Irina Guruli is Program Manager at the Economic Policy Research Center.

Georgia’s economy is made of two components: the so-called formal sector and the “unobserved” part. In the observed part of Georgian economy, 96 percent of all registered firms are small or medium sized enterprises (SMEs). However, there are many registered firms that are empty shells, so the percentage of active firms is very low – only around 13 percent. Moreover, 88 percent of all active firms are small or micro, while only 8 percent are medium-sized enterprises.

The SME sector is a very thin layer of the Georgian economy: it accounts for 6 percent of the GDP and 9 percent of the workforce. However, it also accounts for 43 percent of the private sector’s employment and 19 percent of the GDP generated by the private sector.

Little is known about the mode of activity of the self-employed except that they live mainly in rural areas and are engaged in the field of agriculture. Yet, self-employed amount to about 2/3 of the total employment and according to estimates, generates about 18 percent of GDP. Therefore the question lies in how entrepreneurs emerge and evolve between the unobserved self-employed group and the observed economy. What are the barriers that hamper the self-employed from entering into the formal economy, develop their business activities and create more value added to the country’s GDP.

In order to find these barriers to entrepreneurship, 6 measures were developed and interviews with the same cohorts of 350 self-employed, and 250 micro and small firms were conducted every 6 months in three different regions of Georgia (Adjara, Kakheti, Tbilisi). The first round of interviews took place in August 2013, the second in February 2014. In this article, preliminary results of the first two rounds of interviews are presented.

Entrepreneurship in Georgia is mostly necessity driven. 60 percent of self-employed and 75 percent of micro and small enterprise representatives declared that they are pursuing their business activities, since there are no alternative work opportunities. The second most popular answer is the desire to increase income. However, an absolute majority will not give up their activities for the same amount of fixed salary. The “entrepreneurship by default” parameter should be mitigated, to the extent that there is willingness to be active and take risks to produce more and/or produce better. An outstanding 92% of self-employed do not keep accounting records, against 32% of micro and small firms. By the same token, an overwhelming majority of self-employed are operating with oral contracts, against roughly 40% of micro and small firms using written forms of agreements. These figures have not changed much since the first round, but the difference between self-employed and micro/small enterprises is quite significant. 99% of micro and small enterprises are not members of any association.

Motivations: 40% of micro and small firms and 24% of self-employed would be ready to take more financial risks to develop their businesses. By the same token, 60% of micro and small firms would be ready to take courses or training to improve their businesses, although this figure is lower for the self-employed (40%). One could say that the small Georgian entrepreneur is ready to take certain risks to grow his or her business, but that this fails to translate into plans and actions, due to the external environment, their vulnerability to and perception of it.

Project and expectations: fewer entrepreneurs plan ahead in 2014. Approximately 90% of the self-employed and 70% of micro and small firms do not plan to sell more of their services or products in the coming 3, 6 months or even 2 years. Only 4.5% of micro and small enterprises and 1% of the self-employed feel they did have some opportunities to grow their businesses during the past 6 months. As compared to the first round even less respondents are considering together with partners or alone to attempt a new business endeavor, sell more or new services. Among self-employed, less of them are considering the possibility to register officially as a business in the next 6 months.

Legal framework:the absence of the state administration. Self-employed do not have any relations with the state authorities. Likewise, micro and small businesses do not encounter problems with state officials, or with their suppliers and clients. This has been consistent throughout two rounds. Approximately 45% of the micro and small business believe that property rights are well protected in Georgia; there has been a slight increase in the number of people who believe this. 20% of micro and small firms in both rounds do not believe the state provides a fair ground for competition and that the state favors big businesses.

Informal institutions: Georgian culture supports entrepreneurship. Approximately 65-70% of both self-employed and micro and small firms agree that the Georgian culture favors business. Likewise, more than half of the respondents, in both categories, think that Georgian culture approves of those who take risks. But network, outside of friends and family, cannot be really considered as a resource for self-employed, micro and small firms. They don’t rely on their network for financial help or human resources.

Perception of opportunities:micro and small enterprises are more confident than self-employed. More than half of the micro and small firms think they have the expertise and skills for doing what they do while less than 40 percent of the self-employed think the same. By the same token, whereas half of the self-employed admit that fear of failure would prevent them from starting something new or introducing new services, only 35% of micro and small firms do so.

Material resources and opportunities: the structure of the market is what counts, and not the market per se. Value chains are underdeveloped, causing high concentration on the local markets, which is the main market for most – 80% of self-employed and micro and small enterprises. This fact has not changed in between rounds. Regarding access to finance, the Georgian case shows that the problem lies in the establishment of a proper financial market. Only half of the micro and small firms and 20% of the self-employed interviewed have a bank account. The figure has increased by 3 percent as of the second round for both subgroups.  Bank-real sector relationships are too weak and the private lending sector, though an important part of the financial sector, is probably not the most efficient one. Indeed, 11% of self-employed have a loan of up to 5,000 GEL – a high figure if one considers that 77% of them do not have a bank account. It is highly probable that a lot of self-employed, micro and small firms have taken loans from private lenders, without having any bank account.