to EUR 6.7 million.The wide external deficit signals significant externalvulnerability in the current global economic environmentand financing deep external shortfalls may provechallenging and costly.The Pension Fund suffered a sharpdrop in the value of its portfolio when its investmentsabroad lost value. The losses totalled EUR 100 million in2008 and approximately EUR 8 million in January 2009.

A multi-agency committee was recently set up toprotect the country’s financial stability. The committeewas created following the signing of a jointmemorandumof understanding by the Central Bank (KCB), the Ministryof Finance and Economy and Parliament’s Commission forBudget and Finance. Its main goal for 2009 is to have thecountry join the International Monetary Fund. Kosovounder UNSCR 1244/99 has unilaterally introduced theEuro, therefore currency stability is not under question.

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Kosovo under UNSCR1244/99

Kosovo under UNSCR 1244/99’s SME classification


Small 10-49 persons


The government created a EUR 200 million fund forany economic sector in need of liquidity. It increased themonitoring of the commercial banks and enhanced co-operation between the KCB and other central banks.Thegovernment also cut various taxes starting January 2009in order to stimulate consumer spending and foreigninvestment.



In Kosovo under UNSCR 1244/99, the SME SupportAgency is the responsible institution for the elaborationof the SME policy and its implementation.This situationis appropriate in Kosovo under UNSCR 1244/99 due to itssmall size and to the fact that it is in the process ofbuilding its own institutions.The agency was establishedin 2006 and it is subordinated to the Ministry of Tradeand Industry.

Among themain attributions of the agency, there are:

• The development of policy framework supportivefor the SMEs;

• Initiating legislation concerning the SMEs andgiving recommendations on pieces of legislationthat influence the business environment;

• Proposal and compilation of plans for a better co-ordination and co-operation between the existingdomestic and foreign organisations working forthe development of SMEs;

• Implementation of programmes related to thecreation and the developing of SMEs.

In 2008 the agency had 12 employees and a budgetto allocate to different projects of approximately EUR 2.3million. Although the agency does not include in thisbudget the donor’s support, this is rather significant forKosovo under UNSCR 1244/99.

Inter-ministerial co-ordination in Kosovo underUNSCR 1244/99 is weak, as the Rules of Procedures providefor some requirements for it, but they are not very strong.Also a sort of internal competition between agencies forfinancial resources and influence limits the scope for co-operation.

However, apart from the SME Consultative Councilthat it is used both as a body for inter-ministerial

consultation as well as for public-private dialogue (seesection on public-private dialogue), in 2008 thegovernment approved the creation of the Board of theAgency for the Support of SMEs, to be formed ofrepresentatives of fourministries and two representativesfrom the business community. This body should alsoinsure inter-ministerial co-ordination in this field

The main problems related to the institutionalframework in Kosovo under UNSCR 1244/99 are lowcapacity of the public administration in terms ofprofessional personnel and the fact that themanagementlevel is affected by the influence of the political spheres.The first sixmonths of 2008, the agency operatedwithouta general manager due to the post-elections re-nomination procedures.

For themoment, there is no strategic framework forthe SME sector development in Kosovo under UNSCR1244/99. Although the drafting process of the PrivateSector Development Strategy started in 2005 with thehelp of the European Agency for Reconstruction and anew and updated draft was delivered in 2008 to the Kosovounder UNSCR 1244/99’s authorities, this strategy has notbeen adopted yet.


Themain player in Kosovo under UNSCR 1244/99 forbusiness representation is the Chamber of Commerce. Itunderwent reform in 2004 and now counts 5 000members,all voluntary. The chamber benefited from significantdonor support in order to develop its capacity to provideservices. Its special competencies are trade, arbitration,certification and training. It seems that the chamber hasa good representation capacity, being successful ininfluencing the economic reform agenda.Aside from theChamber of Commerce an important role is played bythe AmCham (for foreign investors) and the KosovoBusiness Alliance.

In 2005 the SME Consultative Council was created asa consultative body for theMinistry ofTrade and Industry.It was mandated to discuss and analyse the state of theSME sector and to decide on the necessary steps toimprove its situation and to evaluate the draft legislation.The Council,whichmeets regularly, has 23members fromgovernmental and non-governmental organisations, thedonor community, business associations and universities,etc.However, the effectiveness of this forum for the public-private dialogue is contested by some businessrepresentatives. Furthermore, the Rules of Procedure of

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the government do not create the obligation ofconsultations prior to the adoption of a legislative act.


Due to the specific situation of Kosovo under UNSCR1244/99 (it did not inherit the legislation from Serbia orYugoslavia) and the fact that one of its main concerns isthe creation of a comprehensive and clear legal framework,it does not focus, at this point in time, on the review of itscurrent legislation.Therefore, it was decided not to assessKosovo under UNSCR 1244/99 on this particular aspectbut to emphasise the need to move towards theimplementation of regulatory impact analysis.

The silence-is-consent principle, although it isrecognised as an important element in the framework ofbetter regulation is not yet fully applied in Kosovo underUNSCR 1244/99 with the exception of the businessregistration.


Regulatory impact analysis is not used in Kosovounder UNSCR 1244/99, although a requirement for suchanalysis for the legislative drafts is included in thegovernment’s Rules of Procedure. The only assessmentdone is for the budgetary implications of the proposal.Thelack of capacity to undertake such an analysis at thedifferentministries’ level is to be blamed for not using RIAin the work of the government.



Company registration in Kosovo under UNSCR1244/99 is handled by theAgency for Business registration(KBRA), operating under the supervision of the MinistryofTrade and Industry. Business registration certificates areissued usually within one day for the date of applicationfor business registered as sole ownership andwithin fivedays for all other type of business entities. Registrationfees are low, with a maximum of EUR 20 for businessentities registered as joint ventures. The KBRA does notoperate as a one-stop shop. New business entities haveto register separately with theTaxAdministration, SocialSecurity and Customs Authority. The entire notificationprocess is completed with 5 to15 days. There have beenno significant changes in the first phases of the business

start-up process (registration and notification) over thelast two years. Registration fees have been marginallyreduced, while notification time has slightly increased.However, the overall business start-up process remainscumbersome and relatively expensive. While theminimum capital requirement for incorporated businesshas been eliminated, the pre-paid work permit fee,whichcan go up to EUR 1 000 according to the type of business,is still in place and the process for obtaining a businesslicense at municipal level has become more complex.Online registration is not in place, however a pilot projecthas started in the Suhuareka municipality.


Over the last two years the authorities in Kosovounder UNSCR 1244/99 have been focused primarily onthe strengthening of the institutional and legal frameworksupporting SME policy.Targeted support to SMEs has beenmainly provided by the donor community in co-operationwith the newly established SME Support Agency. Themain initiative conducted directly by the agency is theestablishment of an industrial park located in the outskirtof Prishtina.The park is due to be up and running by theend of 2009.

Therefore, Kosovo under UNSCR 1244/99 is still inan early phase of policy development in the areas relatedto enhancing SME competitiveness and technologicalcapacity, with no significant changes over the last twoyears. Export promotion activities are now in the portfolioof the newly established Kosovo Investment PromotionAgency. The capacity of the agency in this area is stilllimited and themain activities have been the organisationof trade missions and workshops for exporters with thesupport of the European Reconstruction Agency.

There are no initiatives under way in thetechnological area.However, initial steps have beenmadeto identify possible areas for cluster development in thesector of stone processing, goldsmith andwine production.


In Kosovo under UNSCR 1244/99 the IPR legislativeframework and institutional framework is at an earlystage of development. A Law on Customs Measures forIPRs was adopted in 2008 and implementation startedin June 2008, providing the basic framework to theCustoms administration to take action against piracyand counterfeiting. The Office of Industrial Property

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became operational in November 2007, but furtheractions are needed to strengthen its technical andadministrative capacity.The enforcement record remainsvery limited.

Access to finance

The largest bank is Procredit Bank Kosovo with amarket share by total assets of 41.2%. RZBK is the secondlargest bank with a market share of 36.4% of total assetsout of seven banks active in Kosovo under UNSCR 1244/99.The third largest bank is NLB Pristina,which was createdby a merger of Kasabank and new Bank of Kosovo inearly 2008. With EUR 69.8 million, RZBK has the largestequity of all banks.The three largest banks,which are allforeign owned, hold 89.5% of the market share by totalassets.

TheMinistry ofTrade and Industry is looking for thepossibility to activate the Credit Guaranty Scheme, onwhich it is working closelywith theAustrian DevelopmentAgency, the Austrian Patent and Licensing Management,the Economic Initiative for Kosovo representatives inVienna and theAustrianMinistry of Economy and Labour.

Collateral requirements range between 150-200% ofa loan amount. Business credits up to the amount of EUR50 000 can be guaranteed only as uncollateralised loans.The Pledge Office (Central Registry) was established in2008 under the Ministry of Trade and Industry.

UNMIK Regulation No. 2001/6 on BusinessOrganisation, Article 39 defines procedures regardingconcerned companies, their acceptance or bankruptcy.

The Cadastral Informative System of Kosovo underUNSCR 1244/99 is operational. According to cadastralrecords, owners and property users can be identified andthe relevant documentation on ownership can beprovided.However, the high level of corruption negativelyaffects the reliability of the information provided by thecadastre. A Pledge Registry Office is in place. A CreditRegistry of Kosovo under UNSCR 1244/99 has been inplace since 2006, operating under the Central BankingAuthority and providing the positive and negative credithistory of each client (regardless of loan issued orduration). Access to information is limited to financialinstitutions and the Central Banking Authority.

TheMinistry of Economy and Finance in co-operationwith theMinistry ofTrade and Industry are drafting a lawon the regulation of the leasing industry.

There is no venture capital or equity funds legislationunder consideration.



Since 2006, Kosovo under UNSCR 1244/99 has madesome progress in planning and implementing e-government measures that encourage small enterprisesto adopt electronic forms of communication.TheMinistryofTrade and Industry, as the keyministry responsible forSME policy, re-launched its website in 2006 and hasimproved its web presence considerably to reach astandard similar to the websites of the Ministry ofEconomy and Finance, and theAssembly of Kosovo underUNSCR 1244/99. But most Kosovo under UNSCR 1244/99institutions are still in the first stage of the Internet agewith a simple presentation of information on theirwebsites. Some have moved to the use of web-basedsearchable databases but nowebsite has reached seriouslevel of interactivity. The Kosovo under UNSCR 1244/99government is, however, now engaged in implementinga comprehensive e-government strategy and is startingto train its staff on it. Still, the Serbian and Englishlanguage versions are lagging behind the Albanian.

Thewebsite of the SMEAgency is updated from timeto time and provides information on the agency’sstructure and work plan, and about laws and regulationsrelevant to SMEs. No coherent level of interactivity hasbeen reached.The website of the Chamber of Commerceof Kosovo under UNSCR 1244/99 has proven a moreeffective tool to date for information exchange on aspectssuch as tenders or participation of SMEs in donor orgovernment programmes.

The efforts in transferring government servicesonline in the past two years have shown mixed results.Agencies with a certain regulatory independence suchas the Pension Trust developed searchable databases forcitizens to find the value of their pension savings, or formunicipalities to check the licences of constructioncompanies to see if they are able to participate in publictenders.The Cadastre Agency does not offer this service.The Kosovo under UNSCR 1244/99 tender service is auseful service from the Chamber of Commerce.

There are plans to allow for taxpayers tocommunicatewith the tax agencies online via a new e-taxsystem. This is supported by the donor community as a

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vital part in the double effort to fight corruption and raiseresources for the government of Kosovo under UNSCR1244/99. There are presently trial projects undertakenbetween key taxpayers and the tax agency to implementVAT fiscal register cashiers in all of Kosovo under UNSCR1244/99.As part of this new system it would be feasible toexpect that themanagement of the tax authorities woulduse this opportunity to make a complete shift in itsrelations with the SME community in income, corporateand SME taxation. Sceptical voices in the SMEs communityhave expressed their concern that the incentive structureof tax inspectors might delay online tax return for thetime being.Online services for social security returns andreporting enterprise statistics have not yet been developedin Kosovo under UNSCR 1244/99.


The European Agency for Reconstruction hasimplemented a project focused on the establishment ofbusiness incubators in Decan, Gjilan and Shtime. Theincubator in Gjilan seems to work successfully and theother two seem to need more capacity building toproduce sustainable long-term results. The effortsundertaken to create two industrial parks in Mitrovicaand Drenas still require substantial additional funds.They appear to be large capital spending projects beyondthe administrative capacity of the Kosovo under UNSCR1244/99 government and beyond the planning time lineof international donors. Nevertheless, incubators andbusiness parks are highly needed as prices of propertyhave gone up in the post-independence boom, anddemand for subsidised and managed work space couldbe significant. The new government seems to becommitted and more competent in handling thesechallenges. With the right support by the donorcommunity, the success of both these important projectscould be secured in a reasonable time frame.

There is an urgent need in Kosovo under UNSCR1244/99 to reorganise its business support structures inthe near future and to provide transparent informationon the limited business services that are available. TheSME agency implemented aVoucher Counselling Scheme(2006-2007) but the funding was too limited to have asignificant impact. Kosovo under UNSCR 1244/99 has abroad range of donor-managed SME support programmes,especially the USAID Cluster project and the EAR grantprogrammes. There are various microfinance and SMEaccess to funding projects, but there is a lack of co-ordination and information. There are, however,associations of accountants and a separate association of

business consultants in Kosovo under UNSCR 1244/99.The EAR is planning a project to establish a commonplatform for these associations.

In terms of business information services orequivalent, the SME agency of Kosovo under UNSCR1244/99 has five regional offices which are the mainoutlets of the government on the local level outsidePristina.TheWorld Bank has concrete plans to establishbusiness centres in all municipalities of Kosovo underUNSCR 1244/99. Most dealings with the government onbusiness issues still have to be done in Pristina.

The law on the electronic signature has been passedand the new government and the post-status donor effortplan to set up a functional accreditation body.

5. Human capital

This section considers entrepreneurship educationand training, and availability of skills for enterprises.

Kosovo under UNSCR 1244/99 hasmade considerableprogress through the elaboration of a comprehensiveentrepreneurial learning strategy where policycommitments have been made by three ministries inparticular: education, industry and labour. The strategyidentifies the challenges aswell as priorities to ensure thedevelopment of lifelong entrepreneurial learning inKosovo under UNSCR 1244/99. It includes a number ofkey EU policy recommendations, including across-campusentrepreneurship university education and specifictraining support for women, with recommendations forcurriculum reform and teacher training. A wide range ofstakeholders was involved in the strategy’s development:government bodies, social partners, non-governmentalorganisations, women’s business groups, municipalitiesetc. Overall, the strategy provides an excellent blueprintfor developing lifelong entrepreneurial learning.

A number of activities from the strategy are alreadybeing implemented, including teacher training,curriculum reform and promotion of school-basedmini-companies. While the strategy is constrained by lack ofresources, its potential remains strong given that it isbacked by a cross-stakeholder partnership and with aformal monitoring role provided by the Prime Minister’sOffice. The policy momentum in Kosovo under UNSCR1244/99 could be backed up with a set of definite actionsdesigned tomeet the entrepreneurial learning targets setwithin the Charter policy index.

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Turning to entrepreneurship promotion in lower andupper secondary education, good efforts have beenmadein introducing more open learning arrangements ineducationwhichwill help in developing entrepreneurshipas a key competence. A paper defining standards forentrepreneurial learning goes some way to meeting thisobjective. A curriculum revision group working in 2009provides an opportunity for the learning outcomes to bemore specifically defined. Good efforts at teacher training(initiated by 2006 EU funds and with follow up from the2008 national budget) should build on the capacity of theteaching corps to deliver on the entrepreneurship keycompetence, as well as more specific entrepreneurshipmodules for secondary level students. More effort isneeded to create structured co-operation and engagementof local businesses with schools.

While, there is a range of evidence demonstratingdissemination of good practice, given what is clearly agood entrepreneurial learning strategy, the range ofpartners responsible for its elaboration would do well toshare it with fellow countries in the region, and beyond,as an example of good partnership and policy making.

With respect to enterprise skills, an initiativeundertaken by the Chamber of Commerce on enterprisetraining needs analysis has the potential to be developedfurther, to include systematic tracking of human capitalwithin Kosovo under UNSCR 1244/99’s small businesssector. There are plans to develop capacity through thechamber’s regional offices in enterprise skills’ surveys.This should ensure that the data requirements,particularly for start-up and growing businesses withinthe Charter policy index, could be met. Given sustaineddonor interest in Kosovo under UNSCR 1244/99,benefactors in education, training and enterprise sectorswould do well to work with all parties to ensure thateducation and training developments are more tightlyreferenced to real enterprise needs. In this regard, furthersupport for capacity building of enterprise associations indefining training needs will be important.

In terms of ensuring enterprise access to the trainingmarket, more support will be necessary to provideinformation on available training offer. As a trainingmarket develops, the enterprise sector,with governmentacting in partnership, should consider the developmentof a quality assurance system for training providers.Thisshould contribute to better confidence of enterprises intraining offer and stimulate more demand.

6. The way forward

Human capital: The policy momentum generatedwith the national entrepreneurial learning strategy shouldbe accompanied by a set of actions to meet theentrepreneurial learning targets set within the Charterpolicy index. Meanwhile, an initiative of the Chamber ofCommerce on developing intelligence on enterprisetraining should be continued.Government support shouldbe considered here given mutual interest, therebyreinforcing public-private sector co-operation onenterprise skills.

Access to finance: SMEs in Kosovo have to facemanychallenges in their endeavour to access finance. Thecountry has made few progresses in the assessed areas.Credit information services are not available whichhampers bank lending to SMEs. SMEs face high collateralrequirements and a poorly developed non-bank financingframework. No venture capital or equity fund legislationhas been under consideration until assessment cut-offdate.More advanced areas are thosewhere laws are eitherunder consideration (leasing law, establishment of creditguarantee scheme) or already in place albeit at an earlystage of implementation (bankruptcy law). Although theownership of land has been documented, the cadastre isnot fully functioning.

Improving online access: In order tomake the searchfor online information and services for SMEs lesscumbersome, SME-relevant information and links shouldbe bundled in a single SME-specific online portal, whichis regularly updated and allows for interaction betweenSMEs and the administration.

221

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Notes

1 Source for SME-data: ‘Kosovo Chamber of Commerce’.


1. Overview

Recent growth in the former Yugoslav Republic ofMacedonia has been strongwith 5.1% in 2007 and 5.3% in2008, the highest rate recorded so far in the transitionperiod.However formerYugoslav Republic of Macedonia’saverage growth performance in the last five years staysbelow that of the Western Balkan countries. Increasedinvestment, partly financed by foreign direct investment,is the main driver boosting domestic demand. Anothermain driver of growth has been total factor productivity,which is common during the initial period of post-communist transition and results from the elimination ofinefficiencies of the former economic regime. Despite itsisolated position, the former Yugoslav Republic ofMacedonia is impacted by the crisis with a lower, albeitstill positive GDP growth projection for 2009.

The former Yugoslav Republic of Macedonia hasadopted the EU definition for SMEs. According to thisdefinition in terms of the number of employees (adoptedin 2004 with the Law onTrade companies) SMEs accountfor 98.7% of active business entities registered with theCentral Registry in 2006. The former Yugoslav Republicof Macedonia’s SME sector accounted for 78.4% ofemployment and 54.3% of GDP in 2006. The informalsector remains large, although there are indications thatit has been somewhat reduced, for example byimprovements in tax collection, a lowering of the taxburden and financial incentives for registration.

There are very few large enterprises in the formerYugoslav Republic of Macedonia1.Within the SME sector,small companies dominate in number (98.7% of total),contribution to employment (66.7% of total) and valueadded (53.3% of total), while medium-sized enterprisesdominate in terms of value added.Accordingly, economicefficiency increaseswith enterprise size in the SME sector.

From a sectoral perspective, small companies aremostly operating in the wholesale and retail trade sector(43.9%),whilemanufacturing (14.5%), togetherwith healthand social work (10%) and transport, storage and

communication (9.4%) follow in terms of importance.Micro and small businesses are often family businesses.They lack a sufficient capital base and managementexperience, which makes them rather vulnerable andhardly suitable for business and employment growth.The SME sector is characterised by low export penetrationand low business sophistication.

The highest concentration of SMEs is in the capital,Skopje (39.3%). Other regions with strong SME presenceare the cities of Bitola (6.5%),Tetovo (4.7%), Stumica (4.6),Ohrid (4.5%), Prilep (4.5%) and Kumanovo (4.9%).


So far, the formerYugoslav Republic of Macedonia’seconomy has been affected by the further descent intorecession of key export markets, tight credit conditionson global capital markets and limited access to workingcapital for the former Yugoslav Republic of Macedonia’senterprises. Deteriorating business and consumerconfidence are dampening investment spending andhousehold consumption as well. Basic metals are animportant segment of both industrial output and exports,and this area is extremely depressed in the current globaleconomic downturn. Industrial output in January 2009was 17.7% lower than in the same month of 2008 in realterms.Output ofmining and quarrying fell 23.7% year-on-year in January 2009, output and distribution of electricity,gas and water was down 4.6%. Manufacturing outputdeclined 18.7% from the level achieved in January 2008.Among major manufacturing branches, the sharpestdownturns in January measured year-on-year weresuffered bywood products, basicmetallurgy, non-metallicmineral products, transport equipment, textiles andtobacco products. In general, intermediate goodsexperienced the largest dip in output, down 41.4% fromthe previous year, and capital goods, 20.8% lower. As aconsequence of the crisis most of the metallurgiccompanies have slashed their production and decided todecrease their workforce. Car parts producer Ruen-Kochani decided to decrease its workforce due to sinkingdemand. Due to the financial crisis,major investment or

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expansion plans are being delayed. Turkey’s airportdevelopment,management and operating companyTAVHavalimanlari Holding announced that it would suspendits investment plans in the former Yugoslav Republic ofMacedonia for Alexander the Great Airport in Skopje andSt. Paul the Apostle Airport in Ohrid.

