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Methods of support and development of small business in Russia

Tags: Essay | Russia | Macroeconomics | Urban studies | Food | Acquiring | Small business

But don’t worry - no one will use them.

Small business support is a standard topic for discussion at various state and near-state meetings, both at the federal and regional levels. Template statements about the high importance of “babies” for the economy, about the experience of developed countries, where the share of small players in GDP can reach up to 50%, about the need for state support ... But in practice, such forums and discussions are useful only for their participants and speakers - they have good time in a pleasant company, good food, and even get paid for it.

The sole result of such meetings is the approval at the regional level of the program for supporting small business. It usually contains a standard set of “benefits” - reducing requirements for permits, some tax benefits, limiting the number of regulatory reviews. Sometimes, sweet things are added for small venture capital enterprises. All this, of course, is good, but it doesn’t affect the success of small business and its share in the economy ...

Such measures insignificantly reduce the costs of small businesses, but have virtually no effect on the most important thing - its income, turnover and role in the economy.

The costs of small businesses are still higher than those of competitors from the medium and large segments, which means that cost competition will still be lost. Tax cuts only lead to the fact that local budgets (honestly they are poor too) refuse income from those economic entities that in many countries form the basis of municipal incomes. The overbearing of business by inspections is completely exaggerated - this is not a factor that has a profound effect on something. Support for venture small enterprises is more like a beautiful gesture and has little effect on the economy as a whole - have you seen a lot of small innovative enterprises in the typical Russian region? Somewhere in the Penza region or in Altai? Typically, small businesses are trade and service enterprises, and the number of its innovations tends to zero.

Below we tried to reflect on what measures can actually lead to an increase in the share of small business in the economy.

Low-floor Russia: cities should to growth horizontally, not vertically

The regional authorities received the task to improve people housing conditions. These conditions are generally measured by living metres per person.

In conditions of low incomes and the need to ensure at least some kind of profitability for building companies, most regions support companies to build high-floor houses

Typical new construction in non-capital cities is either lonely multi-storey towers, or micro district of 20-floor panels towers. Such apartments have a low cost - the building company is able to propose low price, and poor population is ready to buy such flats.

Low-floor construction (cottage villages), which was gaining momentum in the country during the economical growth years, is now virtually stopped - people prefer not to move out of town for a number of reasons (it is expensively to maintain their housing, lack of infrastructure, poor transport). As a result, most Russian cities today grow only up and within stable city borders.

Anthills and multi-story ghettos are a great gift for the network economy giants

A large shopping center with Auchan or Lenta opens in any new multi-floor microdistrict. In smaller neighborhoods, Magnets and Pyaterochka reign. You need to understand that small businesses can never compete with the retail network for costs. Networks benefit from economies of scale and volume — where they get the right amount of demand, they burn out everything living around them.

Their weak point is the so-called “last mile”, where costs increase sharply and demand is dispersed across the area. Business margins in areas with low population densities are usually much lower, the share of logistics costs increases in the cost structure (and here, unlike purchase prices, networks do not have such a radical advantage). For network monopolists, low margins are not acceptable - their overall return on investment is falling, reporting is deteriorating and investors are unhappy. Such areas are less interested in opening new stores. For small companies, this is often the only market, such a margin is acceptable. Surely you noticed that in the areas of the "private sector" the density of network giants is much lower than in multi-storey residential districts.

We are talking here not only about food retail, but in principle about any retail. For example, gasoline stations of network brands usually tend to be located on large highways and junctions, and small business operate on regional roads and in the suburbs. As a result, prices will be higher, but the added value will remain in the domestic region, and not transfered to the owner of the network giant in Moscow.

If we talk about the growth of low-rise buildings in suburbs, it is difficult for people to live without a personal car.

In cities with a high population density, taxi services and public transport are winning more and more - there is no special need to keep your own car (if only for reasons of prestige). For people living outside the cities, having a car is a priority. The more cars, the wider the sector of services related to their support and maintenance - repair shops, car washes, etc. This is also the habitat of small businesses.

Therefore, the small business development program should be directly linked to the territorial development program. It’s wrong to build only cheap anthills in cities - this allows you to quickly solve problems with housing, but such development usually reduces the overall quality of life. The regions have huge territories that can be involved in residential circulation - first of all, abandoned industrial zones. Yes, housing will cost more, probably state co-financing of such programs is necessary (for example, even in rich Moscow the state will co-finance renovation) - but in the future this will lead to an increase in the quality of life and growth of the local economy.