The banking system has so far been unaffected, asthe deposit base and the loans quality remain stable.There were no massive deposit withdrawals, althoughbanks experienced a slowdown in the growth of deposits(from 59.5% in December 2007 to 37.6% one year later).Theinterest rates on bank loans started to rise as banksfunding has become more expensive, and banks havebecome more prudent in their lending. The companiesfrom export-oriented sectors, especially from the metalsector, are subject to increasinglymore detailed screeningfrom the banks. Banks are also more concerned aboutmaturity mismatches between their loans and theirfunding base. The authorities appear to be monitoringthe situation closely. In January 2009, Slovenia’s secondlargest commercial bank Nova Kreditna banka Mariborannounced it would delay its plans for expansion in theformerYugoslav Republic ofMacedonia due to the ongoingglobal financial crisis. In December 2008, the central bankintroduced a liability for commercial banks to maintaina certain minimal level of liquid assets for settling itsliabilities which fall due in the following 30 and 180 days,separately in Denars and in foreign currencies.Accordingto the central bank, thismeasurewill result in an increasein the banks’ resilience to the unfavourable effects fromthe current global financial and economic crises. Due tothe lack of interest of foreign investors, trading on thestock exchange has also been negatively affected.



In the former Yugoslav Republic of Macedonia, thetwomain institutions working for the support of the SMEsector are the Department for Entrepreneurship andCompetitiveness within the Ministry of Economy (MoE),and the Agency for Promotion of Entrepreneurship(APPRM). The department is in charge of elaborating theSME policy and in doing so, of consultingwith all relevantinstitutions. Its second function is to provide support tothe business organisations network. APPRM is theexecutive agency, established to implement the SMEpolicy, andmore specifically the programme onmeasures

to promote entrepreneurship and the competitiveness ofthe SMEs, as well as other projects. However, it seemsthat theMoE retains the implementation prerogatives onspecific projects. The agency employs 12 persons (9 areprofessional staff) in three sectors: Strategic andDevelopment Project Sector, Co-ordination andInstitutional Support, and Information and ResearchSector. The 2009 budget of the agency is EUR 325 000, anamount insufficient to allow them to carry out theirprojects.Also, the agency has no network of local offices,but it co-operates with the existing network of businesssupport organisations.

The number of staff in the SME department of theMinistry of Economy was increased from seven to nineand it seems now adequate. However, the SME agencystill lacks sufficient human and financial resources toimplement all the measures in the SME strategy, andimplementation support of the European Charter forSmall Enterprises.There is no co-ordination body in placein order to support the decision making process, butaccording to the Rules of Procedures the proposingministry should consult the other ministries concerned.However, as the delays to receive comments haveshortened further, to seven days, it is not reasonable tocount on an in-depth analysis of the document.Furthermore, the consultation seem to appear late in theprocess and should not concentrate on legislative issuesalone but also on policy ones. This should also allow formore feedback from non-governmental organisationsand the business community. Enhanced co-ordination isnecessary between the different programs that are aimedat enhancing competitiveness of the companiesmanagedby the Ministry of Economy on the one hand (SMEdevelopment, improving competitiveness, clusterprograms, industrial policy measures) and Ministry ofEducation and Science on the other hand (R&D, technicalculture and technological development).

The strategic document for SMEs in the formerYugoslav Republic of Macedonia is a long-term strategy:theNational Development Strategy for SMEs for the period2002-2012. Based on the results achieved after the mid-term implementation review, as well as on other changesthat occurred such as achieving the status of candidatecountry, the implementation of the ECSE and theparticipation in the CIP, a revision of the strategy tookplace and it was also extended until 2013. Theimplementation of the strategy is done through annualprogrammes, specifying themeasures to be taken in orderto achieve objectives. However, the budget allocated forthe activities under the 2008 Programme for the

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development of the entrepreneurship, competitivenessand innovation of the SMEs was insufficient to giveeffective impetus to the development of SMEs in thecountry.


In the former Yugoslav Republic of Macedonia themain system of business representation is the Chamberof Commerce. There are two types of chambers basedon two pieces of legislation: the Law on the EconomicChamber of Commerce and the Law on the Chamber ofCommerce (the first piece of legislation giving morefavourable conditions). There are efforts to unify thislegislative framework. Also, in the former YugoslavRepublic of Macedonia membership in the Chamber ofCommerce is not compulsory, except for the Chamberof Crafts. There are several business associations.Although there are no specific SME associations, SMEsare present in sectoral associations. Currently thechambers offer a broad range of services, not tailoredto SME needs. Also, the fact that for a certain type ofservice, the chamber has to obtain the approval of thepublic institutions adds to the difficulties to providehigh quality, specific services.

Regarding the public-private consultations, thereare two such platforms in the former Yugoslav Republicof Macedonia: the National Entrepreneurship andCompetitiveness Council (NECC) and the SME Forum.The NECC was established in 2003, as a donor initiativeand, for the moment, is in a process of redefining itsinstitutional structure as well as its mission, planning toconcentrate more on clusters and other measures toenhance the competitiveness of SMEs. (The NECC wasdesigned to create a platform for discussions between thegovernment and the private sector, organising regularmeetings with an agenda approved initially by thebusiness sector.) Also it disseminates informationthrough the chamber of commerce and the businessassociations.

The SME Forumwas established at the national levelin 2005 and in 2008 several local SME forums wereinitiated.The forum should function as a two-way channelof communication and information between thegovernment and the SME sector. However, this forum ismanaged by the Department of SME in the Ministry ofEconomy, meaning that the meetings are called for byMoE and the agenda is sometimes discussed with theprivate sector. From its creation until mid-2008, the forummet only five times. Another issue is that this is not

institutionalised and itmeets on an ad hoc basis.There areefforts to institutionalise it based on the Law of PublicPrivate Partnership.


The regulatory reform process started relatively latein the formerYugoslav Republic of Macedonia comparedto other countries in the region and benefited from thesupport of the World Bank through the BusinessEnvironment Reform and Institution StrengtheningProject.The Regulatory Guillotine Project was introducedin 2006 as amechanism of review and streamlining of theexisting legislation, including the simplification of theadministrative burden.The process entailed the screeningof a stock of 2 162 regulations (both laws and by-laws) bothby the government and the business community, whichtabled 900 proposals. At the end of the process, the Co-ordinative Committee led by the Deputy Prime Ministerfor Economic Affairs, recommended simplification orabolishment of 64 laws and 481 by-laws.

By September 2008, 27 of the primary laws and 357of the items of implementing legislation identified inthe first phase of the regulatory guillotine process weresimplified or abolished. Most of the rest of the by-lawsdate from the period of ex-Yugoslavia and in order to beabolished, they require replacement by new by-laws.This reduction represents a mix of regulatory andbusiness simplification, as it includes reduction of delaysfor the public administration to respond for permits andlicenses and reduction of tariffs.The regulatory guillotineresulted in streamlining three regulatory regimes (taxpayments, customs, and registration of land and realestate property).

Although the importance of the silence-is-consentprinciple is recognised andwas included in the regulatoryreform process, the principle is applied in only two cases:the Law on Craftsmen Activities and the Law on Trade.


The introduction of the regulatory impact analysiswas the second phase of the regulatory reform process inthe former Yugoslav Republic of Macedonia. The legalframework for RIAwas introduced inMarch 2008, throughamendments to the government’s Rules of Procedure andwith the by-law for RIA methodology, making RIAmandatory for new pieces of legislation, except for urgentprocedure laws, starting January 2009.

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The body in charge of introducing and monitoringRIA is the Sector for Economic Policy and RegulatoryReform,within the General Secretariat of the government.It should also check and advise the ministries on RIA.Depending on the complexity of the legislation (basedon the proportionality principle), it is decided if only aninitial RIA is conducted or an extensive analysis. Theinitial RIA is carried out in parallel with the consultationprocess.

Since September 2008, two pilot projects were carriedout as part of the RIA training and strengtheningadministration capacity for RIA implementation, the firstRIA pilot project being for the draft Law on Court Taxesand the second one for the draft Law on Packaging andWaste Packaging.



Since the entry into force in January 2006 of the LawonOne Stop-Shop System and for themaintenance of thetrade register and the register of other legal entities, theformer Yugoslav Republic of Macedonia has furtherimproved the efficiency of its company registration systemand reduced company registration fees. The CentralRegistry is currently able to process a companyregistration application in less than one day, down fromfive days in 2006 for a fee of approximately EUR 57. Astypical of a one-stop shop system, the Central Registryissues the unique company registration number andobtains, on behalf of the new company the tax registrationnumber, normally in a matter of a few hours. In order tofurther reduce start-up costs the formerYugoslav Republicof Macedonia has recently waived the minimum capitalrequirement for limited liability companies.

The former Yugoslav Republic of Macedonia has aseparate registration system for crafts.The registration isconducted through the 14 regional craft centresestablished in the branches of the Craft Chamber throughthe country. The silence-is-consent principle is appliedand if the entrepreneur receives no objectionwithin eightdays, the start-up craft is automatically authorised tooperate. During those eight days the Craft Chambercompletes the registration process with the CentralRegistry and performs the necessary notification process.All the procedures are completedwith a single visit to thecraft centre. Online registration is not yet in place.However, an in-depth analysis of the requirements for

introducing online procedures has been alreadycompleted and a tender for the development of anintegrated database is under way. Online registration istargeted for October 2009.


Over the last two years the government has takensteps in the export promotion area. Since 2006 it hasestablished an export promotion programme and doubledstate financial support from approximately EUR 277 518to 571 361. The main actions have been the launch of ashort-term credit facility for exporters, administrated bytheMacedonian Bank for Development and disbursed throughcommercial banks, the introduction of an exportinsurance scheme and the opening of a bill discountingfacility for exporters.

However, in spite of a relatively good startingposition, the country performance in relation toinnovation policy and support of the technologicalupgrading of SMEs over the last two years has beenrelatively mixed. Several initiatives have been launched,but a broad innovation strategy is still missed and anumber of initiatives, launchedwith donor support, haveencountered sustainability problems.

The former Yugoslav Republic of Macedonia wasone of the first countries in the region to establish aNational Competitiveness Council in 2003, but over theyears this body progressively lost its catalyst role.Thereare currently proposals by private sector associations torevamp it, with a wider membership base. There hasbeen some progress on the legislative front. A new lawon Supporting and Facilitating TechnologicalDevelopment, opens the possibility for enterprises toapply for government co-financing for up to 50% of R&Dproject costs. At the end of October 2008, 57 projectsproposals were under evaluation. However, budgetallocations are limited to around EUR 146 921 in 2008. Inthe former Yugoslav Republic of Macedonia there arecurrently four technology transfer centres in operation(three in Skopje and one in Bitola) established with thesupport of GTZ, the German technical Co-operationAgency. Another nine centres are planned, under theUSAID-funded Competitiveness Project. In addition, alocal consortium formed of the Ss. Cyril and MethodiusUniversity, the Foundation for Management andIndustrial Research, the Agency for the Promotion ofEntrepreneurship and the Economic Chamber of theformer Yugoslav Republic of Macedonia is providing

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technology transfer services in the context of theEnterprise Europe Network since the beginning of 2008,through the European Information and Innovation Centrein Macedonia (EIICM).

At the end of 2006 the country had nine clusters inincubation. Most of the cluster development activitieswere co-ordinated by the NCC, operating with the supportof USAID. However, the NCCwas de facto dissolved at theend of the USAID project, and since then clusterdevelopment activities have been scaled downconsiderably. Two cluster development programmes,focusing on tourism development and meat and dairyproducts, have actually been abandoned, as donorsupport was phased out. Currently there are seven clusterdevelopment programmes still in place, coveringgarment, fashion design, wood processing, smallagricultural machinery and, fruit and vegetableprocessing, wine and IT. After an initial phase in whichcluster development projects were mainly donor-supported, the government is currently preparing afour-year cluster development programme, with thepurpose of creating synergies between government-supported programmes (such as export promotionservices) and donor-supported projects.


Over the last two years there has been some progressin the IPR area. The Copyright Law has been amended,allowing the transfer of the responsibility of inspectionsfrom theMinistry of Culture to State Market Inspectorateand raising the level of fines for copyright infringement.In addition there has been a limited improvement in theState Market Inspectorate administrative capacity. Someprogress has also been made on the enforcement front,although piracy and counterfeiting remain widespread.

Access to finance

In May 2007, a new banking law was adopted tostrengthen the banking system by raising the minimumcapital requirement from EUR 3.5million to EUR 5million.In addition, requirements for foreign banks entry becamestricter.There are 18 banks, but two-thirds of the sector’sassets are concentrated in the three largest banks(Komercijalna, Stopanska andNLBTutunska). Bymid 2008,around 71% of the total banking shareholders’ capitalwas in foreign hands, a 10% increase over end 2007. Thelevel of financial intermediation is rising from year toyear but remains relatively low. In the first half of 2008,total banking loans accounted for 43.5% of GDP

(compared to 38% at end 2007), while the comparableratio is between 40-80% in more developed transitioncountries and well over 100% in EU countries. Lending islargely funded by customer deposits, which are over 95%short-term. Long-term capital investment loans arepredominantly funded by the capital foreign-ownedbanks, obtained from their parents and foreign creditlines.A registration system formovable assets is in placefor legal and physical persons and can be accessed onrequest for a fee of around EUR 5. Information services onloans issued to physical and legal persons are availableonly to financial institutions.

The European Investment Bank has extended aEUR 20 million sovereign guaranteed credit line whichhas been fully disbursed by five local banks. Anotheractive investor in the market of the former YugoslavRepublic of Macedonia, particularly in the micro andsmall lending segment, is the European Fund for South-Eastern Europe (EFSE). EFSE is successor of KfW (one ofthe investors in EFSE) which has disbursed EUR 32million through five local banks accompanied by atechnical co-operation component. To date, two SMEcredit lines and one subordinated loan totalling aboutEUR 30 million have been approved. Credit guaranteeschemes could be significantly improved by increasingthe amount of the guarantee, lowering collateralrequirements, and improving marketing and promotionof the schemes.

Due to the financial crisis, SMEs are under a lot ofpressure. Some foreign partners are cancelling contracts,some customers are asking for longer credits, and banks’lending policies have become evenmore conservative (itis now difficult to secure a loan for a term of more thanfive years). Banks have very rigid collateral requirementsalthough some progress can be witnessed in the area ofmicrofinance. However, microfinance loans have highprovision and interest rates. The Law on Leasing wasadopted in 2002 and amended several times subsequently.Out of 13 authorised firms, 6 are currently active on thefinancial leasing market.

The only long-term non-sovereign credit lines to thelocal commercial banks are extended by the EBRD and theIFC. The sovereign guaranteed credit lines from otherfinancial institutions are channelled to the local banksthrough the Macedonian Bank for Development Promotion,the only state-owned bankwhich acts as an intermediarybetween the lenders and the commercial banks. Most ofthese credit lines are targeting the SME sector and havelimits of maximum EUR 0.5 million. Sub-loan approval

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procedures for most of these credit lines are lengthy andcumbersome for the borrowers, as the loans have to beapproved by both the local bank and theMacedonian Bankfor Development Promotion (or the lender as in theWB case).Local banks are reluctant to use these lines through theMacedonian Bank for Development Promotion due to thecomplicated procedure and risks of political interferenceby the Macedonian Bank for Development Promotion (beinga state-owned bank) as well as due to the interest rateceiling for the ultimate borrowers imposed by theMacedonian Bank for Development Promotion.

In April 2006 the EBRD established an investmentfacility (WB LEF) with financial contributions and supportfrom the Italian government. The facility providesindividual equity and quasi-equity investments thatmayreach up to EUR 8million forminority local companies inWestern Balkan countries, including the formerYugoslavRepublic of Macedonia.

Another small equity fund, the Small InvestmentFund,was established in September 2007.The fund is runby Skopje-based investment advisory SPMG Capital withan initial capital of EUR 500 000. The fund, which willoperate for ten years, plans to exit its investments inthree to five years. In October 2008, it made its firstinvestment of approximately EUR 75 212 in an SME inthe former Yugoslav Republic of Macedonia, acquiring a20% ownership stake.

The US-funded Small Enterprise Assistance FundMacedonia has undertaken 15 investments up to now,acquiring minority shareholdings of between 20% and49% in enterpriseswhich have a potential for rapid growth.



Since 2006, the former Yugoslav Republic ofMacedonia has made some progress in planning andimplementing e-government measures that encouragesmall enterprises to adopt electronic forms ofcommunication. PRO, the institution responsible for taxpayment and supervision and provision of informationregarding the taxes paid by physical and legal entities, hasbeen working on the development of software forelectronic filing of the tax returns of small and mediumtaxpayers.However, at present, this system is not availablemainly due to technical reasons, but the plan is toimplement the system in the near future and to make itavailable for this group of taxpayers.At themoment, thisservice is available only to large taxpayers.

Regarding enterprise statistics, in June 2008, a projectfunded by theWorld Bank (BERIS) was finalised that wouldidentify the preconditions in the formerYugoslav Republicof Macedonia for the establishment of an electronicexchange of financial and business information. Theexpectations are that this study will identify activitiesfor legal persons in the country and for adjustments in thedirection of international accounting standards, andintroduce a unique standard for the exchange of data inthe one-stop-shop system, transparency andcomparability of business and financial data. This willensure better opportunities for evaluating companies byforeign investors and for the implementation of therelevant European directives regarding the clarification offinancial data and information.

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Source: EBRD.

2005 2006 2007 2008

Real growth in credit to the private sector 19.0% 26.9% 31.1% N/A

Domestic credit to private sector to GDP, official data 24.0% 28.9% 36.4% N/A






Regarding other online government services, thePublic Procurement Bureau operates an InformationSystem for Electronic Filing (ISEF) through which allphysical or legal personsmay access calls for tenders andadvertisements. ISEF permits electronic trade between, onthe one hand, public institutions (the demand side) and,on the other, the domestic and foreign suppliers. Thissystem eliminates the need for hard-copy tenders andimproves the efficiency in implementing proceduresfor public procurement. In accordance with the Law onPublic Procurement , the documents are submittedthrough electronic means and the regulations that arerequired for the use of electronic signatures are alsoapplied.

Regarding online information for SMEs, there is noseparate e-governmentweb portal in the formerYugoslavRepublic of Macedonia. Services for enterprises can befound on the websites of the different ministries orinstitutions, but not always in English. For instance, smalland medium taxpayers can find necessary informationregarding legislation and the relevant laws, regulations,brochures published, tax calendars, application formsand a dictionary of terminology on the website of thePRO. These can be downloaded electronically and allapplication forms and templates can be filled inelectronically.

There is a government portal (www.uslugi.gov.mk)that provides information on relevant governmentalinstitutions. Any person may pose a question on thisportal, and depending on the type of the request, therelevantministry or institutionwill reply by e-mail.Thereis a plan for this portal to become a major interactivelink between the government and its institutions, andthe citizens and the private sector. The focus on SMEs,however, is lacking to date.


Business incubators in the formerYugoslav Republicof Macedonia have suffered from the ending of a WorldBank project in 2001, which funded incubators in Prilep,Krusevo,Makedonska Kamenica, Delcevo, Stip, Strumica,Ohrid andVeles.The responsibilities and follow-up of theoperation of the incubators were transferred to somedepartments and units in MoE, as well as APPRM, yettoday only the Ohrid incubator is now partiallyoperational. Since 2006, however, a number of newinitiatives have resulted in the opening of new incubatorsand the planning of others, which will be launched in2009.Themost successful incubator is theYES incubator,

which officially started operations in September 2007: atthe outset, only two companies commenced operations,but over time this number has grown and now stands at15, all of them functioning successfully and employingabout 50 young people.

The number and variety of business services in theformer Yugoslav Republic of Macedonia is limited. Mostof the services offered on the market are a combinationof the services of private providers and training financedby the government and international organisations.TheAPPRM Voucher System of Counselling provides co-financing for business services to participants in thesystem (100% of costs for potential entrepreneurs and50% for active enterprises). The issue of the voucherstakes place through regional SME centres in the country– Skopje, Strumica,Tetovo, Bitola, Kumanovo,Ohrid,Velesand the Roma Centre. The services for enterprises thatmay be co-financed through the voucher are in thefollowing areas: enterprise management,marketing andexport, human resource development, finance andfinancial services, production, quality, informationtechnology and general counselling. During 2007, 231vouchers for 157 clients were issued, of which 156vouchers (96 clients) for unemployed persons and 75 forSMEs. In 2008, the innovative voucher,which co-financesconsulting services in the field of innovations, newproducts and services etc.was introduced.TheMacedonianEnterprise Development Foundation provides training toentrepreneurs, but with a greater emphasis on farmers,micro and small enterprises, and unemployed persons.

The quality certification of business services offeredto enterprises is still in its early development phase.Although there are some attempts, it will still take severalyears to develop a body of service providers with theappropriate certification.

In terms of business information centres, SMEsmayfind the information they need in several locations. Eventhough the network of centres is best developed in Skopje,at the local level there is at least one centre or office towhich entrepreneurs may address their requests forinformation.The only difference relates to the quality ofinformation that entrepreneursmay expect from centresin less-developed and rural areas of the country.Nevertheless, the aim of the government is to provideentrepreneurs with the same quality of information andat the same speed regardless of their place of operation.

The Law on Electronic Data and Electronic Signaturewas adopted in the former Yugoslav Republic of

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Macedonia in 2001, along with four sets of regulations. InJune 2006, the first issuer of certificates was registered inthe Single Register for Issuance of Certificates.The secondissuer (Makedonski Telekomunikacii A.D.) was recentlyselected. In practice, any interested party may providecertificates at this moment and use them legally in allapplications and services. The infrastructure isestablished, as well as the first applications that usedigital certificates, but at this stage they are availableonly to a very limited extent. The beginning of the realupsurge of key public infrastructure for the applicationsis expected in the near future.

5. Human capital

This section summarises the human capitaldimensions of the Charter: entrepreneurship education,and training and availability of skills.

Critical to the development of a lifelong learningmodel for entrepreneurship is that the range of partnersresponsible for education (all levels) and training,including those responsible for non-formal learning, havedeveloped an all-encompassing framework to ensure thateach part of the learning system contributes toentrepreneurship development.And that each part of thelearning system builds systematically on the learningoutcomes from earlier education. The assessment findsthat more effort will be required by the range of partnersin the former Yugoslav Republic of Macedonia to co-ordinate and co-operate on policy, and consequently, toallow for institutional understanding and commitment asto how a sequenced lifelong entrepreneurial learningsystem can be developed.While there is good evidence ofsingular initiatives involving a limited range of actors inco-operating on entrepreneurial learning, (e.g. vocationaltraining centres with Chamber of Commerce) a moredefinite engagement of all parties, including the highereducation establishment, into a common policy dialogueneeds to take place.

While it is clear that the Charter co-ordination officeis prompting co-operation amongst a small number ofactors, the task ultimately lies with the authoritiesresponsible for education and training to take the lead infacilitating a policy debate on entrepreneurial learning.This would be the opportunity tomove from the existingnarrow concept of partnership to amore comprehensiveinvolvement of the wider range of players required forbuilding a lifelong entrepreneurial learning framework.This partnership approach could facilitate policymaking

and allow for discussions as to how resources necessaryfor entrepreneurial promotion at different levels ofeducation could be identified. Additionally, a morestructured partnership would encourage better co-ordination between formal and non-formalentrepreneurial learning provision, where good practiceis more easily identified (e.g. enterprise skills for youngpeople supported by the British Council).

With respect to entrepreneurship promotion in theschooling system, there is a more developed awarenessof entrepreneurship as a key competence withineducation with initial steps to address theentrepreneurship key competencewithin lower secondaryschooling (ISCED 2). A proposal to establish a nationalworking group for the entrepreneurship key competenceis timely. This should be followed up and addresscurriculum and teaching/learning processes, includingteacher training to allow for progress on the ISCED 2indicators. The key competence issue also needs to beaddressed within upper secondary education althoughgood progress has been made with the majority ofsecondary schools having already introducedentrepreneurship as a compulsory subject within thecurriculum.

Turning to performance on the enterprise skills’indicators, the assessment underlines that further workis required in order to establish more systematic data onhuman capital within the small business sector.Trainingneeds analysis for the most part is undertaken as part ofdonor-supported initiatives although the Ministry of theEconomy has taken steps to develop a more structuredTNA system. Should this initiativemove forward, data tomeet the requirements of specific indicators e.g.enterprise training and start-ups should be satisfied,ensuring progress on both indicators.

While efforts are being made to promote trainingfor growth enterprises a voucher scheme to encouragegrowth enterprises to develop innovation could bebroadened to include a more definite human resourcedevelopment line for interested companies.

Finally, good efforts are being made in bringingforward quality assurance in the training market withsteps to establish a national accreditation framework fortraining providers. This should help build confidence ofthe enterprise world in the training market and boostdemand. All developments in quality assurance ideallyshould be linked into wider quality assurance networksin the region and wider Europe.

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6. The way forward

The former Yugoslav Republic of Macedonia shouldfocus on the following areas of the Charter, in order toeffectively improve SME development:

Human capital (dimensions 1 and 4): A betterengagement particularly by the public education andtraining organs, including universities, will be necessaryto ensure synergy, co-ordination and co-operation indevelopment of a lifelong entrepreneurial learning system.Secondly, entrepreneurship as a key competence needsto be addressed within general education. Further workis required to establish more systematic data on humancapital within the small business sector. Finally, efforts atpromoting quality assurance in the training marketshould be continued.

Improving online access (dimension 5): In order tomake the search for online information and services forSMEs less cumbersome, SME-relevant information and

links should be bundled in a single SME-specific onlineportal, which is regularly updated and allows forinteraction between SMEs and the administration.

Access to finance (dimension 7b): SMEs are stillhampered by conservative lending policies with rigidcollateral requirements. Land ownership of the countrystill needs to be fully documented in order to have a fullyfunctioning cadastre allowing firms to use real estate ascollateral in their efforts to access bank finance. Thedevelopment of a central collateral registry coveringmostbank loans would furthermore ensure transparency overpledged assets. Credit information services available tofinancial institutions and the public, providing positiveand negative information on legal and physical persons,would also help banks to identify reliable borrowers.Finally, bankruptcy laws are still at an early stage ofimplementation. Procedures would benefit from beingfully integrated in commercial law and practice accordingto international standards.

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SME Policy Index scores for the former Yugoslav Republic of Macedonia per Charter dimension(2009)2

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Notes

1 Ministry of economy – Annual Report 2007 for the SME Sector.


1. Overview

Global financial turmoil and economic recessionwilllikely have a substantial adverse impact on confidence,credit growth, tourism and foreign direct investmentinflows in the near term.After strong GDP growth ofmorethan 10% in 2007 and 7% in 2008, a sharp deceleration ingrowth is expected in the near term. Banking systemexposure to a sudden stop or even reversal in foreignfinancing flows from parent banks is high. Rapid wagegrowth in the context of the Euro peg will ultimatelyundermine Montenegro’s attractiveness as a destinationfor foreign direct investment, making it more difficult tobroaden the production base of the economy. Moreover,in themedium term, only amodest rebound in growth isexpected. Cooling demand will also have a substantialadverse impact on fiscal revenues, and the fiscal positionis coming under pressure.

SMEs dominate Montenegro’s economy1,representing 99.8% of all registered businesses. Withinthe European Union SMEs account for 70% of total EUturnover and represent 60% of total EU GDP. InMontenegro, the SME sector represents approximately60% of national GDP.The sector’s significance in the overalleconomy is mirrored by its weight in the overallemployment figure. 67% of the total number of employeesin Montenegro are employed in the SME sector.

SMEs in Montenegro are classified according to thenumber of their employees:

The EU definition of small and medium-sizedenterprises consists of firms that employ fewer than 250people, and have an annual turnover not exceeding EUR50million and/or a balance sheet total not exceeding EUR43million.The definition of SMEs inMontenegro is basedon the same criteria as the EU definition; classification ofthresholds differs in absolute terms for turnover andbalance sheets because of Montenegro’s economy size

and performance.The number of employees is the maincriteria employed in both definitions, seconded byturnover and balance sheet figures.

Within the SME sector, micro companies dominatethe Montenegrin SME sector in number (77% of total),followed by small (9.6%) and medium-sized enterprises(2.8%). Unfortunately, there is no information availableon turnover and value added by enterprises’ size.

While SMEs are dominant in all economic sectors ofMontenegro, evidence suggest that general trade andrepair services play a very important role, both beingactivities which emerge easily in a developing economy.SMEs are concentrated in the following sectors: wholesaleand retail; trade, repair ofmotor vehicles;motorcycles; andpersonal and household goods and manufacturing. Thechallenge for technical assistance programmeswill be toassist the building of higher value added sectors whichthe economy can build upon, including those with exportpotential.

In terms of geographical distribution the SME sectoris dominant all over Montenegro. However, the largestnumber of SMEs (68%) is concentrated in fivemunicipalities: Pogdorica, Budva, Herceg Novi, Bar andNiksic.


The economy continued to expand, albeit at a slowerpace in 2008, with an estimated real GDP growth of 7%.This growth performance has been underpinned by robustdomestic demand fuelled by large foreign directinvestment inflows and very rapid credit growth. As aresult, the current account deficit widened to an estimated36.4% of GDP in 2008 from 32.5% in 2007.On the fiscal side,the general government balance is estimated to haverecorded a surplus of about 1% of GDP in 2008, thanks tolarger than expected revenues and privatisation receipts.

The impact of the global financial and economiccrisis started to be felt in the last quarter of the year.Despite foreign parent banks having continued to provideliquidity to their subsidiaries, credit growth hassignificantly slowed down to 52% year-on-year in

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Montenegro

Montenegro’s SME classification


Small 10-49 persons


November 2008 comparedwith 176% in 2007. In addition,foreign direct investment inflows declined by 9.9% in thefirst ten months of the year, following the weakening ofthe global economy and a reduced risk appetite forinvestments. On the real side, industrial productioncontracted by 2% in 2008, mostly as a result of thedownsizing of the aluminium conglomerate (KAP) tominimize its financial losses, as aluminium prices fellsharply and electricity becamemore expensive.Demand-driven inflationary pressures started to ease in the lastquarter of 2008,with inflation slowing to 7% by end-year.Montenegro has unilaterally introduced the Euro,therefore currency stability is not under question.

Downside risks are significant, particularly given thenarrow basis of the Montenegrin economy and foreign-owned domestic banks relying on their parent banks’support. Due to the global economic crisis, the activity inthe tourism sector and foreign direct investment inflowscould significantly slow down further, thus underminingeconomic growth. In addition, the future of KAP, thecountry’s main exporter, which accounts for nearly halfof all export revenues, is uncertain.

The global financial crisis has affected the financialsector in Montenegro, by means of a growing lack ofconfidence among depositors:

• Prva Bank, the second largest bank inMontenegrostarted to delay payments to its depositors. Themain reason was a strong growth of the loanportfolio, which resulted in a very poor assetquality, due to large exposure to the real estatesector.When new inflows of deposits did not occur,the bank started to suffer from liquidity problems.The bank has started to use obligatory reserves,dismissed top management and replaced theboard. Formany clients, these events brought backmemories of painful events which occurred duringthe 1990s, when many depositors lost their banksavings.

• Unsettling information in the media about asignificant drop of the share price of HungarianOTP Bank led to a bank run on CKB, the largestlocal bank, which is 100% owned by OTP.

• The maturity structure of deposits in theMontenegrin banking sector is in favour of sightand short-term deposits and their origins aremainly from foreign direct investment, of which50% are related to real estate businesses. Someinvestors have postponed their real estateinvestments in Montenegro.

During 2008, the government has approved a numberof new laws to preserve the liquidity and solvency of theMontenegrin banking system. In summary the key areasare:

• Guarantee of the deposits of all private and legalentities (national as well as foreign);

• Guarantee of inter-bank lending, limited tonominal value of the bank’s shares and secured bya pledge on the bank’s shares;

• Provision of credit support for up to one year, atECB interest rate, limited to nominal value of bank’sshares and secured by a pledge on the bank’sshares;

• Recapitalisation of an ailing bank through thepurchase of its shares at nominal value, leading toits nationalisation.This can be done either at therequest of a bank, or at the request of the CentralBank, pending the approval of the government toallow a compulsory purchase of a bank,where thestability of the banking system is at risk;

• Permission for the banks to release 50% of theirliquidity reserve from the Central Bank, for amaximum period of 30 days.



In terms of institutional framework for the SMEPolicy, themain body inMontenegro is the Directorate forDevelopment for Small and Medium Size Enterprises(SMEDA), which has the following co-ordination andimplementation functions:

• Defining the strategy for the development of SMES;• Preparing and implementing programmes andprojects for SMEs;

• Providing expert assistance and participation inthe preparation of regulations related to thedevelopment of SMEs;

• Exploring the impact of legal costs on thedevelopment of SMEs.

The co-ordination function is shared by the above-mentioned Directorate and the Department for Industryand Entrepreneurship in the Ministry for EconomicDevelopment, but the latter has not the capacity to carryout alone its activities entailed by this function. It isheaded by an Assistant Minister and it employs two

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people. The main activities of the Department are lawdrafting and defining the strategy for the development ofSMEs.

The Directorate of Small and Medium SizedEnterprises is well organised and well staffed in order tocarry out its functions.This ‘agency’ employs 20 personsout of which 17 are professional staff. The budget of theagency is EUR 3.15 million, being one of the biggest inthe region, and there is also a network of nine regional andlocal offices.

In Montenegro, inter-ministerial co-operationappears to take place on a regular basis as the WorkProgramme of the government identifies for every pieceof legislation or strategic documents the ministries thatmust be consulted in conformity with the topic discussed.Furthermore the pieces of legislation should be preparedby inter-ministerial working groups which include therespectiveministries and external experts. Starting from2007 a new requirement was introduced requesting thata law should be preceded by a policy document also opento public discussion.Although some of the consultationsstarted too late in the process, the co-ordination systemin place in Montenegro seems to be adequate.2 A goodexample in this sense is the Council for Elimination ofBarriers to Business, established to work on theProgramme for the Elimination of Barriers to theDevelopment of Entrepreneurship. It is composed of thePrimeMinister and several otherministers, the Presidentof the Commercial Court and the presidents of theChamber of Commerce, of the Employer’s Union and ofthe Montenegro Business Alliance.

In October 2007 the government of Montenegroadopted the Strategy for SME Development for 2007-2010,intended to create a favourable business environmentfor development of a competitive SME sector that wouldboost economic development, macroeconomic stabilityand standards of living. The Strategy includes 11operational goals and the work on their achievement isprogressing well.


There are several business representationorganisations in Montenegro, operating at the nationallevel due to the small dimensions of the country. Themain ones are the Employers’ Union, the MontenegroBusiness Alliance and the Chamber of Commerce. Out ofthe three the first two have strong advocacy role, although

the second one seems to protect more the interest of theforeign investors and bigger companies.The Chamber ofCommerce has strengthened its role in the last period, butcould still invest more effort in advocacy and services.There are also,within the Chamber of Commerce, sectoralassociations, including the Association of SmallEnterprises and Entrepreneurs.

Regarding the public-private dialogue, it seems thatthere is a strong emphasis on this aspect. Although aninstitutionalised body for PPD is only present in the caseof elimination of business barriers (see the institutionalframework), there are clear requirements in the Rules ofProcedures for the public consultation. There is a realdialogue between the government and the businesscommunity, although on an ad hoc basis, which could bea good example for the region.


In October 2007, the government adopted theProgramme for Eliminating Barriers to the Developmentof Entrepreneurship inMontenegro, including an analysisof the barriers for business development, as well assuggestions for their elimination according to annualplans.The Operational Plan for 2008 was adopted inApril2008 and envisages measures in the following fields:registration of companies, licences and permits,bankruptcy procedures, property registration, import/exports barriers, labourmarket, etc.The 2008 OperationalPlan is only partly implemented, the biggest advancebeing represented by the adoption of a new Law on SpatialPlanning and Construction in July 2008, replacing severalprevious laws.

Montenegro is considering the widespreadapplication of the silence-is-consent principle to othersectors of the public administration, apart from thebusiness registration, and the amendments to the Law onGeneral Administrative Procedure are in preparation.


For the moment, regulatory impact analysis is notapplied in Montenegro. Its introduction is envisaged forDecember 2009.The only analysis carried out regularly isthe financial impact assessment, although not allministries have the appropriate capacity to carry out thistask.

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Montenegro has been one of the first countries in theWestern Balkans to reform the company registrationprocess and establish an electronic company register.Thereform dealt successfully only with the first step in thebusiness start-up process, the issue of the companycertificate that can be delivered in less than two days fora low fee (around EUR 11). However, the reform has nottouched yet the other phases of the start-up process,notification and compliance. Over the last two years, theonly relevant change in the start-up process has been amarginal cut of the already low company registration fee.As other countries in the region have made substantialprogress in the start-up process, the relative position ofMontenegro in this dimension has deteriorated.

The notification phase is still not streamlined, witheach administrative authority retaining its own registry,requiring a separate registration process and issuing aseparate registration number.As a result, five registrationsand identification numbers are still required (includingcommercial court, statistical office, customs, labour officeand tax office). However, the main obstacle to completethe start-up process is connected to the requirement ofobtaining a municipal business licence for all businessactivities. The license is issued after the completion of amunicipal inspection. In addition the new entrepreneurhas to produce a paper dossier, including certification ofregistration with the company registry and the otheradministrative entities. This set of information could beeasily accessed by the municipality by consulting theelectronic registries. The inefficiency of the doubleregistration process, at national andmunicipal level,wasalready highlighted in the 2007 Charter report. Thegovernment intends to tackle this issue as part of theregulatory reform programme.


As noted in the previous report Montenegro hadintroduced anumber of programmesdirected at supportingexport-oriented and innovative companies.Most of thoseprogrammes are supported by donor funding and they areco-ordinated by the SMEDA. Over the last two years therehas been no major new development in this area.

Regarding export promotion, the agency (besidesproviding training services for exporters and supporting

trade missions), is working in co-operation with theChamber of Commerce, the International Trade Centreand GTZ on the establishment of a Trade InformationCentre. The Competitiveness and Export Department ofthe agency is also in charge of managing a co-financingand cost-sharing scheme to support exports. So far nineprojects have been approved for a total amount of EUR 1.65million. In addition 23 applications have been received forthe cost-sharing scheme supportingmarketing activitiesabroad.

By contrast, Montenegro’s position in relation toinnovation and technological support for SMEs is relativelyweak and no significant policy development has takenplace over the last two years. The Centre for Design andDevelopment at the University of Montenegro inPodgorica, alreadymentioned in the previous report as themain initiative in this area, is still not operational.


Montenegro is a specific case. Under the Union ofSerbia and Montenegro, IPRs were covered by a State ofUnion Law. After independence, declared in June 2006,Montenegro has continued to apply the pre-existent IPRlegislation.However, amendments on administrative feeswere introduced in April 2008, a Law on Geographicaloriginswas adopted in July 2008 and a draft law on patentshas been approved by the Council of Ministers.

Access to finance

The banking sector continues to grow rapidly,bringing much-needed credit to the private sector butalso raising concerns about possible overheating. Totaldomestic credit rose by 165% in 2007 but slowedsomewhat in 2008, reaching 81% year-on-year by mid-2008 as a result of the banks’ reduced appetite for risk andof new regulations introduced to restrict credit expansion,effective from January 2008. In October 2008, theauthorities took steps to reduce the risks arising fromthe ongoing global financial turmoil. They announced afull guarantee of all bank deposits, removed ceilings oncredit growth, and passed a law authorising thegovernment to provide direct support to banks.The latterwas applied in December 2008 to lend EUR 44 million tothe financially troubled Prva Banka, the second largestbank in the country. According to the newmeasures, thelargest commercial banks,with net credits in their balancesheet of over EUR 200 million, are obliged to limit theirannual credit expansion to 30%. The smallest lenders,with credit portfolios of less than EUR 100million,will be

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allowed to increase their extended credits by no morethan 60% annually. A ceiling of 40% on credit growth isapplied to lenders that have outstanding loans in therange of EUR 100 million to EUR 200 million.

Legislation to regulate the establishment of CreditGuarantee Fundswas approved in 2008.TheDoing Businessreport indicates that banks can acceptmovable assets ascollateral and that the definition of collateral is flexible.The cadastre covers about 51% of the territory (mostlyurban areas), or 79% of cadastral parcels. A SecuredTransaction Registry is in place for registration of pledgesand liens. On the basis of the contract with the registry,authorised persons (lawyers and commercial banks) canfile a notification statement electronically. Other entitiescan file notification statements in a written form or bytelefax, and they can search the database of the registryonline, check the accuracy of data entered by the registrystaff and obtain other relevant information.

A public credit registry is in place and startedsharing information with banks and microcreditfinancial institutions in the second half of 2007. Thedecision on amendments to the reporting decision (FormKR) of 6 June 2007 eliminated the minimum loanthreshold of EUR 3 000 to include loans in the database;now, all loans are listed in the registry. However,legislation is not yet in place to ensure that allindividuals can access their data.

There are two stock exchanges in Montenegro. TheMontenegro Stock Exchangewas established in June 1993by four Montenegrin banks and the Montenegrin Agencyfor Economic Restructuring and Foreign Investments.The

second stock exchange is the New Securities Exchange,established on 20 September 2001. According to theSecurities Law, trading of securities can be performedonly at the official stock exchanges; therefore no OTCmarket exists in Montenegro.

In 2005, the EBRD benchmarked the Montenegrosecurities markets legislation with the Objectives andPrinciples of Securities Regulation published by theInternational Organisation of Securities Commissions.The results demonstrated that the national legislation isinmedium compliancewith international standards,withmajor deficiencies registered in the Collective InvestmentSchemes section.This reflects gaps in the legal frameworkas collective investment schemes are not regulated bylaw.

A Law on Investment Funds was adopted. Inaccordance with this law, privatisation funds were re-registered as investment funds. The SecuritiesCommission, within overall monitoring of market,monitors establishment and operations of investmentfunds. The only exit possibility is direct sales on themarket.

Voluntary liquidation is regulated in accordancewithinternational standards. A decision on a company’sliquidation is made by at least two-thirds of itsshareholders and the decision is published in the OfficialGazette, as well as a decision on appointment of theliquidator who has all powers of a board of directors anddoes all things necessary for beneficial liquidation of thecompany.With regard to the cessation of existence of aninsolvent entity, it incorporates three proceedings:

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Source: EBRD.

2005 2006 2007 2008








reorganisation, liquidation and orderly self-liquidation.The role of the court is brought down to the supervisoryand ruling functions, whereas the emphasis on theliquidation proceedings is put on the administrator andcreditors.



With respect to the improvements made in onlineaccess for SMEs and their interaction with governmentinstitutions, the Montenegro Tax Agency (the institutionresponsible for tax payment and supervision andprovision of information regarding taxes paid by physicaland legal entities) has been working on the developmentof software for electronic filing of the tax returns of smalland medium taxpayers. This system is only partiallyfunctional, mainly due to technical problems.

Concerning online filing of social security returns, thelaw on common registration and reporting system oncalculation and tax and contribution payment has beenadopted. However, the simplification of the procedure forestablishing a business, consisting of unifying thecollection of all taxes and contribution under a singlebody, has not yet been enacted.

Montenegro has a relatively well functioningEnterprise Statistics office, including a separate databasefor business and certain reporting requirements.However,online reporting on statistics is not yet possible, but isincluded in the first phase of a Central e-GovernmentPortal.

The Public Procurement Bureau operates a websitewhich is part of the general web portal of the Governmentof Montenegro, but it lacks relevant and updatedinformation.The agency for real estate transaction has asolid database which is searchable and accurate, andprovides detailed information about land ownership inMontenegro, although it lacksmapswith parcel numbers.Another issue is still the time delay it takes from theactual purchase until the new ownership title appearsonline, which is never less than one year.