Food preservatives requirements

If you travel a lot around Russia, you probably noticed that in retail chains local products are most often represented by bakery products and the dairy segment. The reason is commonplace - this is perishable products, which means that in this case the standard method does not work - to build one large plant somewhere in the central part of Russia, which will produce products with the lowest possible cost. But such a chip does not work with bread - it will become corny, which means that losses from unsold residues will exceed any savings on production costs.

Preservatives triumph in the Russian retail - most often manufacturers cannot entry to the chain store if the shelf life of their products does not meet the established requirements.

And when the product life cycle is long, local producers cannot realize their main advantage - logistics and proximity to the sales market. For the price, they cannot never can compete with giants. The legislative attack on preservatives in some types of products - primarily certain types of meat products, dairy products, confectionery products, juices - will improve the position of local producers. It is not necessary to completely ban - you can differentiate products by type and increase taxes for products with preservatives (at the same time, there will be benefits for the budget). Yes, prices will rise again, but the added value will remain in the region to a greater extent, the incomes of the local population will grow.

Radical decrease in the share of cash turnover

The statement may seem strange, because the small business largely survives due to the “gray schemes” - not all incomes are shown in the reports, part of the salary is paid to employees in an envelope so as not to pay insurance premiums from it. But the paradox lies in the fact that regional officials know this well and take it into account when making decisions on the distribution of places and quotas among economic entities.

It is simply not profitable (low tax payments) for regional authorities to develop markets and street trading formats - and these are traditional habitats of small business. It is much more profitable to cultivate large shopping centers and retail chaings. Or, for example, it is becoming increasingly common to observe that quotas for bus routes are provided to large carriers or to municipal enterprises altogether. And here it’s wrong to blame everything only on the corruption factor and the personal interest of officials. One reason is that big players are much more predictable. They will not conceal a part of the proceeds, pay all taxes, and create an understandable number of jobs for the local population. If you give the green light to small business, you will get an Asian driving a bus, selling alcohol to children at night, counterfeiting, a hole in the budget, you will not be able to pay all the social benefits on time, and after a loud scandal, you will fly out of the chair. And the abstract growth in the share of small business is so abstract that the federal authorities will not notice and appreciate it.

Most Russian officials know very well - the people need to hear not what you think, but what they want to hear.

Therefore, any official will always and everywhere publicly talk about the importance of supporting small business, its high importance for the economy, but in practice make those decisions that give the pie into the hands of larger and more predictable companies. They are easier to manage and collect money from them.

To reach the forefront, a small business must become white and accessible for various inspections. The introduction of online cash registers and the activation of tax control measures is an important step in this direction. In the future, a radical reduction in the commission for acquiring and, conversely, the taxation of ATMs and other infrastructure facilities of the cash economy can help. This will also lead to proper self-selection among small enterprises themselves - not those who best avoid taxes and monetize prohibited activities will benefit, but those who produce good products and services.

Local income growth

This is perhaps the most abstract recommendation in this article. The Russian authorities are too focused on limiting inflation in the short term - hence they support for retail chains, palm oil food, etc. But what matters is not the abstract inflation index on the Rosstat website (by the way, we wrote that there are big problems with its calculation), but the purchasing power of the population — that is, the ratio of income to price of goods.

Local income growth itself launches a positive spiral. With the growth of income, two important things happen: 1) people start spending less on food and more on services 2) people are not only guided by the price when choosing goods

A service sector is one where most of the added value is created by people living in this area. If a product can be produced thousands of kilometers from here and sold at a local chain store with a minimal mark-up, then it’s more difficult to do this with services. With rising incomes, people are increasingly turning to services. The poorer the population, the more it does with its own hands - it repairs the apartment itself, watches movies on torrent sites, learns English from online courses on the Internet, and is treated in state polyclinics. With income growth, behavior usually changes, as the cost of one's own time increases - a specialist is called to repair an apartment, they watch a movie in cinema, they learn English with a tutor, but they don’t mind paying money for good treatment. The service sector will grow - local small business will grow.

Also, with growth, the purchase decision begins to be made not only by price criteria. It becomes important for people the quality of the product (between a cheap palm chocolate and an expensive cocoa they selected second) and its personality, the satisfaction of some of their specific needs. A small business can never produce the cheapest product - but it shows itself well in the niche of natural and eco products, and is also able to provide a wide variety of offers.

How to increase incomes, of course, there is no direct recipe. But all the measures described above, as well as a thoughtful antitrust policy, the refusal to grow large state-owned giants in each segment of the economy, and the preservation of the collected taxes locally, contribute exactly to this. Yes, in the short term, the effect may even be the opposite, but strategically this way seems more true.

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