Most services for enterprises can be found on thewebsites of different SME stakeholders, agencies andinstitutions. These websites are regularly updated. Thewebsites of three key business organisations are up todate and provide useful information on their activity.

However, an SME-dedicated portal is lacking, but iscurrently under elaboration.

SME support facilities and services

Montenegro is currently establishing its firstincubator, initiated by SMEDA and the Municipality ofPodgorica, with the support of EU and EBRD, through theTAM programme. The incubator premises are provided(50m2 for administrative staff and 120m2 for tenants ofthe incubator) and a list of potential tenants has beenidentified. The main activity of the incubator will bedeveloping IT technologies.

Montenegro has established a network of regionaland local business centres (six regional and three local),including a range of services: consulting, business plansdevelopment, referral services, etc.The network of privateconsulting agencies has expanded somewhat since the2007 report, but the quality certification of businessservices offered to enterprises is still in its earlydevelopment phase. Nevertheless, the business serviceproviders have lately expressed the need for introducingquality standards and certification procedures for theprovision of business services, which would lead toestablishing real competitive conditions in the businessservices market.

Regarding the information available to SMEs onbusiness, a national directory of business servicesproviders has been compiled by SMEDA, and is availablethrough the network of regional and local business centresand the EICC. Personalised business information isavailable in paper form from the regional/local businesscentres’ network and EICC.

The Law on Electronic Data and Electronic Signaturewas adopted in 2003, but the lack of a functioningaccreditation body has hindered effective implementationand an integration of the e-signature with services of e-government.

5. Human capital

This section addresses the human capitaldimensions of the Charter: entrepreneurship educationand training, and availability of skills.

Montenegro’s efforts in accommodating the policyrecommendations from the Charter on entrepreneurshipeducation and training since the 2007 report are

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particularly marked by the development of a lifelongentrepreneurial learning strategy and an action plan(2008-2009).This is backed up with state funds to delivera limited number of actions.While the strategy has valueas a stand-alone instrument, the inclusion ofentrepreneurial learning within a wider battery of policydocuments and action programmes (e.g. National ActionPlan for Employment 2008-2009, SME strategy, NationalStrategy for Employment and Human ResourceDevelopment,HRDMontenegro 2017) reinforces its overallpotential in ensuring that the various strands of thelifelong entrepreneurial learning strategy are followedthrough.A second factor has been themobilisation of anentrepreneurial learning partnership. It will be importantthat the partnership established for the purposes ofstrategy building is sustained and that commitments tofunding of entrepreneurship promotion (particularly inthe schooling system) are realised. This would allow fora more systematic tracking of entrepreneurial learningactivities formonitoring and evaluation purposes,whichremains to be developed.

Turning to efforts to promote entrepreneuriallearning in lower and upper secondary education, theassessment finds significant efforts in promoting moreopen teaching and learning arrangements in publicschooling.This includes entrepreneurship as an electivesubject in upper secondary education, although the extenttowhich enterprise engages directlywith the teaching andlearning process is difficult to determine. Further, animportant step has been taken to integrateentrepreneurship as a key competence with strategicpiloting in the Berane region, including curriculum reformand teacher training.A next step is to determine how theBerane experience can be mainstreamed into widernational curriculum, involving initial and continuingteacher training efforts of Nikši Pedagogical TrainingFaculty and the Bureau of Education.The momentum ofBerane reforms, including the high level of teacher andcommunity engagement, should be maintained.

Data on training requirements of the enterpriseenvironment remains an area for government andenterprise to work on together if Montenegro is to ensurethat the quality of its human resources meets therequirements of a more competitive enterpriseenvironment. A small-scale TNA initiative of theMontenegrin Employers’ Federation (MEF) has generateddiscussion on howmore developed intelligence on humancapital within Montenegro’s enterprises could evolve.Follow-up support for more developed data build-up isforeseen from the European Union. This effort should

address budding entrepreneurs up as well as post-startup training, in order for Montenegro tomore strategicallymonitor the impact of training for new ventures.

With respect to growth enterprises, there is clearpolicy recognition of the need for investment inmanagement and occupational skills within theentrepreneurial learning strategy, although this targetgroup does not feature in the action plan thataccompanies the strategy.AnMEF-led initiative to improveenterprise training intelligence should ensure that growthenterprises feature within its priority target groups.

Quality assurance for training programmes andtraining providers remains to be addressed systematically,while more needs to be done in developing informationservices to allow enterprises to more easily identifytraining offer.

Finally, efforts are being made to disseminate goodpractice in entrepreneurial learning and enterprise skills.Plans by the SME Directorate to establish a web portalwill significantly reinforce the visibility of the range ofeffort. The remaining challenge for Montenegro on thegood practice indicator is to demonstrate how know-howfrom Montenegro can be transferred internationally.

6. The way forward

Better online access: In order to make the searchfor online information and services for SMEs lesscumbersome, SME-relevant information and links shouldbe bundled in a single SME-specific online portal, whichis regularly updated and allows for interaction betweenSMEs and the administration.

E-business and SME support: There is an urgentneed to complete the regulatory framework forintroducing the electronic signature and to establish afunctioning and legitimate accreditation body. This is aprecondition to developing electronic commerce andmoreadvanced online business-to-business functions, as wellas for making the most of online government services.

Human capital: A partnership arrangement forelaboration of a national entrepreneurial learning strategywill need continued political and financial support toensure its strategic value is sustained.A next task for thepartnership would be to provide a monitoring andadvisory role to a plannedNational Employment andHRDCommittee. Secondly, the good work and expertise

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developed in the Berane region on entrepreneuriallearning should be transferred to other parts of thecountry. Finally, MEF plans to develop more systematic

intelligence on enterprise human capital will need the fullsupport of government.

241

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SME Policy Index scores for Montenegro per Charter dimension (2009)3

Notes

1 National Agency for Development of Small and Medium-Sized Enterprises.

2 Source : Sigma.


1. Overview

With global financial turmoil increasingly spillingover to Serbia, the authorities requested assistance fromthe International Monetary Fund. Serbia’s external anddomestic economic environment has deterioratedabruptly and relentlessly. Exports and imports haveplummeted, external borrowing has dried up andeconomic activity slumped. In this difficult setting, afterstrong growth in 2007 with 7.5% of GDP and in 2008 with6.1% of GDP according to EBRD projections, Serbia’s GDPgrowth is likely to be negative in 2009, with limitedprospects of recovery next year. The arrangementenvisages a loan of around EUR 3 billion with aprogramme period of 27 months until mid-April 2011.The authorities’ policy package includes two elements: alarge and balanced fiscal adjustment package and themaintenance of foreign banks’ commitments in thecountry.

SMEs dominate Serbia’s economy1, representing99.8% of all registered businesses. Within the EuropeanUnion, SMEs account for 70% of total EU turnover andrepresent 60% of total EU GDP. In Serbia, the SME sectoralready accounts for 67.6% of total turnover and represents56.7% of national GDP. The sector’s significance in theoverall economy is mirrored by its weight in the overallemployment figure. 65.5% of the total number ofemployees in Serbia (54.7% in 2004) are employed in theSME sector, with a dominant share of SMEs in privateownership accounting for 46.5% of the employed in theeconomy.

Despite the growth in SME activity achieved over thepast years, Serbian SMEs still face large challenges inincreasing their competitiveness and export potential,and are still hampered by financing difficulties. SMEs inSerbia concentrate on the local market and lack exportcompetitiveness with only a 43.9% share in total exports.Serbia also needs to improve the situation of women inthe economy.The employment rate of women (40.8%) isbelow the average of the developed countries (around56%).The unemployment rate of women in Serbia (27.4%)is also significantly higher than that of men (17.6%) and

increasing rates of female entrepreneurship offer onesolution to this problem.

SMEs in Serbia are classified according to the numberof their employees:

The EU definition of small and medium-sizedenterprises consists of firms that employ fewer than 250people, and have an annual turnover not exceeding EUR50million and/or a balance sheet total not exceeding EUR43million.The definition of SMEs in Serbia is based on thesame criteria as the EU definition; the classification ofthresholds differs in absolute terms because of Serbia’seconomy size and performance.The number of employeesis the main criteria employed in both definitions andthere is consistency between them, seconded by turnoverand balance sheet figures.

Within the SME sector, micro companies dominatethe Serbian SME sector in number, turnover and totalvalue added, but in proportion to their number, small andmedium-sized enterprisesmake the largest contribution.Accordingly, economic efficiency increaseswith enterprisesize in the SME sector. Growth in turnover by microenterprises has been decreasing,while that of both smalland medium-sized enterprises has been steadilyincreasing.

While SMEs are dominant in all economic sectors ofSerbia, evidence suggest that general trade and repairservices play a very important role, both being activitieswhich emerge easily in a developing economy.Out of thetotal number of SMEs 65% of them are concentrated in thefollowing three sectors: wholesale and retail trade, repairof motor vehicles, motorcycles and personal andhousehold goods (37.5%), manufacturing (16.8%), andtransportation, warehousing and connections (10.7%).The highest value added as a percentage of total value

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Serbia

Serbia’s SME classification


Small 10-49 persons


added is provided in the trade sector, closely followed bythe manufacturing sector. The challenge for technicalassistance programmes will be to assist the building ofhigher value added sectors which the Serbian economycan build upon, including those with export potential.

In terms of geographical distribution the SME sectoris dominant all over Serbia. However, the largest numberof SMEs (46.6%) is concentrated in four districts: the Cityof Belgrade, the South-Backa District, Nis District andSouth Banat District.These districts also correspond to thedistricts with the highest turnover achieved, closelyfollowed by SremDistrict,where small andmedium-sizedenterprises have slightly higher turnover than enterprisesin the South Banat District.

Donor programmes, which until now have focusedtheir activities on the capital, are increasingly targetingthe regions. Programmes need to be adapted as firms inthe regions face less competition, a less developedbusiness environment and a lack of qualified workforce.


As a consequence of the current global financialcrisis, the Serbian economy is likely to slow down witha protraction of both exports and imports in 2009,accompanied by a sharp reduction of Serbia’s current-account deficit. The country’s full-year current-accountdeficit surged to about 20% of estimated GDP in 2008,while gross external debt rose to approximately 68% ofGDP. In January 2009, the current-account gap droppedto a preliminary EUR 72.9 million, down dramaticallyover the revised year-earlier level of approximately EUR351.2 million. The extent of Serbia’s recent fall of 17.1%year-on-year in industrial output is alarming and can beexpected to have adverse effects on other parts of theeconomy.

Major privatisation or foreign investments have beendelayed or cancelled. After three failed attempts, theSerbian government has given up for now trying to sell amajority stake in the Bormining complex.The tender forsale of 51% of JAT Airways failed in October 2008 as nosuitors filed bids by the deadline.The privatisation of JATTehnika and the third attempt to sell IMR Rakovica failedas well. According to unofficial estimates, there are stillbetween 300-500 smaller state-owned companies whoseprivatisation could be delayed due to the global financialcrisis. US Steel Serbia and Tigar Tyres – the country’sbiggest exporters – have already started to experiencefinancial difficulties, forcing them to temporarily suspend

production. More generally, foreign direct investment islikely to drop sharply this year, not so much because ofa perceived deterioration in the investment climate butsimply because investors will find itmore difficult to raisethe required funding. The delay in Fiat’s investment inZastava is an example of this.The moderation of foreigndirect investment inflows and more limited access toexternal loans have substantially raised the financingrisks of Serbia’s external deficits. Serbia’s sovereign riskoutlook has deteriorated once again, due to rising externalimbalances and the heightening impact of the globalfinancial crisis.

In February 2009, the government adopted a set ofmeasures for alleviating the effects of the global financialcrisis. The programme envisages setting aside EUR 1.3billion for stimulating production and export throughimproving the liquidity of the economy and thepurchasing power of the population. State funding willencourage banks to finance businesses, withdrawadditional funds from their head offices, and enablecitizens to buy local products under favourable terms.The cabinet will also set aside additional funds forsecuring 5.5% annual interest rates for the loans.Furthermore, it will allocate EUR 179 million forinvestment loans, of which 30%would be disbursed by theState Development Fund, while the remainder would bedisbursed by the local lenders. Under the incentives forthe local economy, the government will use an additionalEUR 400 million in international loans earmarked forSMEs.Anothermeasure announced by the government isthe direct subsidising of consumer loans for purchasinglocal products.

Hit by a deepening crisis, the Serbian government isalso asking the International Monetary Fund for someEUR 3 billion over the next two years that would helpboost foreign currency reserves and provide balance-of-payments support. Serbian officials began a fresh roundof talkswith the InternationalMonetary Fund on 16March2009, aimed at reaching a new stand-by arrangement tohelp secure the country’s macro-economic position. Ifapproved, the new loanwould substantially raise fundingto the troubled Serbian economy, replacing a preliminaryagreement worth approximately EUR 398.6 million thatwas reached in November 2008 and which has not yetbeen drawn upon. If the Serbian authorities fail to reacha new agreement with the International Monetary Fund,the country’s external positionwould be very complicated,serving as a trigger for a sovereign risk downgrade. Fitchratings revised the Serbian outlook for 2009 from stableto negative on 30 December 2008.

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2. SME policy and public-private consultation


The institutional structure of the SME policy in Serbiaremained unchanged from the previous report on theCharter’s implementation. The institution in charge ofelaborating the SME policy is the Ministry of Economyand Regional Development (MoERD), through the Sectorfor the Development of SMEs. MoERD is supervising theactivity of the Agency for the Development of SMEs andco-operates in developing the strategic documents withother agencies such as the Serbian Investment and ExportPromotion Agency, Export Credit Insurance Agency andNational Employment Agency.

The implementation of the policy is conducted by theSerbianAgency for the Development of SMEs, establishedin 2001.The agencyworks closelywithMoERD and definesits annual and quarterly work programme and activitiestogether with the ministry. The agency also developed anetwork of regional agencies (14) and local centres (17),employing 35 permanent employees and 18 contractualagents for the offices across Serbia. Of them, 26 areprofessional staff. The agency is financed from thenational budget and its own resources, its 2008 budgetamounting to approximately EUR 3 million. The agencyis also managing the start-up support facility providinggrants to new companies operating under the NationalDevelopment Fund.

The co-ordination body in Serbia regarding the SMEpolicy is the Small and Medium Enterprises Councilestablished in 2006.The tasks of the council aremonitoringandanalysing the state of the SMEs,offering support for thedevelopment and the implementationof theSMEpolicy,andacting a forum for co-operation amongdifferentministries.There are 12members,ofwhom7are representatives of theministries with a role in influencing the businessenvironment of SMEs and 5 are representatives of thebusiness community. Although the SME Council shouldmeet every month, and submit quarterly reports to thegovernment, the meetings were not frequent in 2008, duemainly to the elections that took place in that year and tothe frequent changes of the different ministries’representatives. However, the council worked on severalimportant documents, such as drafting the SME strategy for2008-2013, adopting the Programme for the Developmentof Business Incubators and Clusters for 2007-2013, etc.

In October 2008, Serbia adopted a new strategy forSMEs, the Strategy for the Development of Competitive

and Innovative SMEs for the period 2008-2013. The newstrategy is based on five pillars:

Promotion and support for entrepreneurship andbusiness start-ups;

• Human resources for a competitive SME sector;• Financing and taxation for SMEs;• Competitive advantages of SMEs in exportmarkets;• Serbia’s legal, institutional and businessenvironment for SMEs.

Although the strategy is accompanied by a detailedoperational plan, its implementation cannot be assessedyet. Particular attention should be paid to the estimationof the costs to implement it and how the necessary budgetwill be gathered, while considering the donors’ help.Theprevious strategy for the period 2003-2008 contributed tothe improvement of the business environment,improvement that is also visible in the higher scores onthe SME policy index.


In terms of SME representation, Serbia madesignificant progress since the last assessment exercise,when it was at the bottom of the classification.This is duemainly to the reform of the national Chamber ofCommerce and the establishment of the SME Forum.Boththe advocacy function and the capacity to provide servicesincreased. In addition, it created an external network,with offices in 10 countries. Apart from the SerbianChamber of Commerce the network of chamberscomprises 16 regional and 2 district chambers.The focuson SMEs has increased. However, their efficiency inpromoting SMEs’ interest and offering the right servicesfor SMEs has still to be improved.

Apart from the chambers system there are severalassociations including SMEs.According to the government’sself-assessment, there are 161 general associations ofentrepreneurs.However, although these associationsmightinfluence the decision-making process at the local level,only those associated with the chambers can make theirvoices heard by the government. One such association isthe Association of Business Women, which is very activein promoting both the interest ofwomenentrepreneurs andentrepreneurship among women in Serbia.

As per the section on institutional policy frameworks,it is advisable for the SME council to also operate as themain institution for public-private consultations in Serbia.

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Due to the infrequency ofmeetings, the low representationof the business community and the fact that this counciloperates more as an inter-ministerial co-ordination body,the SerbianChamber of Commerce initiated anSMEForum.Although it started out with ad hoc meetings with thegovernment, the intention is to establish it as a consultativebody to the government that will meet regularly.


The inherited regulatory setting from the ex-YugoslavRepublic together with the introduction of new legislationafter its dismantling (which is characterised by the lackof insight on the impact of legislation on stakeholders, lackof co-ordination between different ministries inelaborating it and a poor enforcing capacity) makeregulatory reform in Serbia very important.

In 2003, the Council for Regulatory Reform andQuality Control was established in order to assist thegovernment in the regulatory reform process. Althoughthe council contributes to the entire reform process, itsmain contribution is in the RIA area (see section on RIA).

The Council elaborated the Regulatory ReformStrategy for 2008-2011, which was adopted in October2008.The action plan for this strategy was in preparationat the time of the cut-off date. It is expected that thecomprehensive review of the legislation be conducted inthe period ending 2008 - 2009.One objective of the strategyis to reduce the administrative costs for business by atleast 25% by 2011.The key elements2 of the strategy are:

• Principles of good regulatory practice;• Comprehensive regulatory review;• Strengthening RIA implementation;• Tools for maintaining the quality of regulatoryenvironment;

• Establishing the tools for co-ordinating regulatoryactivities.

For the moment the silence-is-consent principleapplies only to business registration, but this principleshould be extended to other fields aswell, such as licensesand permits and where the public administrationsnormally take a long time to decide.


RIA has been applied in Serbia since 2004, thiscountry being the most advanced country in the region

in this domain.The obligation to undergo RIA for the newpieces of legislation is included in the Rules of Procedureof the government of 2005. It applies to all pieces of draftlegislation, and also for several pieces of existinglegislation (the Law on Business Companies, BusinessRegistration Law and Insolvency Law). There is goodevidence that the outcomes of RIA were used to changeor cancel legislation.

In order to assist the different bodies of thegovernment in applying RIA, the government establishedthe Council for Regulatory Reform andQuality Control (seeabove).

The government of Serbia received EUR 2.4 millionin support for developing RIA from the SwedishInternational Development Co-operation Agency (2006-2010) and help from theWorld Bank Group. Currently thetype of RIA analysis applied in Serbia is a “soft” RIA dueto the limited resources available that should be investedin a full RIA and is focused in the first phases on damagecontrol. However, further improvement is necessary bothin terms of personnel and methods used. A new law onRIA, providing for transparency and application of moresophisticatedmeasures is envisaged.Also, specific testingfor SMEs should be taken into consideration.



Serbia has been one of the first Western Balkancountries to implement a comprehensive reform of thecompany registration process. The Law on BusinessRegistration was approved in 2004 and the BusinessRegistration Agency (BRA), that took over the function ofcompany register from the commercial courts enteredinto operations in November 2005. Today Serbia has anefficient and relatively low-cost company registrationprocess in place and the BRA performance is highly valuedby the business sector.3 According to law, companyregistration certificates should be delivered within fivedays from application; in fact the procedure is completedon average within three days. The BRA takes charge ofnotification and registration with the employmentorganisation, the pension fund and the health fund.However a separate process is need for registration withtax authorities. This can take up to 15 days, but it isnormally completed within 5 days. Serbia does not havea separate registration process for crafts. Over 95% of newstart-ups register as a limited liability company. There

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have not beenmajor changes in the company registrationprocess over the last two years, but the overallperformance of the BRA has generally improved. Theintroduction of new controls on money laundering hasadded one more step to the process, while the overallcost of starting a business in relation to GNP has slightlydeclined. The BRA has made the necessary preparatorysteps to introduce online registration, but entry intooperation is conditional to the introduction of theelectronic signature.


Over the last two years, Serbia has further improvedits export promotion and export support system, so thatit now ranks among the most structured and developedin theWestern Balkans.The Serbia Investment and ExportPromotion Agency (SIEPA) offers a wide range ofintegrated services to exporters, with support tailoredto individual companies. A cost-sharing scheme is inplace to support SME efforts in developing new productsand entering new markets. SIEPA is now planning toopen trade promotion offices in themain exportmarkets,starting with Germany.

The government has also made progress in takingaction to promote competitiveness and support thetechnological capacity of SMEs. In January 2008 thegovernment formally established the NationalCompetitiveness Council. Its membership includes allkey economic ministries, the Central Bank, the mainprivate-sector associations, leading academics andbusiness leaders. Its mandate is to conduct analysis oncompetitiveness issues, elaborate policy proposals,monitor policy development and foster programme co-operation; it is expected to become a key policy forum.

The institutional and legislative framework is largelyin place. Serbia has an Innovation Law, introduced in2005, which defines activities and initiatives that canapply for government support.At the end of October 2008,3 innovations centres, 20 research and developmentcentres, 39 research and production centres, 2technological parks and 3 technological incubators hadregistered with the Ministry of Science and Technologyand became eligible for financial support covering up to50% of their R&D projects, with a pre-determined cap.Budget allocation in 2008 amounted to EUR 4.7million.Aspecific strategy for cluster development and businessincubators, covering the 2007-2010 period, is underimplementation.The government has also established a

competitiveness fund to support SMEs of two years'existence or more in adopting technological andmanagerial standards.Donor-funded projects such as theUSAID-funded Competitiveness Project and theTechnicalSupport to Enterprise Policy and Innovation and Turn-AroundManagement Programme to support the pre- andpost-privatisation restructuring and development of SMEssponsored by the EC, with a value of EUR 3.5 million,provide support at company level and complement thegovernment action.


Over the last two years Serbia has made someprogress in strengthening IPR legislation and improvingthe capacity of the institutions in charge of IPR supervisionand enforcement. In October 2008, the governmentappointed the Intellectual Property Office as co-ordinatorfor all government activities concerning copyrights andimproving institutional co-ordination. In June 2008, Serbiawas invited to accede to the European Patent Office.However further improvements are needed in theenforcement area, through an increase in the number ofspecialised judges and a reinforcement of the marketinspectorate.

Access to finance

Due to the financial crisis, year-on-year credit growthhas decreased significantly. Serbia’s banking system isstill sound thanks to tight regulation.Official total bankingassets at end June 2008 amounted to EUR 20.6 billion, butthe real amount is higher due to cross-country loans.Bank lending conditions have significantly tightenedwiththe crisis in the global financial sector. Funding fromparent banks has decreased and banks experienced runson deposits as saverswithdrew EUR 1 billion. Less-affectedbanks are domestic banks such as Komercijalna Banka.However, they face equity and single-party exposureconstraints. As a result of the lower liquidity banks havebeen experiencing, the central bank scrapped the reserverequirement on external borrowing in October 2008 (45%requirement on borrowing by banks, 20% on subordinatedforeign capital and on funds extended to leasingcompanies). On 17 January 2009, the central bank reducedthe key interest rate by 125 basis points to 16.5%, the firstrate cut since October 2007.The government has increasedthe amount of guaranteed deposits of citizens,entrepreneurs and small and medium-sized enterprisesto EUR 50 000 from EUR 3 000. Emergency funds will beincluded in 2009 budget to deal with a potential crisis inthe banking system.

246

Banks have become more aware of the importanceof the SME sector and all of them now have specialdepartments to work with SMEs. Compared to theprevious assessment on the implementation of theEuropean Charter for Small Enterprises, Serbia hasretained similar rankings with slight improvements intwo areas: collateral and provisioning requirements, andventure capital and private equity funds. Serbia achievesthe highest available score in the two newly introducedsub-dimensions formovable assets and credit informationservices.

Serbia’s cadastre system is planned to be completedby 2010, with still 16% of land to be registered.TheWorldBank Real Estate Cadastre and Registration Project focuseson capacity building and institutional strengthening ofSerbia’s Republic Geodetic Authority thus speeding upcompletion andmaintenance of the real estate cadastre,allowing firms to use mortgage as a collateral.

Serbia’s Business Registration Agency and theNational Development Fund have a fully functioningsystem for the registration of movable assets allowingfirms to use movable assets as collateral in their effortsto access bank finance. Information is available online,free of charge with multiple search criteria.

The Serbian National Bank provides regularlyupdated credit information services on legal and physicalpersons, encompassing all positive and negativeobligations. Credit information on physical persons,however, is available only to banks.

A further tool to support SME access to credit is thereduction of collateral requirements through credit

guarantee schemes. The Serbian guarantee fund,Vojvodina Guarantee Fund and several municipal fundsissue guarantees for SMEs out of every branch ofeconomics, start-ups and agricultural producers. TheExport Credit and Insurance Agency, and Serbia andMontenegro Export Credit Agency are focusing theirassistance on export-oriented sectors. It is felt thatoverlapping of activities of these governmental fundsmay require merging and/or better co-ordination of theactivities. Serbia’s Strategy for Increasing Exports hasstarted to focus on this. Furthermore, EBRD recommendsthat credit guarantee schemes be privately managed inorder to achieve efficient resource allocation through theincentive structure of a well-functioning private sectormechanism.

As a result of the credit crunch, however, banks havedramatically slowed down lending to both retail andcorporate customers. Collateral requirements forextending bank loans to enterprises are still high. Inprevious years, loans in local currency were moreexpensive than those in foreign currency, thus enhancingthe foreign currency exposure of SMEs.

Lower inflows of foreign currencies andwithdrawalsof foreign currency savings caused the Dinar to depreciate.In October and November 2008 the central bankintervenedwith EUR 269million and over EUR 230millionin order to smooth the exchange rate fluctuations. Theweaker Dinar will negatively affect citizens andenterprises who borrowed in Euros, and importers andbanks whose capital is Dinar-denominated. It will benefitexporters and citizens whose savings are in Euros.Changes were introduced to the currency structure ofrequired reserves: 20% to be in Dinars and 80% in foreign

247

Source: EBRD.

2005 2006 2007 2008



Bank lending to enterprises, share in GDP N/A N/A N/A N/A


Share of total non-performing loans of banks in total loans N/A N/A N/A N/A



currency (previously 90% in foreign currency and 10% inDinars).

Serbia’s bankruptcy law which came into force in2004 is in line with international standards. Itsenforcement is strongly backed by USAID’s Bankruptcyand Enforcement Strengthening project. Key results todate are (among others) a comprehensive assessment ofthe existing Serbian enforcement system identifyingproblems and possible solutions; meetings with 13majorSerbian banks resulting in agreement to support reformof the enforcement system; and completion of apreliminary design for a new IT system aimed tosignificantly improve the efficiency of the bankruptcysystem, along with standardisation of all documents andinstitutionalisation of best practices and procedures.

Since the Law on Financial Leasing came into forcein 2003, Serbia witnessed a strong expansion of leasingcompanies (currently 17). The Law on Investment Fundswhich came into force in 2006 is a first step towardsallowing the establishment of private equity funds.Operations of the funds, however, will be regulated bythe Company Law. Several foreign private equity fundsoperate in Serbia but no domestic fund has beenregistered so far. Open End Investment Funds appearedin the Serbianmarket in 2007 after the relevant legislationhad been passed. Currently there are 13 open end fundswith assets of some EUR 22 million at end October 2008(down from EUR 50million) which is very small comparedto the region. The largest funds are Delta Plus and FimaProactive. The recent downfall in the stock market isturning investors and regional players away from thefunds. Furthermore, the currently high capital gain tax(20%) is expected to be decreased to 10% which mayprovide additional motivation for investors to invest inthese funds. The first funds to enter the market wereclosed private equity funds. The list below is not allinclusive:

• The most significant investments were made byfundsmanaged by Salford (NewWorldValue Fund,Virgin Islands and FFP Balkan Limited, CaymanIslands). These funds have acquired a number ofsuccessful andwell-known companies in the foodand beverage industry with a total investment ofEUR 400-500 million (e.g. companies in the dairyindustry; Bambi, a confectionery company; andKnjaz Milos, a water and beverage company).

• Southeast Europe Equity Fund (the previous nameof Soros Investment Capital, Ltd. has invested inSerbian Broad Band Cable Company and hasmade

other smaller investments in Serbia andMontenegro.

• In 2007, Emerging Europe Convergence Fund IImanaged by Mid Europa Partners acquired amajority stake in Serbian Broad Band CableCompany.

• Midland Resources has invested in a number ofSerbian companies, most of which have beenexited.

• Private equity firm Reconstruction Capital II madeits first investment in Serbia inmid-2008 with theacquisition of 21.3% of East Point Holdings.

• SEAF, a private equity fund which invests smalleramounts, mostly below EUR 5 million, has madetwo smaller investments.

• 7L Capital Partners Emerging Europe L.P., a EUR100million private equity fundwhich invests in theregion, has acquired the Internet providerVeratnet.

Second types of funds have takenminority stakes incompanies of up to 10%. Some of these funds areGustavson, East Capital, Herma, Falkon and Rafles. EastCapital has been one of the most active funds and hasinvested over EUR 50 million in Serbia, with investmentsin 27 different companies (e.g.Metalac,Alfa Plam, Bambi,Banini, Cacanska banka etc.) with a total fund value ofapproximately EUR 1.5 billion.

The stock exchange is shallow and trading is on asmall scale. Its size is quite small and has recentlydecreased drastically as a consequence of the financialcrisis andwithdrawal of foreign investors.At end October2008, market capitalisation was only EUR 11 billion (end2007 it was EUR 18.2 billion) out of which equities wereEUR 9.6 billion and bonds EUR 1.6 billion. Trading on theBelgrade Stock Exchange in the first three quarters of theyear plunged 50% year-on-year to EUR 800 million, withthe bourse’s blue-chip index BELEX15 losing 71% sincethe beginning of the year. Some of the most frequentlytraded stocks are majority domestically owned bankswhich are listed on the exchange.



It is still impossible for Serbian SMEs to file taxes,social security returns or any other government servicesonline, which is due to the lack of a functioningaccreditation body for electronic signatures (see nextsection on e-business and SME support). Enterprise

248

statistics surveys can be downloaded online but have tobe submitted by mail or in person.

Online information for SMEs is abundant in Serbiaand is spread across several, well-structured websitesthat are available in Serbian, English and often one orseveral additional European languages.Themost notablewebsites are those of the Ministry of Economy andRegional Development (Directorate for SMEs andEntrepreneurs), the Serbian Business RegistrationAgency,the National SME Agency, and the newly developedwebsite of the Chamber of Commerce. Together thewebsites provide the SME sector with information onregistration, taxation, regulations, credits, answers tofrequently asked questions, and the possibility to askspecific questions. However, only the website of theChamber of Commerce resembles a portal, bundlingseveral websites and services. Nevertheless, the Strategyfor Competitive and Innovative SMEs of the National SMEAgency includes the creation of an SME-dedicated onlineportal and there are concrete plans to establish such aportal in 2009.


Serbia currently has 17 business incubators thatare registered under the Innovations Law, of which 7are operational. Within the National SME Agency, atraining centre for business incubators was recentlyestablished.

No comprehensive network of business serviceproviders has been established to date, although recentefforts have been made into that direction. In October2008 a conferencewas held to create national and regionalbusiness consultants associations and a register ofbusiness consultants was initiated. The National SMEAgency offers a range of consulting and mentoringservices to SMEs, free of charge. The agency alsoencourages SMEs to use and pay for specific businessservices by subsidising up to 50% of the costs.

Regarding the availability of information on businessservices, the Chamber of Commerce keeps a fairlycomplete database on business services providers.Information from the database can be obtained ondemand, both regionally and locally, although there areplans tomake this information available online, throughthe website of the chambers of commerce, free of charge.SIEPA is offering an online catalogue of exporters andvarious providers (including business services providers),but its database is incomplete.

The Law on Electronic Signature was adopted inMarch of 2004 and the Public Postal Enterprise PTT Serbiahas been nominated as the certification body pendingaccreditation.

5. Human capital

This section addresses the human capitaldimensions of the Charter: entrepreneurship educationand training, and availability of skills for enterprises.

Firstly, getting to a structured partnership for lifelongentrepreneurial learning within Serbia has been slowalthough there is already a good awareness amongst thewide range of stakeholders as to the importance of co-operation. A number of actors already demonstratecommitment to entrepreneurship education through theirpolicies and activities (e.g. national employment office,vocational education and training services, youth services)with a particular effort being made by the economyministry to raise the profile of lifelong entrepreneuriallearning within national policy debate. However, giventhe importance attributed by the Charter toentrepreneurship within formal education, amore directcommitment of the education authorities toentrepreneurial learning will be important. To date,emphasis has concentrated on entrepreneurship invocational education. Attention now needs to turn togeneral education (primary, secondary and higher).

Turning to education delivery, the assessmentunderlines that developments on entrepreneurship keycompetence (lower secondary) remain to be addressedat system level to ensure a more comprehensiveapplication across the school network.Nonetheless, goodefforts are being made in upper secondary education(primarily vocational) with more flexible teachingarrangements. This includes specific subject-orientedcurriculum on entrepreneurship. Further, there are goodexamples of school-enterprise co-operation.

To move forward, the education authorities couldconsider establishing aworking group to develop a lifelongentrepreneurial learning strategy as well as to determinecurriculum, teaching and assessment arrangements forentrepreneurship key competence promotion in lowerand upper secondary education. This could borrow onthe experience, materials and know-how from existingnon-formal education initiatives (e.g. JuniorAchievement).More developed intelligence on non-formal educationprovision is required. In this regard, an initiative of the

249

Serbian Chamber of Commerce to develop an informationportal for providers of entrepreneurial learning providesan opportunity to address this information gap.

On enterprise skills, a number of agencies undertakeenterprise training assessments (e.g. nationalemployment service, SME agency, Ministry of Economyand Regional Development) and use a variety ofinstruments. However, given their different objectives,getting to an overall assessment of enterprise trainingremains difficult. Bringing order to the diverse data setswill be important for policy purposes as well as nationalinvestment in enterprise training. To this end, a studyunderlines the importance for a more coherentintelligence framework for information on enterprisehuman resources. It advocates a pooling of intelligence bythe range of institutions but with targeted training foranalysts within sector-oriented committees. Should thesemeasures be taken on board, an important step towardsmeeting the quantitative requirements of the Charterindicators will have been met.

With respect to training for growth enterprises, theOperational Plan for Development of Competitive andInnovative SMEs (2008-2013) provides an importantframework for promoting business growth and whereenterprise skills are given particular importance. A nextstep will be to ensure concerted support for humanresource development for growth enterprises set againstclear criteria to ensure investment targets the rightcompanies.

A network of training providers ensures that trainingservices are well developed across the country with aparticular effort by the national SME agency through itslocal offices. Further, plans are in place to develop qualityassurance and accreditation of training providers.Thiswillhelp build confidence of enterprises in the trainingmarket.A planned initiative of the Chamber of Commercefor an e-learning platform should promote greater accessof businesses to training provision.

6. The way forward

Access to finance: Capacity building and institutionalstrengthening of Serbia’s Republic Geodetic Authority,thus speeding up completion and maintenance of thereal estate cadastre, allowing firms to use mortgage ascollateral.

Merging and/or better co-ordination of governmentalcredit guarantee funds’ activities. Furthermore, EBRDrecommends that credit guarantee schemes be privatelymanaged in order to achieve efficient resource allocationthrough the incentive structure of a well-functioningprivate sector mechanism.

E-business and SME support: There is an urgentneed to complete the regulatory framework forintroducing the electronic signature and establish afunctioning and legitimate accreditation body. This is aprecondition to developing electronic commerce andmoreadvanced online business-to-business functions, as wellas for making the most of online government services.

Human capital: Amore definite engagement by theeducation authorities into lifelong entrepreneuriallearning will be important, including reflections on howentrepreneurship as a key competence can be broughtforward in compulsory education. Universities should beincluded into the reflection and dialogue. Governmentand enterprise support institutions should determinehow existing data on human capital within enterprisescould be improved, borrowing on existingrecommendations for a more coherent intelligenceframework for information on enterprise humanresources. Developments in quality assurance of thetraining market should be continued.

250

251

0

1

2

3

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SME Policy Index scores for Serbia per Charter dimension (2009)4

Notes

1 Report on Small and Medium-Sized Enterprises and Entrepreneurship 2007.

2 http://irr-network.org/document/477/Marusic-_Andreja_-2008a_Regulatory_Reform_in_Serbia._Regulatory_Reform_Strategy_2008-2011.html

3 FIC (2008), White Book 2008.

4 Although this report is published in 2009, data collection took place in 2008. For the SME Policy Index Report 2007, data were collected in 2006. Insufficientinformation was available to measure the dimension 7a Taxation. All SME Policy Index scores have been rounded up or down to the nearest 0.25

5 The data for Serbia is absent du to lack of information.

252

Annex 1

AAEF Albanian American Enterprise FundACE Action for Co-operation in Economics (EU Phare Programme)APIU Croatian export and investment promotion agencyAPPRM Agency for Promotion of Entrepreneurship (FYR Macedonia)BAS Business Advisory ServiceBHEPA Export Council and Export Promotion AgencyBIC Business Information CentreBICRO Business Innovation Centre of CroatiaBRA Business Registration Agency (Serbia)CAR capital adequacy ratioCIT corporate income taxCIP Competitiveness and Innovation ProgrammeEAR European Agency for ReconstructionEBRD European Bank for Reconstruction and DevelopmentEC DG ENTR European Commission’s Directorate-General for Enterprise and IndustryEEN Enterprise Europe NetworkEFSE European Fund for South-Eastern EuropeEICC European Information and Communication CentreEIICM European Information and Innovation Centre in MacedoniaEPPA Enterprise Policy Performance AssessmentsETF European Training FoundationEU European UnionFDI foreign direct investmentFINA Croatian National Financial AgencyFYR Macedonia the Former Yugoslav Republic of MacedoniaGDP gross domestic productGEM Global Entrepreneurship MonitorGNI gross national incomeHAMAG Croatian SME agencyHGSME high-growth small and medium-sized enterpriseHITPOP Croatian enterprise training websiteHRD human resource developmentISCED International Standard Classification of EducationICT information and communications technologyIFC International Finance CorporationINSTAT Albanian Institute of StatisticsIPA Instrument for Pre-Accession AssistanceIPPC Integrated Pollution Prevention and ControlIPR intellectual property rightsISEF Information System for Electronic FilingIT information technologyI&T innovation and technologyKBRA Kosovo Business Registration AgencyKCB Kosovo Central BankKPI key public infrastructureKTP Knowledge Transfer Partnership

List of abbreviations

253

MEF Montenegrin Employers’ FederationMELE Ministry of Economy, Labour and EntrepreneurshipMETE Ministry of Economy,Trade and Energy (Albania)METR marginal effective tax rateMoE Ministry of Economy (FYR Macedonia)MoERD Ministry of Economy and Regional Development (Serbia)NBMFI non-bank microfinance institutionNCC National Competitiveness CouncilNRC National Registration Centre (Albania)NECC National Entrepreneurship and Competitiveness CouncilOECD Organisation of Economic Co-operation and DevelopmentOECD PSD Organisation for Economic Co-operation and Development Private Sector Development

DivisionPIT personal income taxPPC public/private consultationPPD public-private dialogueR&D research and developmentRDA regional development agencyRIA regulatory impact analysisSAA Stability and Association AgreementsSBA European Small Business ActSEE South East EuropeSME small and medium-sized enterpriseSIEPA Serbia Investment and Export Promotion AgencySMEDA Directorate for Development of Small and Medium Sized Enterprise (Montenegro)SMEPED SME Policy Enhancement and DeliveryTAC Training and ConsultancyTAM TurnAround ManagementTNA Training Needs AnalysisUNDP United Nations Development ProgrammeVAT value added taxWBC Western Balkan countries (including Kosovo under UNSCR 1244/99)YES Youth Entrepreneurial Service

254

Annex 2

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1

256

Annex 2Up

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innovation,risktaking

bypupils)and

morespecific

business

skills**withinupper

secondaryschools.

Evidence

insomeupper

secondaryschoolsofschool

co-operationwith

local

communities

andenterprises

reportedinbaselinedata


sub-indicator)

Atleast25%

ofupper

secondaryschoolsengagedin

flexibleteaching

andlearning

arrangem

entsconduciveto

prom

otingentrepreneurshipas

akeycompetence(e.g.


initiative,creativity,innovation,

risktaking

bypupils)and

more

specificbusiness

skills**This

includes

directco-operation

betweentheschools,local

communities

andlocal

enterprises.

Evidence

forthislevelw

illbe

draw


Reports

(Monitoringand

evaluationsub-indicator).

Regulatoryframew

orkin

placewhich

provides

for

flexibleteaching

and

learning

arrangem

ents

conducivetoprom

oting

entrepreneurshipas

akey

competence(e.g.




bypupils)and

morespecific

business

skills**.This

includes

directco-

operationbetweenthe

schools,localcom

munities

andlocalenterprises.

Atleast70%

ofuppersecondary

schoolsmeetthe

regulatory

framew

orkforflexibleteaching

andlearning

arrangem

ents

conducivetoprom

oting

entrepreneurshipas

akey

competence(e.g.opportunity

identification,initiative,creativity,


bypupils)

andmorespecificbusiness

skills**.Thisincludes

directco-

operationbetweentheschools,

localcom

munities

andlocal

enterprises.

Evidence

forthislevelw

illbe

draw


Reports

(Monitoringand


1

1.9

*ISC

ED3

Entr

epre

neur

ial

lear

ning

ELinuppersecondary

education

(entrepreneurshipkey

competenceand

business

skills**)is

confined

toad-hoc

projectswhich

arenot

partofmainstream

educationcurricula.

ELinuppersecondary

education(entrepreneurship

keycompetenceand

business

skills**)isconfined

toschool-based

individual

initiatives

which

areknow

ntotheeducationauthorities.

EL(entrepreneurshipkey

competenceandbusiness

skills**)isan

integralfeatureof

thenationalcurriculum

which

specifies

entrepreneurshipkey

competenceandelectiveEL

subjects.

EL(asakeycompetence

andbusiness

skills**)is

included

inteaching

plans

ofatleast50%

ofupper

secondaryschools.

Evidence

forthislevelw

illbe

draw

nfromschools’

AnnualReports

(Monitoring

andevaluationsub-

indicator).

EL(asakeycompetenceand

business

skills**)isincluded

inteaching

plansinatleast70%

ofuppersecondaryschools.

Evidence

forthislevelw

illbe

draw


Reports

(Monitoringand


1

1.10

*ISC

ED3

Lear

ning

envi

ronm

ent

NoEL

materials,staff

expertise

nor

partnershipswith

local

civic/enterprise

communities.

ELmaterialsandteacher

trainingunderdevelopment

byway

ofstrategicpilotsand

which

includestructured

co-

operationbetweenupper

secondaryschools,local

communities

andenterprise.

Atleast25%

ofupper

secondaryschoolsare

employingEL

material,with

stafftrained

for

entrepreneurshipkey


skills.**Theschoolshave

structured

partnershipswith

localcom

munities

and

enterprise.

Atleast50%

ofupper

secondaryschoolsare

employed

ELmaterial,with

stafftrained

for

entrepreneurshipkey


skillsdevelopm

ent.**The

schoolshave

structured

partnershipswith

local

communities

and

enterprise.

Atleast70%

ofuppersecondary

schoolsareem

ployingEL

material,with

stafftrained

for

entrepreneurshipkeycompetence

andbusiness

skills

developm

ent.**The

schoolshave

structured

partnershipswith

local

communities

andenterprise.

1

*Thisindicatorisparticularly

concernedwith

prom

otingteaching

andlearning

arrangem

entswhich

willcontributetoentrepreneurialm

indsetsandbehaviour(curiosity,creativity,autonom

y,initiative,team

spirit)inkeepingwith

therecommendations

oftheEU’sOsloAgenda.

**AtISCEDLevel3

education,entrepreneurshipas

akeycompetenceshouldcontinue

tobe

anintegralpartofthenationalcurriculum

reinforcingthecontributionmadeatISCEDlevel2.AtISCED

3level,

theentrepreneurshipkeycompetencecouldbe

supplementedwith

harderbusiness

skills(e.g.businessplanning,start-up

training,marketing,book-keeping)developed

throughbusiness

relatedstudies

asacompulsoryoras

anelectivesubjectw

ithinthecurriculum

.

257

Leve

l1Le

vel2

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l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

Good

prac

tice

1

1.11

*Go

odpr

actic

e

Thereisno

system

atic

exchange

ofgood

practicebetween

lifelongEL

providers.

Anationalnetworkof

life-long

ELproviders

meetson

aregular

basistoexchange

good

practice.

Exam

ples

ofadaptedEL

good

practice(dom

estic

and/orinternational)are

beingpilotedinthe

country.

Results

ofdomestic

good

practicearebeing

dissem

inated

nationally

(at

leastone

annualevent).

Withinthereporting

period,atleastone

domestic

good

practicehasbeen

transferred

toanothereducationand

trainingenvironm

entinaneighbouring

country,European

Unionorbeyond.

1

*Notethatthisindicatoriscumulativei.e.eachrankingrequiresfulfilmentofthe

earlierlevelsoftheindicator.

Non-

form

alen

trep

rene

uria

llea

rnin

g1

1.12

Non

form

alle

arni

ng

Exam

ples

ofactions

toprom

otenon-formalEL

(privatelyand/orpublicly

supported).

Aworking

group

monitorsnon-formalEL

aspartofnationalEL

strategy

andadviseson

improvem

ents.

Evidence

ofatleastone

quarterly,high-level

presscoverage

(national

newspaperorTV)ofEL

policyordelivery.

Exam

ples

ofagreem

ents

establishedbetween

publicauthorities,

enterprise,community

groups

orphilanthropic

organisations

todevelop

entrepreneurialspirit

andskillsacross

society

with

particularreference

tochildrenandyoung

people.

Atleastone

annual,high-

profile

eventatnational

leveltoprom

ote

awarenessandinformation

onbroaderEL(formaland

non-formal)toshow

-case

successfulprojects.

High-profileeventincludes

nationalrecognitionor

awards

forELpractice.

Transferofknow

-how

:principles

orpracticefromatleast2

ofthenon-formal

show

-caseprojectsfromtheprevious

year’shigh

profile

eventareintegrated

into

otherELenvironm

entsnationalor

internationally.

1

258

Annex 2

Leve

l1Le

vel2

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l3Le

vel4

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l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

2.1

Issu

ing

ofco

mpa

nyre

gist

ratio

nce

rtifi

cate

2

2.1.

1

Num

bero

fday

sfo

robt

aini

ngco

mpa

nyre

gist

ratio

nce

rtifi

cate

Registrationinmore

than

30days.

Registrationtakesmore

than

15days,butless

than

30days.

Registrationtakesmore

than

5days,lessthan

15days.

Registrationtakesless

than

5days,butmorethan

1day

Registrationin1day.

1

2.1.

2

Num

bero

fad

min

istr

ativ

est

eps

for

obta

inin

gth

eco

mpa

nyre

gist

ratio

nce

rtifi

cate

Registrationrequires

morethan

10administrativesteps.

Registrationrequires8-


Registrationrequires5-


Registrationrequires2-4

administrativesteps.

Registrationrequires1administrativestep.

1

2.1.

3

Offic

ialc

osto

fob

tain

ing

the

com

pany

regi

stra

tion

cert

ifica

te

Morethan

Euro250

Less

than

Euro250,

morethan

Euro150

Less

than

Euro150,

morethan

Euro50

Less

than

Euro50,m

ore

than

Euro10

Less

than

Euro10

2

Com

pany

Iden

tific

atio

nNu

mbe

rs1

2.1.

4

Adm

inis

trat

ive

iden

tific

atio

nnu

mbe

rsin

deal

ing

with

the

publ

icad

min

istr

atio

n

5registrations

and

identificationnumbers

indealingwith

different

administrative

authorities

(statistical

office,custom

s,labour

office,taxofficeetc.).

4identificationnumbers

indealingwith

different

administrative

authorities.Som

eregistrations

merged

3identificationnumbers

indealingwith

different

administrative

authorities.Halfof

registrations

merged.

2identificationnumbersin

dealingwith

different

administrativeauthorities.

Mostofregistrations

merged.

Singleidentificationnumberindealingwith

allstandardfunctions

ofpublic

administration-singleregistrationprocess.

1

2.1.

5

Num

bero

fday

sfo

rcom

puls

ory

com

pany

iden

tific

atio

nnu

mbe

r(s)

Allnum

bersinmore

than

30days.

Allnum

bersinmore

than

15days,butless

than

30days.

Allnum

berinmorethan

5days,lessthan

15days.

Allnum

bersinless

than

5days,butmorethan

1day

Allnum

bersinthesameday.

1

2C

HEA

PER

AN

DFA

ST

ERSTA

RT-

UP

259

Leve

l1Le

vel2

Leve

l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

Com

plet

ion

ofth

eov

eral

lreg

istr

atio

npr

oces

san

den

try

inop

erat

ions

1

2.1.

6

Num

bero

fday

sfo

rcom

plet

ing

the

over

allr

egis

trat

ion

proc

ess,

incl

udin

gco

mpu

lsor

ylic

ence

sfo

rsta

ndar

dbu

sine

ssac

tiviti

es(W

BCo

stof

Doin

gBu

sine

ssIn

dex)

Registrationtakes

morethan

30days.

Registrationtakes

morethan

15days,but

less

than

30days.

Registrationtakes

morethan

5days,less

than

15days.


than

5days,butmore

than

1day

Registrationtakes1

day.

1

2.1.

7

Num

bero

fste

psfo

rcom

plet

ing

the

over

allr

egis

trat

ion

proc

ess,

incl

udin

gco

mpu

lsor

ylic

ence

sfo

rsta

ndar

dbu

sine

ssac

tiviti

es(W

BCo

stof

Doin

gBu

sine

ssIn

dex)


morethan



8-9administrative

steps.


5-7administrative

steps.


2-4administrative

steps.

One-stop-shop.

1

2.1.

8Si

lenc

eis

cons

enta

pplie

dto

com

pany

regi

stra

tion

proc

edur

esSilenceisconsentis

notapplied

Silenceisconsentis

system

aticallyapplied

2

2.1.

9Co

sts

conn

ecte

dw

ithre

gist

ratio

n(%

ofGN

Iper

capi

ta)-

(WB

Cost

ofDo

ing

Busi

ness

Inde

x)

Costsaremorethan

10%ofGN

Ipercapita.

Costsarebetween5%

and10%ofGN

Iper

capita.

Costsarebetween

2.5%

and5%

ofGN

Ipercapita.

Costsarebelow2.5%

ofGN

Ipercapita.

Costsareminimal

(close

to0ofGN

Iper

capita).

2

2.1.

10M

inim

umca

pita

lreq

uire

men

ts(%

ofGN

Ipe

rcap

ita)-

(WB

Cost

ofDo

ing

Busi

ness

Inde

x)

Morethan

40%ofGN

Ipercapita.

Between20%and

40%ofGN

Ipercapita.

Between10%and

20%ofGN

Ipercapita.

Less

than

10%ofGN

Ipercapita.

Nominimum

capital

requirementsfor

generalpartnerships

with

personalliability.

2

2.2

Incr

ease

on-l

ine

acce

ssfo

rreg

istr

atio

n1

2.2.

1On

-lin

ere

gist

ratio

n

Thegovernmenthas

nottaken

anysteps

towards

the

introductionofon-line

registration.

Evaluationofexisting

administrative

procedures

and

detailedproposalsfor

theintroductionofon-

lineregistration.

Budgetprovisions

and

pilotproject.

Lawon

online

registration,action

plan

andbudget

provisions

approved.

Designationof

competentauthority.

Level3

+solid

evidence

ofimplem

entationofon-

lineregistrationsystem

availableonlyinsome

regions.

Level4

+complete

implem

entationofon-

lineregistrationsystem

fully

integrated

with

otherservicesofe-

governmentand

availablethroughout

thecountry.On

line

registrationappliesto

allphasesofthe

company

registration

process

1

260

Annex 2Le

vel1

Leve

l2Le

vel3

Leve

l4Le

vel5

Wei

ghtf

orsu

b-di

men

sion

orin

dica

tor

(1-3

)

2.3

Craf

treg

istr

atio

n

Craf

treg

istr

atio

nce

rtifi

cate

2

2.3.

1Nu

mbe

rofd

ays

foro

btai

ning

craf

tre

gist

ratio

nce

rtifi

cate

Registrationinmore

than

30days.

Registrationtakes

morethan

15days,but

less

than

30days.

Registrationtakes

morethan

5days,less

than

15days.


than

5days,butmore

than

1day

Registrationin1day.

1

2.3.

2Nu

mbe

rofa

dmin

istr

ativ

est

eps

for

obta

inin

gth

ecr

aftr

egis

trat

ion

cert

ifica

te


morethan



8-9administrative

steps.


5-7administrative

steps.


2-4administrative

steps.

Registrationrequires1

administrativestep.

1

2.3.

3Of

ficia

lcos

tofo

btai

ning

the

craf

tre

gist

ratio

nce

rtifi

cate

Morethan

Euro250

Less

than

Euro250,

morethan

Euro150

Less

than

Euro150,

morethan

Euro50

Less

than

Euro50,

morethan

Euro10

Less

than

Euro10

2

Craf

tide

ntifi

catio

nnu

mbe

rs1

2.3.

4Ad

min

istr

ativ

eid

entif

icat

ion

num

bers

inde

alin

gw

ithth

epu

blic

adm

inis

trat

ion

5registrations

and

identificationnumbers

indealingwith

differentadministrative

authorities

(statistical

office,custom

s,labour

office,taxofficeetc.).

4identification

numbersindealing

with

different

administrative

authorities.Som

eregistrations

merged.

3identification

numbersindealing

with

different

administrative

authorities.Halfof

registrations

merged.

2identification

numbersindealing

with

different

administrative

authorities.M

ostof

registrations

merged.

Singleidentification

numberindealingwith

allstandardfunctions

ofpublic

administration-single

registrationprocess.

1

2.3.

5Nu

mbe

rofd

ays

forc

ompu

lsor

ycr

aft

iden

tific

atio

nnu

mbe

r(s)

Allnum

bersinmore

than

30days.

Allnum

bersinmore

than

15days,butless

than

30days.

Allnum

berinmore

than

5days,lessthan

15days.

Allnum

bersinless

than

5days,butmore

than

1day

Allnum

bersinthe

sameday.

1

261

Leve

l1Le

vel2

Leve

l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

3.1

Sim

plifi

catio

nof

SME

legi

slat

ion

ofSM

Ere

late

dle

gisl

atio

nan

dre

gula

tion

3

Revi

ewof

the

curr

entl

egis

latio

n

3.1.

1St

rate

gyfo

rleg

isla

tive

and

adm

inis

trat

ive

sim

plifi

catio

n

Noformalised

strategy

forlegislativeand

administrative

simplification,

includingsector

strategies,exists.

Legislativeand

administrative

simplificationstrategy

isunderelaboration.

Multi-yearlegislative

andadministrative


forcurrentperiodis

approved

bythe

government,following

aprocessof

consultationwith

stakeholders,and

inparticularw

iththe

privatesectorandcivil

society.Thestrategy

isatan

initialstageof

implem

entation.

Solid

evidence

ofimplem

entationofthe

legislativeand

administrative


with

indicationofkey

targetsachieved

and

assignments

completed.

Apro-active,comprehensive

legislativeandadministrative


isputin

placeaftera

wide-consultation

process.Thestrategy

incorporates

actionplans

coveringkeyareasofthe

regulatoryreform

agenda.

Thereissignificantevidence

thatallcom

ponentsofthe

strategy

have

been

implem

ented,as

demonstrated

bytim

e-boundtargetsachieved

andnumberofassignm

ents

completed.

3

3.1.

2Re

view

and

sim

plifi

catio

nof

curr

entl

egis

latio

n

Thereareno

plansto

review

andsimplify

currentprim

aryor

secondarylegislation

relatedtoenterprise

policy.

Therehasbeen

ad-hoc

activity

tosimplify

currententerprise

legislationandthe

governmenthas

plans

fora

system

aticreview

ofcurrentlegislation

relatedtoenterprise

policy.

Aconcreteplan

toreview

andsimplify

legislationrelatedto

enterprisepolicyhas

been

approved

and

institutions

incharge

have

been

identified.

Implem

entationofthe

plan

toreview

and

simplify

legislation

relatedtoenterprise

policybeginningwith

thereview

ofmainly

primarylegislation

relatedtoenterprise

policy.

Legislativereview

well-

advanced

andextended

tosecondarylegislation.

2

3.1.

3El

imin

atio

nof

redu

ndan

tle

gisl

atio

nan

dre

gula

tions

(e.g

.reg

ulat

ory

guill

otin

e)

Thereareno

plansto

carryoutsystematic

eliminationof

redundantlegislation

andregulations.

Therehasbeen

ad-hoc

activity

tocarryout

eliminationof


andregulations.The

governmentisplanning

tocarryoutthis

exercise.

Aconcreteplan

tocarryoutsystematic

eliminationof


andregulations

has

been

approved

and

institutions

incharge

have

been

identified.

Implem

entationofthe

plan

underway,

coveringkeyareasof

mainlyprimary

legislationrelatedto

enterprisepolicy.

Regulatoryguillotineprocess

welladvancedandextended

tosecondarylegislation.

2

3BET

TER

LEG

ISLA

TIO

NA

ND

REG

ULA

TIO

N

262

Annex 2Le

vel1

Leve

l2Le

vel3

Leve

l4Le

vel5

Wei

ghtf

orsu

b-di

men

sion

orin

dica

tor

(1-3

)

Regu

lato

ryIm

pact

Anal

ysis

3.1.

4Us

eof

Regu

lato

ryIm

pact

Anal

ysis

(RIA

)

Nosystem

atic

regulatoryimpact

analysistargeted

atSM

Esexists.

Proposalfora

lawon

RIAforlegislationwith

impacton

SMEs.A

simplified,pilotRIA

programmeisbeing

used

incertainareasof

regulation.

Approvaloflawon

RIA.

Implem

entationofRIA

insomeSM

E-related

policyareas.

RIAon

SMEs

issystem

atically

implem

ented.

1

3.1.

5Ty

peof

Regu

lato

ryIm

pact

Anal

ysis

TheRIAappliedis

limitedinscopeandis

restrictedtosimplistic

techniques

(e.g.inter-

ministerialm

eetings,

consultationwith

interested

parties).

Thereisno

preceding

analysison

what

techniqueismost

applicableandtheRIA

processispoorly

structured.

RIAisbasedon

both

unsophisticated

and

sophisticated

(e.g.

cost-benefitanalysis,

cost-efficiency

analysis,realcase

pilots)techniques.

However,thereisno

structured

preceding

analysison

whattype

oftechniqueismost

applicableandtheRIA

processispoorly

structured.

Thetype

ofRIAapplied

istargeted

tothetype

oflegislationexam

ined

basedon

pre-defined

criteria.Accordingly,

sophisticated

techniques

areapplied.

Level3

+Thereis

someevidence

thatthe

outcom

esoftheRIA

have

been

used

tochange

orcancel

legislation.

Level4

+Thereisam

ple

evidence

thattheoutcom

esof

RIAhave

been

used

tochange

orcancellegislation.RIAisalso

appliedex-posttomeasurethe

impactoflegislationduringthe

implem

entationstage.

1

3.2

Sim

plify

rule

s1

3.2.

1Si

lenc

e-is

-con

sent

prin

cipl

eTheprincipleisnot

used

instandard

administrativepractice.

Evaluationofcurrent

procedures

and

detailedproposalson

theintroductionofthe

silence-is-consent

principle.

Approvaloflawon

silence-is-consent.

Solid

evidence

ofimplem

entationofthe

silence-is-consent

principleinkey

areas/sectorsofthe

administration.

Fullimplem

entationand

widespreaduseoftheprinciple

inmanyareas/sectorsofthe

administration.Regularreviews

(involvingbusiness

sector)to

identifynewareaswherethe

principlecouldbe

adopted.

1

263

Leve

l1Le

vel2

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l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

3.3

Inst

itutio

nalf

ram

ewor

k3

3.3.

1In

ter-

gove

rnm

enta

lco-

ordi

natio

nin

polic

yel

abor

atio

n

Noinstitutionis

responsibleforSME

policyelaboration.

Severalinstitutions

are

responsibleforSME

policyelaborationand

they

have

overlapping

portfoliosandlim

ited

co-ordination.

Approvalfor

establishm

entofa

singleinstitutionin

charge

ofleadingand

co-ordinatingSM

Epolicyelaboration.

Singleinstitutionin

charge

ofSM

Epolicy

elaborationinplace

andfully

operational.

System

ofconsultation

with

theimplem

enting

agency

(ies)inplace

Level4

+effectivemechanism

ofpolicyco-ordinationinvolving

keyministries,agenciesand

localadm

inistrations

when

relevant.

1

3.3.

2SM

Ede

velo

pmen

tstr

ateg

yNo

SMEdevelopm

ent

strategy

exists.

SMEdevelopm

ent

strategy

isunder

elaboration.Review

ofexpiredSM

Estrategy

underw

ay.

Multi-yearSM

Edevelopm

entstrategy

forcurrentperiodis

approved

bythe

governmentand

atinitialstageof

implem

entation.

Budgetestablishedbut

entiretyoffundsnot

yetreceived.

Solid

evidence

ofimplem

entationofthe

SMEdevelopm

ent

strategy

with

indication

ofkeytargetsachieved

andassignments

completed.Entiretyof

fundsreceived

andin

processofbeing

disbursed.

Apro-activeSM

Edevelopm

ent

strategy

accompanied

bysignificantevidence

thatall

componentsofthestrategy

have

been

implem

ented,as

demonstratedby

time-bound

targetsachieved

andnumberof

assignmentscompleted.SME

strategy

hasademonstrated

impactandhasstrengthened

theSM

Esector.

1

3.3.

3SM

Epo

licy

impl

emen

tatio

nag

ency

oreq

uiva

lent

NoSM

Epolicy

implem

entationagency

with

anexecutiverole

(orequivalent)exists.

Government

consideringthe

establishm

entofan

SMEpolicy

implem

entationagency

(orequivalent).

SMEimplem

entation

agency

(orequivalent)

established.Staff,

structureandbudgetin

place.

Rangeofoutput

tobe

coveredby

agency

beingdrafted.

SMEimplem

entation

entityfully

operational

andcoversarangeof

activities

with

measurableoutcom

es.

Staffiscompleteand

therequiredexpertise

(economicandlegal)is

inplace.Solid

implem

entationrecord

ofSM

Estrategy

based

onachievem

entsof

time-boundtargetsas

detailedinactionplan.

SMEimplem

entationentityis

themainbody

for

implem

entationoftheSM

Estrategy,operatingwith

full

politicalsupport.Theentityhas

aclearreportingsystem

inplaceandarecognised

advocacy

andpolicyadvice

role.

Theentityiswell-funded,wide-

reaching,and

itsactivities

have

proven

tobe

effectivein

supportingSM

Edevelopm

ent

with

measureableoutcom

es.

1

264

Annex 2

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tfor

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ensi

onor

indi

cato

r(1

-3)

4.1

Trai

ning

need

san

alys

ispo

licy

(TNA

)

SmallbusinessTNAdoes

notexistorisbasedon

‘ad

hoc’surveysonly.

Thereisno

regularand

system

aticcollectionof

dataon

thetrainingneeds

ortrainingconsum

ptionin

thesm

allbusiness

community.

Government,social

partnersandbusiness

community

areindialogue

with

view

toestablishing

asystem

aticTNAframew

ork

forthe

smallbusiness

community.

AnationalTNA

framew

orkhas

been

agreed

between

government,socialpartners,and

business

community

with

particularreference

toeconom

icgrow

thsectors.

TheTNAframew

orkidentifiesa)

skillweaknessesinthe

workforce,b)skillgaps

andc)

futureskillrequirements.

Standarddatacollection

instrumentsandadata

managem

entsystemarein

placeas

partofawidernational

econom

icdevelopm

entplan.

TNAas

defined

byalife-

long

ELpolicyare

undertakeninatleast20%

ofsm

allbusinessesin

grow

thsectorsand

reportedpubliclyon

arecognised

websitefor

access

byenterprises,

trainingprovidersand

policymakers.

AnnualTNAisundertaken

inatleast40%

ofsm

all

businesses

ingrow

thsectorsandavailable

publiclyon

arecognised

websiteforaccessby

enterprises,training

providersandpolicy

makers.

3

*Evidenceforthisindicatorw

illbe

takenfromenterprisesurvey-based

data.

4.2

Qual

ityas

sura

nce

Thereisno

national

framew

orkforquality

assuranceoftraining

delivered

tothesm

all

business

community.

Somecasesof

accreditationoftraining

programmes

andtraining

providersby

international

bodies.

Arangeofad

hoc

structures

andtools*are

beingused

todetermine

quality

oftrainingforthe

smallenterprise

community.

Dialogue

ongoingbetween

trainingproviders,em

ployers

andGovernmentregarding

quality,standards

and

accreditationoftraining

provisionforenterprises.Thisis

linkedtowiderEuropean

quality

assurancenetworks.

Anationalquality

assurancesystem

for

enterprisetrainingis

agreed

andisfully

operational.

Accreditedtraining

providersandprogrammes

areposted

onwebsitesand

informationboards

ofsm

all

enterprisesupport

agencies,public

andprivate

employmentagenciesand

trainingcentres.

Thenationalquality

assurancesystem

for

enterprisetrainingis

operationaland

fully

integrated

intoEuropean

Quality

Assurance

Fram

ework(tradeskills)

andrecognised

managem

enttraining

quality

assurancesystem

s.

2

4.3

Star

t-up

s*No

trainingavailablefor

start-ups.

20%ofnewlyregistered

start-upsinlast24

months

have

benefited

from

trainingandbusiness

advisoryservices

inthe

reporting

period(including

e-training).


start-

upsinlast24

monthshave

benefited

fromtrainingand

business

advisoryservices

inthe

reporting

period(includinge-

training).


start-upsinlast24

months

have

benefited

from

trainingandbusiness

advisoryservices

inthe

reporting

period(including

e-training).

Business

advisoryservices

forsmallenterprises

availableup

to36

months

afterstart-up.


start-upsinlast24

months

have

benefited

from

trainingandbusiness

advisoryservices

inthe

reporting

period(including

e-training)

Business

advisoryservices

forsmallenterprises

availableup

to36

months

afterstart-up.

1

*St

art-

uptr

aini

ngco

mpr

ises

man

agem

ent,

basi

cfin

ance

and

basi

cm

arke

ting

skill

ssu

ppor

ted

bypu

blic

and

priv

ate

fund

s

4.A

VA

ILA

BIL

ITY

OF

SK

ILLS

265

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onor

indi

cato

r(1

-3)

4.4

Ente

rpris

egr

owth

Nosystem

aticapproach

todevelopsm

allenterprise

human

resources

(knowledgeandskills)for

grow

ingbusinesses.

Know

ledgeandskills

developm

entforenterprise

grow

thhasbeen

agreed

asaprioritybetweenbusiness

community

and

governmentand

isregistered

innational

econom

icdevelopm

ent

plan.

Publicfinance

agreed

tosupporttrainingand

advisoryservices

for

grow

thenterprises.

Financialsupportfortrainingand

business

advisoryservices

for

grow

ingenterprises

available.(1)

Financialsupportislinkedto

clearcriteriatoallowenterprises

toapplyforsubsidies

tosupport

trainingandadvisoryservices

linkedtoenterprisegrow

th.

20%ofgrow

ingbusinesses

benefited

fromtrainingand

advisoryservices.

Morethan

50%ofgrow

ing

businesses

benefited

from

trainingandadvisory

services.

1

(1)Financialsupportw

illparticularly

addresstheknow

ledgeandcapacitiesrelatedtotheEU

regulatoryframew

ork.

4.5

Acce

ssto

trai

ning

Noon-line

publicregisterof

trainingprovidersand

trainingprogrammes

isavailable.

Registeroftraining

providersandtraining

programmes

broken

down

byregions,availableon

arecognised

website.

Smallbusinesstrainingprovision

isdevelopedbutislim

itedto

specifictowns

andregions.

Governmentsupportmeasures

prom

otedevelopm

entofon-line

trainingservices.

Good

trainingprovider

networkdevelopedacross

thecountry.(1)

Evidence

ofon-line

training

services

developing

for

smallbusinesscommunity.

Good

trainingprovider

networkdevelopedacross

thecountry.

Dataon

on-line

training

acquiredby

enterprises

istracked

byTNAsystem

and

evaluatedas

partof

nationalentrepreneurship

learning

policy

improvem

ents.

1

(1)Informationon

trainingprovidersavailablewithineconom

icdevelopm

entdepartmentsoflocal/regionaladm

inistrationoffices.

266

Annex 2

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-3)

5.1

Inte

ract

ion

with

gove

rnm

ents

ervi

ces

1

5.1.

1Ta

xre

turn

sTaxreturnscannotbe

filed

on-line.

Governmentisconsidering

proposalstoallowforon-

linefilingoftaxreturns.

Pilotproject.

Approvaloflegislationand

budgetaryprovisions.

Developm

entofsoftware.

Early

phaseofimplem

entation.

Taxreturnscanbe

filed

on-line,

butthe

softw

areallowsonlyfor

alim

itednumberofoperations.

Level4

+thesoftw

are

allowsforcredit/debit

compensationwhen

availableinthecountry.

1

5.1.

2So

cial

secu

rity

retu

rns

Socialsecurityreturns

cannotbe

filed

on-line.



linefilingofsocialsecurity

returns.Pilotproject.



Developm

entofsoftware.

Early

phaseofimplem

entation.

Socialsecurityreturnscanbe

filed

on-line,butthesoftw

are

allowsonlyfora

limitednumber

ofoperations.

Level4

+thesoftw

are


compensationwhen


1

5.1.

3Re

port

ing

onen

terp

rise

stat

istic

s

Reporting

onenterprise

statisticscannotbe

filed

on-line.



linereporting

onenterprise

statistics.Pilotproject.



Developm

entofsoftware.

Early

phaseofimplem

entation.

Reporting

onenterprise

statisticscanbe

filed

on-line,

butthe

softw

areallowsonlyfor

alim

itednumberofoperations.

Advanced

phaseof

implem

entation+softw

are

allowsforw

iderangeof

operations.

1

5.1.

4

Exte

nsio

nto

othe

rser

vice

s(i.

e.pe

nsio

ns,

proc

urem

ent,

cada

stre

,etc

.)

Otherservicescannotbe

filed

on-line.



linefilingofotherservices.

Pilotproject.



Developm

entofsoftware.

Early

phaseofimplem

entation.

Otherservicescanbe

filed

on-

line,butthe

softw

areallows

onlyfora

limitednumberof

operations.

Level4

+thesoftw

are


compensationwhen


1

5.2

Info

rmat

ion

2

5.2.

1On

-lin

ein

form

atio

nfo

rSM

Es

Noon-line

information

availableon

keyareasof

interestforSMEs

(i.e.tax,

labour,standard

regulations).

SomeSM

E-specific

informationcanbe

found

on-line,buton

different

portals.

Initialstageofdevelopm

ent

ofSM

Ededicatedportal

limitedinformationavailable

on-line

nopossibilityof

interaction.

SMEdedicatedportal

established:asignificant

amountofinformationis

availableon-line

anditis

regularly

updatedinteraction

limitedtorequestof

information.

Level4

+SM

E-specific

singleportalallows

interaction(requestof

informationapplications

tax

returns)betweenSM

Esand

theadministration.

1

5.2.

2Qu

ality

ofon

-lin

epo

rtal

Existenceofon-line

portal

unknow

ntoSM

Ecommunity.Informationis

notupdated

ormaintained.

On-line

portalsarenot

easilyaccessibleby

the

SMEcommunity.Portalis

notuser-friendly.

Informationisupdatedand

maintainedon

anad

hoc

basis.

On-line

portalsare

accessibletoSM

Ecommunity.Portalis

regularly

updatedand

maintained.

Level3

+portalisuserfriendly.

Level4

+Portaloffers

informationinlocal

languages,Englishand

language

ofthemost

presentforeign

investor.

1

5.IM

PRO

VIN

GO

N-L

INE

AC

CES

S

267

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onor

indi

cato

r(1

-3)

6.1

Expo

rtpr

omot

ion

prog

ram

mes

Noexportprom

otion

programmes

exist.

Exportprom

otion

programmes

under

consideration/somepilot

programmes

inplace,

limitedfundingavailable

andno

co-ordination

betweenprogrammes.

Newprogrammes

approved.

Programmes

arelargely

funded

bydonorcountries.

Co-ordinationbetween

programmes.Basictrade

informationprovided

and

sometrade

prom

otion

activities

(trademissions,

countryrepresentationat

majortrade

fairs)inplace,

butlimitedsupportgiven

toasm

allnum

berofSMEs.

Exportprom

otionprogrammes

areadequatelyfunded

butdo

notcom

pletelyprovideforallof

thefollowing:trade

policy

informationandcommercial

intelligence,exportprom

otion

andmarketing,trade

fair

participation,product

developm

entand

financial

services

andtraining.

Rangeofwell-funded

exportprom

otion

programmes

capableof

providingallofthe

dimensionsmentionedin

level4.

2

6.2

Enha

ncin

gSM

Eco

mpe

titiv

enes

s

Noprogrammes

orinitiatives

enhancing

SMEcompetitivenessin

place.

Competitiveness

programmes

under

consideration/initialpilot

programmes

inplace

Newcompetitiveness

programmes

approved.

Programmes

arelargely

funded

bydonorcountries,

coveringi.e.cluster

developm

ent,linkageswith

universities,foreign

partners,supplychain

trainingetc.

Relativelygood

rangeof

competitivenessprogrammes

inplace,adequatelyfunded,but

limitedco-ordinationwith

other

policyareas(science

and

technology,tax

incentives

for

R&D,educationandtraining,

etc.)

Rangeofwell-funded

exportcompetitiveness

programmes

capableof

providingallofthe

dimensionsmentionedin

level3

and4with

effective

policyco-ordinationand

monitoringmechanism

sin

place.

2

6.3

Natio

nalS

ME

prom

otio

nev

ents

NationalSMEprom

otion

eventsoccuronan-ad

hocbasis.

Eventsarenot

open

totheentireSM

Estakeholdercom

munity

andcovera

limited

numberofsectors.

NationalSMEprom

otion

eventsinunder

considerationby

the

government.Draft

calendarofeventsbeing

considered

byconcerned

ministry/agency.

NewnationalSME

prom

otioneventsapproved.

Evidence

thatrelevant

stakeholdershave

been

informed

ofandinvitedto

upcomingevents.

RegularhostingofnationalSME

prom

otioneventsoccur.

Evidence

thatawide-

representationofstakeholders

attend

andthateventscovera

widerangeofsectors.

Level4

+evidence

that

nationalSMEprom

otion

eventshave

enhanced

SME

competitiveness.

Regular

evaluationofpastevents

andplanning

offuture

eventsheldby

relevant

ministry/agency.

1

6M

ORE

OU

TO

FT

HE

SIN

GLE

MA

RK

ET

268

Annex 2

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eigh

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ensi

onor

indi

cato

r(1

-3)

7.1

Adap

ttax

syst

emto

favo

urSM

Es

7.1.

1An

alys

isof

tax

burd

enon

SMEs

TheMinistryofFinance

does

notm

aintaina

corporateincometax

(CIT)and

apersonal

incometax(PIT)m

icro-

simulationmodelthat

distinguishtaxpayersby

turnover(gross

business

revenue)and

totalbusinessassets.

Nocurrentplans

toimplem

entsuch

models.


does

notm

aintainCITand

PITmicro-simulation

modelsdistinguishing

taxpayersby

turnoverand

totalbusinessassets,but

istaking

stepstowards

implem

entation.


does

notm

aintainCIT

andPITmicro-

simulationmodels

distinguishing

taxpayersby

turnover

andtotalbusiness

assets,butiscurrently

taking

stepsto

implem

entsuchmodels

anddatasetswithinone

year.

TheMinistryofFinancemaintains

CITandPITmicro-simulation

modelsdistinguishing

taxpayers

byturnoverandtotalbusiness

assets.Themodelsareroutinely

used

toanalysethecontributionof

SMEs

tototalcorporateincome

taxrevenue,andtotalpersonal

incometaxrevenueon

business

income,andtoanalysethetax

revenueimplications

oftaxreform

proposals.

Level4

plus

therequirementthat

analyses

ofSM

Eincometaxliability

arecarriedoutatthe

industry

(ratherthan

econom

y-wide)level

(requiring

datasetsstratifiedby

industry).

1

7.1.

2

Anal

ysis

ofta

xim

pedi

men

tsto

SME

inve

stm

ent


does

notm

aintaina

marginaleffectivetax

rate(METR)modelthat

enablesanalysisoftax

effectson

(distortions

to)SMEinvestment

(versusinvestmentby

largefirms).Noplans

forimplem

entation.


does

notm

aintainaMETR

modelthatenables

analysisoftaxeffectson

SMEinvestment,butis

taking

stepstowards

implem

entation.


does

notm

aintaina

METRmodelthat

enablesanalysisoftax

effectson

SME

investment,butis

currently

taking

steps

towards

implem

entationwithin

oneyear.

TheMinistryofFinancemaintains

aMETRmodelthatenables

analysisoftaxeffectson

SME

investment.Themodelis

routinelyused

toanalysetax

distortions

toSM

Einvestmentand

theimplications

oftaxreform

proposals.

Level4

plus

therequirementthata)

theMETRmodelisdisaggregated

across

machineryandequipm

ent,

buildings,inventoryandland

andb)

METRresults

areexplainedin

summaryreports

forconsideration

byMinisterstohelpinform

policy-

making.

1

7.1.

3

Anal

ysis

ofta

xim

pedi

men

tsto

SME

equi

tyfin

ance

Studiesexam

ining

implications

for

enterprisefinancing

andinvestmentof

doubletaxationof

distributed

andretained

profithave

notbeen

undertakenby

tax

officials.

Studiesexam

ining

implications

forenterprise

financing

andinvestment

ofdoubletaxationof

distributed

andretained

profithave

been

undertakenby

tax

officials,w

ithstudy

findingsdocumentedand

reportedtoseniorMinistry

ofFinanceofficialsfor

discussion

and

consideration.

Level2

plus

the

requirementthatthe

analysisofdouble

taxationincludes

anassessmentofprosand

cons

(advantages,

disadvantages)andtax

revenueimplications

ofalternative‘integration’

system

storelieve

doubletaxationof

distributed

andretained

profits.

Level3

plus

therequirementthat

findingsofstudiesofdouble

taxationandalternative

integrationsystem

sareaddressed

incurrenttax

policyorinplanned

taxreform

overthenexttwo

years.

Level4

plus

therequirementthat

studiesofspecialtax

incentives

inthecurrentsystem,orplanned

for

introductionoverthenexttwo

years,orbeingproposed

bybusiness

(mainprovisions)to

increase

financing

ofsm

all

enterprises,havebeen

undertaken,

documented,andreportedtosenior

MinistryofFinanceofficials.Tax

revenueandefficiencyimplications

ofadjusting(possiblyeliminating)

theseincentives

have

been

considered

alongsideimplications

ofadjustingthedegree

ofdouble

taxationreliefinrespectof

distributed

andretained

profit.

1

7.TA

XA

TIO

NA

ND

FIN

AN

CIA

LM

AT

TER

S

269

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onor

indi

cato

r(1

-3)

7.1.

4An

alys

isof

tax

arbi

trag

eby

SME

owne

rs

Studieshave

notbeen

undertakenby

tax

officialsexam

ining

effectivetaxrateson

business

incomeof

closely-held

corporations

paidoutas

wages,ordividends,or

realised

ascapital

gains,toassess

possibletaxdistortions

toearnings

payout

policiesinsuch

cases.

Similarly,studies

have

notbeenundertaken

exam

iningpossibilities

forconversionof

taxablecapitalgains

(e.g.onrealproperty)

intotax-preferred

(possiblytax-exem

pt)

capitalgains

(e.g.on

shares).

Studieshave

been

undertakenby

taxofficials

exam

iningeffectivetax

rateson

business

income

ofclosely-held

corporations

paidoutas

wages,ordividends,or

realised

ascapitalgains,

toassess

possibletax

distortions

toearnings

payoutpolicies.

Level2

plus

the

requirementthat

studieshave

also

been

undertakenby

tax

officialsexam

ining

possibilitiesfor

conversion

oftaxable

capitalgains

intotax-

preferred(possibly

tax-exem

pt)capital

gains.

Level3

plus

therequirementthat

reports

have

been

prepared

consideringpossiblemeans

toaddresstaxarbitrage

byow

ners

ofclosely-heldcompanies.The

findingshave

been

documented

andreportedtoseniorMinistryof

Financeofficialsfordiscussion

andconsideration,butm

easures

have

notbeenadoptedtoaddress

themostcom

mon

formsoftax

arbitrage.

Level4

plus

therequirementthat

measureshave

been

adoptedto

addressthemostcom

mon

formsof

taxarbitrage.

1

7.1.

5

Anal

ysis

ofta

xim

pedi

men

tsto

risky

inve

stm

enti

nSM

Es

Possibleimpediments

toinvestmentinearly-

stage,high-risk

companies

ofalternativeloss-offset

rulesgoverninglim

itsto

taxdeductibilityof

business

losses,and

capitallosseson

shares,havenotbeen

analysed,docum

ented

anddiscussedam

ongst

seniortaxofficialsof

theMinistryofFinance.

Possibleimpedimentsto

investmentinearly-stage,

high-riskcompanies

ofalternativeloss-offset

rulesgoverninglim

itsto

taxdeductibilityof

business

losses,and

capitallosseson

shares,

have

been

analysed

with

findingsdocumentedand

reportedtoseniorMinistry

ofFinanceofficialsfor

discussion

and

consideration.

Level2,plusthe

requirementthattax-

planning

opportunities

underalternativeloss-

offsetprovisions

have

been

exam

ined

(taking

intoaccountlimits

totaxauditsurveillance

thatcanbe

carriedout

bythetax

administration),w

ithstudyfindingsreported

toseniorMinistryof

Financeofficialsfor

discussion

and

consideration.

Level3

plus

therequirementthat

mainfindingsofstudiesof

possibleimpedimentstorisk-

taking

(includinginvestmentin

equityshares),andpossibletax-

planning

opportunities,under

alternativeloss-offsetprovisions,

areaddressedincurrenttax

policy,and/orinplannedtax

reform

overthenexttwoyears.

Level4

plus

therequirementthat

followingtheadoptionoftaxreform

thatexpandsorlim

itsloss

offset

provisions,and/orbroadensor

contains

scopefortax-planning

around

losses,anex-post

evaluationiscarriedoutthat

exam

ines

implications

forrisk-

taking

andtax-planning.

1

270

Annex 2Le

vel1

Leve

l2Le

vel3

Leve

l4Le

vel5

Wei

ghtf

orsu

b-di

men

sion

orin

dica

tor

(1-3

)

7.1.

6

Anal

ysis

ofta

xco

mpl

ianc

eco

sts

forS

MEs

and

rem

edia

lta

xad

min

istr

atio

n


(orTax

Administration)

hasnotassessedthe

averagecosttoSM

Esofcomplying

with

any

ofthemaintaxes

(currentdesign)

imposedby

central

government.

TheMinistryofFinance(or

TaxAdministration)has

assessed

theaveragecost

toSM

Esofcomplying

with

certainmaintaxes(e.g.

incometax,general

consum

ptiontax(VAT

orsalestax),intheircurrent

design)imposedby

centralgovernm

ent.


(orTax

Administration)

hasassessed

the

averagecosttoSM

Esofcomplying

with

all

maintaxes(current

design)imposedby

centralgovernm

ent.

Level3,plustherequirementthat

studieshave

been

prepared

todeterminethepros/consof

simplifyingcertainelem

entsof

centralgovernm

enttax

administration(e.g.lessfrequent

taxinstalments,electronicfiling).

Therehasbeen

someinitial

implem

entationofreformsthat

addressthemainfindingsof

thesestudies.

Level4,plusevidence

thata)

reformshave

been

implem

ented

thataddressthemainfindingsof

studiesofpossiblesimplificationof

centralgovernm

enttax

administrationandb)meetings

have

been

heldwith

senior

provincial/state-leveltax

officialsto

discussSM

Ecompliancecosts

wherestudiesrevealthattax

compliancecostsinrelationtosub-

centralgovernm

entaxes(e.g.

propertytax)areexcessivelyhigh.

1

7.1.

7

Asse

ssm

ento

fpo

licy

mea

sure

sto

less

enta

xco

mpl

ianc

eco

sts

forS

MEs


hasnotassessedthe

implications

ofalternativesimplified

taxpolicyregimes

(e.g.

presum

ptiveregimes)

toapplytoSM

Esto

addresstaxcompliance

costsunderapplication

ofbasicincometaxand

basicVATsystem

s.No

plansforassessm

ent.


hasnotassessedthe

implications

ofalternative

simplified

taxpolicy

regimes

toapplytoSM

Estoaddresstaxcompliance

costsunderapplicationof

basicincometaxand

basicVATsystem

s,but

plansan

assessment

withinoneyear.


hasassessed

the

implications

ofalternativetaxpolicy

regimes

(e.g.

presum

ptiveregimes

and/orVATexclusions

forfirm

sunderturnover

threshold)toapplyto

SMEs

toaddresstax

compliancecostsof

basicincometaxand

basicVATsystem

s.

Level3

plus

therequirementthat

analyses

have

been

prepared

that

considercriteria

andoptions

for

establishing

thresholdlevel(s)

determiningtheapplicationof

alternativeregimes

(e.g.VAT

exem

ption,versus

presum

ptive

taxregime,versus

basicVAT

regime),and

possibledistortions

(e.g.tofirmsize)introducedby

differentthresholdlevels.

Level4

plus

therequirementthat

therehasbeen

someinitial

implem

entationofreformsthat

applydifferenttaxregimes

toSM

Es,depending

ontheirsize(e.g.

turnover),whereanalyses

indicate

thatsuch

reformswouldbe

desirableandappropriate.

1

7.1.

8

Asse

ssm

ento

fSM

Eta

xpay

ers

assi

stan

ceto

redu

ceta

xco

mpl

ianc

ebu

rden

Limitedtaxpayer

access

(at

regional/localtax

offices)toinformation,

supporting

documentationand

assistance

towards

understandingand

complying

with

the

maintaxesimposedon

business

bycentral

government.No

immediateplansby

centralgovernm

entto

significantlyimprove

taxpayerservice.

Informationand

documentationtoassist

taxpayersincomplying

with

themaintaxes

imposedon

business

bythecentralgovernm

entis

dissem

inated

toregistered

taxpayersalongwith

tax

returns.

Plansarebeing

developedby

central

governmenttoimproveits

taxpayerservice.

Level2

plus

the

requirementthattax

returnsandinformation

andsupporting

documentationare

widelyavailableto

taxpayers(e.g.available

atnon-government

sites,downloadedfrom

governmentw

ebsites).

Atoll-freetelephone

service,with

adequatelytrained

tax

specialists,isprovided

torespondtotaxpayer

questions.

Level3

plus

therequirementthat

additionalservicestoeducate

business

onits

taxobligations,

reporting

andfilingrequirements

areprovided

throughan

‘outreach

programme’thatincludes

tax

seminarsorganisedatthelocal

level(e.g.with

localchambersof

commerce),specialadvertising,

andpossiblyotherstrategies

toactivelydissem

inatetax

informationtobusiness.

Level4

plus

regulardiscussions

with

nationalChambersof

Commerce

andotherbodiesto

considerhowtaxpayerassistance

andeducationcouldbe

improved.

1

271

Leve

l1Le

vel2

Leve

l3Le

vel4

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l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

7.2

Acce

ssto

Fina

nce

7.2.

1Cr

edit

guar

ante

esc

hem

esNo

creditguarantee

schemeinplace.

Creditguarantee

schemefacilityunder

consideration.

Creditguarantee

facilitiesinplace.

(Governm

entinitiative

andstatecontrolled).

Creditguaranteefacility

operatingundercontracttothe

privatesectorbutstate-funded.

Numberofm

utualorm

ixed

creditguaranteeschemes

inplaceunderprivate

managersabletofinance

them

selves

outoffeesalone.

1

7.2.

2Co

llate

rala

ndpr

ovis

ioni

ngre

quire

men

ts

Veryhigh

collateral

requirements>200%

.Restrictivecollateral

definition

and/orrigid

provisioning

requirementsfor

uncollateralised

loans

Collateralrequirement

ranging150-200%

ofloan

amount.Restrictive

collateraldefinition

and/orrigid

provisioning

requirementsfor

uncollateralised

loans

Flexiblecollateral

definition

and/orflexible

provisioning

requirementsforloans

under$30,000.

Flexiblecollateraldefinition

and/orflexibleprovisioning


under

$30,000andcentralcollateral

registryinplace

Flexiblecollateraldefinition

and/orflexibleprovisioning


under

$30,000andcentral

collateralregistrycovering

mostbankloans.

3

7.2.

3

Law

san

dpr

oced

ures

ondi

stre

ssed

com

pani

es,

rece

iver

ship

and

bank

rupt

cy

Nospecificlawsand/or

otherprocedureson

distressed

companies,

receivershipand

bankruptcy.

Distressed

company,

receivershipand

bankruptcy

lawsand/or

procedures

indrafting

stage.

Distressed

company,

receivershipand

bankruptcy

lawsand/or

procedures

formallyin-

place.

Legislationnot

system

aticandatan

early

stageof

implem

entation.

Evidence

ofimplem

entationof

distressed

company,

receivershipandbankruptcy

lawsand/orprocedures

inline

with

internationalstandards

and

fully

integrated

inand

consistentwith

commerciallaw

andpractice.Backlogofold

caseshasbeen

reduced.

Distressed

company,

receivershipandbankruptcy

lawsand/orprocedures

effectivelyandsystem

atically

appliedinatransparentway.

Procedures

take

place

speedily.

3

7.2.

4Ca

dast

reNo

functioning

cadastres.

Planshave

been

made

toimplem

enta

functioning

cadastre.

Cadastresystem

inplace,buttheland

ownershipofthe

countryhasnotyet

been

entirely

documented.

Theow

nershipofland

hasbeen

documentedbutthe

cadastreis

notfullyfunctioning.

Level4

+fully

functioning

cadastreallowingfirmsto

userealestateas

collateral

intheirefforts

toaccess

bank

finance.Availableon-line.

3

7.2.

5Le

asin

gin

dust

ryNo

leasingindustry,no

planstohave

leasing

law.

Leasinglawunder

preparation

Leasinglawapproved

andinstitutional

responsibilitiesclearly

assigned.

Evidence

ofimplem

entationof

leasinglaw.Regulatoractivein

monitoringthemarket.

Leasinglawfully

implem

ented.Regulationand

supervisionoftheleasing

sectorisenacted.

1

272

Annex 2Le

vel1

Leve

l2Le

vel3

Leve

l4Le

vel5

Wei

ghtf

orsu

b-di

men

sion

orin

dica

tor

(1-3

)

7.2.

6Ve

ntur

eca

pita

l/Equ

ityfu

nds

Noventurecapitalor

equityfundslegislation

underconsideration.

Equityfund

legislation

underconsideration.

Equityfund

legislation

inplace.

Level3

+.Severalequityfunds

investing,butonlyexit

possibilitiesaredirectsales.

Rangeofexitoptions

for

equityfunds,includinga

functioning

stockmarket.

1

7.2.

7Re

gist

ratio

nsy

stem

sfo

rm

ovea

ble

asse

ts

Nofunctioning

registrationsystem

sfor

movableassets.

Legislationtoestablish

afunctioning

registrationsystem

atthedraftingstage.

Registrationsystem

ofmovableassetsin

place,butnotyetfully

operational.

Informationnoteasily

accessibleorfully

reliable.

Theow

nershipofpledgeson

theregistered

assetshasbeen

fully

documented.Easy,low

-costaccess

toregistrationand

information.

Registration

system

in-line

with

international

standards.

4+fully

functioning

system

forregistrationofmovable

assets,allowingfirmstouse

movableassetsas

collateral

intheirefforts

toaccess

bank

finance.Informationavailable

on-line.

3

7.2.

8Cr

edit

info

rmat

ion

serv

ices

Nocreditinformation

services

availableinthe

country.

Creditinformation

services

in-place,but

access

limitedto

financialinstitutions.

Creditinformation

services

availableto

financialinstitutions

andtothepublic.Both

positiveandnegative

creditinformationis

available.

3+dataon

loansofmorethan

€20,000

tolegaland

physical

personsarecollected

andmade

availabletofinancialinstitutions

andthepublicupon

request.

Informationisupdatedregularly

andcomprehensive.

4+morethan

2yearsof

historicaldataaredistributed.

Bylaw,borrowershave

the

righttoaccess

theirdata.

3

273

Leve

l1Le

vel2

Leve

l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

8.1

Prom

ote

tech

nolo

gydi

ssem

inat

ion

tow

ards

SMEs

1

8.1.

1Su

ppor

ttra

inin

gon

tech

nolo

gyNo

supportfortraining

ontechnology.

Governmentisplanning

tointroduce

someform

ofsupport,butno

concreteactionhas

been

taken.

Formulationand

approvalofconcrete

programmes

totechnologicaltraining,

relyingon

publicand

privateservice

providersdesignationof

competentauthority

andbudgetprovisions.

Partialimplem

entationrecordof

supportprogram

me.Key

componentsfully

operational.

Fullimplem

entationof

technologicaltraining

programmes,i.e.

system

ofvouchersto

supporttrainingon

technology

fully

implem

entedand

availablethroughoutthe

country.

1

8.2

Fost

erte

chno

logy

co-o

pera

tion

deve

lop

rese

arch

prog

ram

mes

focu

sed

onco

mm

erci

alap

plic

atio

nof

know

ledg

ean

dte

chno

logy

1

8.2.

1

Inno

vatio

nan

dte

chno

logy

cent

res/

co-o

pera

tion

betw

een

univ

ersi

ties,

R&D

cent

res

and

SMEs

Noschemes

toprom

ote

co-operationon

innovation.

Evaluationand

proposalson

the

introductionof

innovationand

technology

centres.

Partnershipwith

private

sector.

Policyframew

orkin

place.Actionplan

and

budgetaryprovisions

approved,pilot

schemes

introduced.

Initialevidence

ofimplem

entationof

innovationprom

otionschemes.

Innovationandtechnology

centres

inoperations.Private/public

partnershipinR&

D,innovationand

productdevelopmentactively

supportedby

centraland

local

government.

Networkofhigh

level

innovationand

technology

centres

presentinthecountry.

Strong

relationshipwith

research

institutions

andprivatesector.

1

8.2.

2In

telle

ctua

lpro

pert

yrig

hts

(IPRs

)

Nolegislationon

intellectualproperty

inplace,system

atic

violations

ofIPRs.

Legislationon

IPRs

underpreparation.

IPRs

legislation

approved,assuring

protectionconsistent

with

TRIPsagreem

ent.

Effectiveenforcem

entofIPRsdoes

notextendtoalltypes

ofIP

(patents,trademarks,copyright,

industrialdesigns

etc)ortoalltypes

ofproducts(pharmaceuticals,

audio-video,spareparts,etc)and

itdoes

notinvolve

allthe

concerned

authorities

(customs,policy,courts,

etc)

Good

implem

entation

recordofIPRs

legislation.IPis

effectivelyand

system

atically

protectedinallits

formsandforall

products.

2

8.3

Deve

lop

inte

r-fir

mcl

uste

rsan

dne

twor

ks2

8.3.

1In

ter-

firm

clus

ters

and

netw

orks

Governmenthas

noclearstrategy

oninter-

firmclusters.

Proposalstodevelop

inter-firmclustersand

networks.Consultations

with

business

sector.

Pilotprojectinonekey

sector.

Approvalofactionplan

anddesignationof

competentauthority.

Inter-firmclustersandnetworks

concentratedintraditionalexport

sectors.

Widerangeofinter-firm

clustersandnetworks

coveringawiderange

ofsectors,including

internalmarket.

8.ST

REN

GT

HEN

ING

TH

ET

ECH

NO

LOG

ICA

LC

APA

CIT

Y

274

Annex 29

SU

CC

ESSFU

LE-

BU

SIN

ESS

MO

DEL

SA

ND

TO

PC

LASS

SM

ALL

BU

SIN

ESS

SU

PPO

RT

Leve

l1Le

vel2

Leve

l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

9.1

SME

supp

ortf

acili

ties

and

serv

ices

1

9.1.

1Bu

sine

ssin

cuba

tors

Noincubatorsinplace

andno

plansto

establishthem

Strategy

onincubators

underdiscussion/local

initiatives

inpreparation.

Strategy

onincubators

approved:detailed

proposalsandbudget

allocations,eitheratcentral

orlocalgovernm

entlevel.

Pilotincubatorsin

operation.Focuson

job

creation,no

exitstrategies.

Level3

+severalincubatorsin

operation,outofthe

experim

ental

phase.Provisionofbasicservices,

someincubatorsused

tofoster

innovation.Partialimplem

entation

ofOECD

guidelines

onbusiness

incubators

Level4

+networkof

incubatorsthroughoutthe

country.Focuson

innovation,

provisionofhigh

quality

services,existence

ofexit

strategies.OECDguidelines

widelyimplem

ented.

1

9.1.

2Ra

nge

ofbu

sine

ssse

rvic

es

Verylim

itedrangeof

basicbusiness

services,available

mainlythroughdonor

funded

programmes.

Morestructured

rangeof

business

service,

availablethrougha

combinationofpublic

funded

andprivate

business

providers

Networkofpublicfunded

business

serviceproviders.

Good

networkofprivate

business

serviceproviders,

providingpersonalised

services

forenterprises

Welldeveloped

marketforbusiness

services,w

ithgood

levelofinternal

competition.

Level4

+widerangeof

business

services

availablein

thecountry,including

widespreadpresence

ofinternationalconsultancyfirms

2

9.1.

3Qu

ality

ofbu

sine

ssse

rvic

es

Nostandards/

certificationon

quality

ofservices.

Non-bindingguidelines

onquality

ofbusiness

services

under

discussion.

Non-bindingguidelines

approved.Public-private

co-operationtosetquality

standardsandcertification

procedures

forprovision

ofbusiness

services.

Level3

+somecertifications

and

standardsinplaceforsom

ebusiness

services.Strong

private

elem

entinelaborationofstandards

andcertificationprocess.

Level4

+mostofbusiness

services

areregulatedby

quality

standardsbasedon

internationalstandards.

Certificationandmonitoring

mainlybasedon

privatesector.

2

9.2

Info

rmat

ion

forS

MEs

1

9.2.

1Av

aila

bilit

yan

dac

cess

ibili

tyof

info

rmat

ion

Noinformationon

availabilityof

business

services.

Fragmentedinformation

onavailabilityofbusiness

services

availablelocally.

Nationaldirectoryof

providersofbusiness

services

availablelocally.

Level3

+personalised

information

onprovidersofbusiness

services

availableon-dem

andinpaperform.

Nationaldirectoryofproviders

ofbusiness

services

available

on-line

with

multiple-criteria

search

engine.

1

9.2.

2Bu

sine

ssin

form

atio

nce

ntre

s

Nobusiness

informationcentres.

Informalinformationcan

beobtained

insomelocal

offices.

Creationofarepertoryof

business

information,

availablelocally

inclearly

designated

offices.

Personalised

business

information

availableon

demandinpaperform

frominformationcentres.

Repertoryofbusiness

informationavailableon-line

with

multiple-criteriasearch

engine

onsinglebusiness

informationweb

portal.

1

9.3

Law

onel

ectr

onic

sign

atur

e1

9.3.

1El

ectr

onic

sign

atur

e

Thegovernmentdoes

nothaveaconcrete

plan

onelectronic

signature.

Evaluationand

formulationofdetailed

proposalsoflawon

electronicsignatureand

implem

entingregulations.

Approvaloflawon

electronicsignatureandof

theimplem

enting

regulations.

Solid

evidence

ofimplem

entationof

lawon

electronicsignature.

Possibilitytousee-signatureinkey

areasforSMEs

incontactw

ithpublicadministration.

Fullimplem

entationoflawon

electronicsignatureandfull

integrationofelectronic

signaturewith

otherservices

ofe-government.Regular

review

sinconsultationwith

SMEs.

1

275

10.D

EVEL

OP

ST

RO

NG

ER,M

ORE

EFFE

CT

IVE

REP

RES

ENTA

TIO

NO

FSM

ALL

ENT

ERPR

ISES

’IN

TER

EST

S

Leve

l1Le

vel2

Leve

l3Le

vel4

Leve

l5W

eigh

tfor

sub-

dim

ensi

onor

indi

cato

r(1

-3)

10.1

SME

netw

ork

3

10.1

.1SM

Ene

twor

kInformalgroupin

gofSM

Esat

local/secto

rlevel,

withlim

ited

mem

bership

base.

Industry/se

ctorg

roupso

fSM

Esrepresentingbusin

ess,

withalimitedmem

bership

base.N

onation

alnetwork,

limitedcapacityo

frepresentation

Structu

redloc

alandnation-wide

interestrepresentation

,presenceo

factiveN

GOs,craftsassocia

tions,

presence

ofinternalgovernance

rules

.

Organis

edSM

Eassocia

tions,N

GOs,

craftsassocia

tions,operatingat

nationalle

vel(directly

orthrougha

networks

ystem),grow

ingcapacityto

engage

governmentinpolicyd

ialogue

onkeyissues

Strong,in

dependentand

locallyrooted

networko

fSMEs,representing

SMEs

interestatlocalandnationalle

vel.

Capacitytoc

onductconstru

ctive

and

regular

policyc

onsultations

onaw

iderangeo

fissues.

2

10.1

.2Ch

ambe

rsof

Com

mer

ce(C

oC)

CoChasn

oinstitution

aladvocacy

role,

general

information

service

sprovid

ed,

fewbasic

busin

esss

ervic

esofferedtomem

bers

Somea

dvocacyrole

,limitedloc

alnetwork,capable

ofofferingsome

service

sand

operating

underclea

rlydefined

governance

rules

.

Strong

advocacy

roleextended

alsoto

SMErelated

issues,strongloc

alpresence,capableofofferingaw

iderangeo

fservic

es.

1

10.2

Publ

icPr

ivat

eCo

nsul

tatio

ns(P

PCs)

3

10.2

.1

Freq

uenc

yof

publ

ic/p

riva

teco

nsul

tatio

n(P

PCs)

Consultation

onSM

Eiss

ues

betweenthep

ublic

andpriva

tesphereso

ccur

sporadica

lly/ad-

hoc.

Proposals

have

been

madeto

establish

astructure/fram

eworkfor

public/priva

teconsultation

.

Aregulation

(s)has/h

aveb

een

adoptedwh

ichstipulate(s

)regula

rconsultation

betweenpublica

ndpriva

tesphereso

nSM

Eiss

ues.

Consultation

sinvolv

ingkeya

ctors

frompublica

ndpriva

tesecto

rtake

place

onaq

uarte

rlybasis

.

Level4

+thec

onsultations

take

place

onam

onthlybasis

ormore.

2

10.2

.2Fo

rmal

influ

ence

ofPP

Cs

PPCs

take

theformof

unstructureddebatesb

etwe

enthep

ublic

andpriva

tesecto

ron

generalSMEiss

ues.

Level1

+thep

rivates

ector

hasthe

opportu

nitytog

iveform

alrecommendations

ontheissuesd

iscussed.

Level2

+thep

rivate

secto

rhas

the

opportunitytoformallyc

ommenton

draft

SMElegislation

inthose

meetings.

Level3

+thereisa

mple

evide

ncethat

thec

ommentson

draftlegislation

are

integrated+thep

rivates

ectorcan

suggestown

initiatived

raftlaw

sor

measureso

nSM

Epolicy.

Level4

+thereisa

mple

evide

ncethat

suggestions

onow

ninitiatived

raft

lawso

rmeasuresfromthep

rivate

secto

rhaveb

eenrealised.

2

10.2

.3Re

pres

enta

tivity

ofPP

Cs

Few,

random

lyselec

ted

companie

sareinv

itedtothe

PPCs.The

access

totheP

PCsis

thus

restricted

andthereisn

osyste

mofdis

semina

tingthe

information

aboutupcom

ingPPCs

tothep

rivates

ector.

Invitations

ofcompanie

stothe

PPCs

aretargeted,howe

verm

ainlytobig

andinflue

ntial

companie

s.Some

attemptsa

remadetoinformthe

priva

tesecto

raboutupcoming

PPCs

(e.g.announcementson

governmentw

ebsite).

TheP

PCsc

onsis

tofa

forumthatis

broadly

representativeo

fthe

SME

community

(differentsectors,different

company

sizes,chambersof

commerce,etc.).Comprehensiv

eand

widelyaccessibles

tructu

resa

rein

place

toinformthep

rivates

ector

aboutupcom

ingPPCs.

2

10.2

.4Ho

wdo

esth

ePP

Cm

eet?

Thetiming

oftheP

PCsis

decid

edupon

bytheg

overnm

ent

withshortnotice

.Thereisno

pattern

inthetiming

ofthe

meetings

throughoutthey

ear.

Meetings

ares

hortandthe

governmentdecide

sonthe

agenda

entirely

.Noformal

record

ofthem

eetings

iskept.

PPCs

occuronaregula

rbasis,

the

scheduleisagreed

upon

withthe

priva

tesecto

ratthe

begin

ningof

they

ear.T

heagenda

oftheP

PCsis

senttothep

articipa

ntsinadvance

andthey

areg

iventheo

pportunity

togiv

ecom

mentsandsuggest

changes.Aform

alrecord

ofthe

meetings

iskept,butisnoteasily

accessible.

Level3

+Thep

rivates

ectoris

responsib

leford

esign

ingpartofthe

agenda

independentlyandcancallfor

anexception

almeetingseveraltimes

peryearw

hendeem

ednecessary.A

detailedrecord

ofthem

eetings

iskept

anditiswidelyaccessible(e.g

.published

onaw

ebsite)

1

276

Annex 3

The Western Balkans National CharterCo-ordinators

COUNTRY NAME CONTACT DETAILS TEL/FAX/E-MAIL

ALBANIAMr. Gavril LASKU

Director of “Export Promotion and SMEDevelopment” division

ALBINVESTBlvd “Gjergj Fishta”Pall Shallvare Tirana

Albania

Tel: +355/4/235704Mob: +355/696/062 099

[email protected]

BOSNIA AND HERZEGOVINAMr. Ivica MIODRAG

Chief of Department for EconomicDevelopment and Entrepreneurship

Ministry of Foreign Trade and EconomicRelationsMusala 9

71000 SarajevoBosnia and Herzegovina

Tel: +387/33/444.303Fax: +387/33/206/141

[email protected]

CROATIAMrs. Dragica KARAIC

Head of International Department forSMEs

Ministry for Economy, Labour andEntrepreneurship

Ulica grada Vukovara 7810000 Zagreb

Croatia

Tel: +385/1/610.68.12Fax: +385/1/610/91/14

[email protected]

KOSOVO under UNSCR 1244/99Mr. Naser GRAJCEVCI

Director

SME Support Agency3-5 “Perandori Justinian”

Qyteza Pejton10000 Prishtina

Kosovo under UNSCR 1244/99

Tel: +381/38/ 20036007Mob: +377/44 /141563Fax: +381/38/504604

[email protected]@yahoo.com

FORMER YUGOSLAV REPUBLICOF MACEDONIA

Mr Imerali BAFTIJARIHead of Support of Entrepreneurship andCompetitiveness of SME Department

Ministry of EconomyJuri Gagarin 151000 SkopjeFYR Macedonia

Tel: +389/2/[email protected]

MONTENEGROMr. Zarko DJURANOVIC

ManagerEICC Montenegro

Directorate for the Development of Smalland Medium Sized Enterprises

Bulevar Revolucije 281,000 PodgoricaMontenegro

Tel: +382/81/406 310Fax: +382/ 81/406 323

[email protected]

SERBIAMr Igor BRKANOVIC

Assistant Minister of Economy

Ministry of Economy and RegionalDevelopment

15 Kralja Aleksandra St.BelgradeSerbia

Tel: +381/11/3347 207Fax: +381/11/3216 794

[email protected]

www.oecd.org/daf/psdwww.ec.europa.eu/enterprise

www.etf.europa.euwww.ebrd.com


SMEPo

licy

Index

2009

Progress in the Implementationof the European Charterfor Small Enterprisesin theWestern Balkans

European Commission