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views or policies of the Asian Development Bank

Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy
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ADB official terms.

DETERMINANTS OF SME UPGRADING

FROM LOCAL TO INTERNATIONAL
MARKET: EVIDENCE FROM KYRGYZ
REPUBLIC
Kamalbek Karymshakov, PhD.
Kyrgyz-Turkish Manas University
Finance and Banking Department
kamalbek.karymshakov@manas.edu.kg

“Trade, Global Value Chains and Small and Medium-Sized Enterprises: Country-Level (Case) Study”
6-7 February 2020
Tokyo, Japan
 CONTENT
• Introduction

• SMEs in Kyrgyzstan

• Literature Review

• Empirical analysis
– Methodology
– Data and descriptive statistics
– Estimation results

• Conclusions
 INTRODUCTION
• Participation of local firms in the Global Value Chains (GVC) in a
developing country context has been increasingly important for export
performance, increasing added value and raising income (OECD 2012;
Gereffi & Sturgeon, 2013; Bamber et al. 2014).

• Kyrgyzstan as developing country in Central Asia has challenges of making

private sector with their effective participation in the GVC.

• During the recent five years almost 40 per cent of GDP were generated by
the SMEs

• However, participation performance has not been sufficient for effective

integration into the GVC (for instance, see: Vandenberg & Khan, 2015).

• Objective of this study - examine factors affecting SMEs engagement in

local and national/international markets in case of Kyrgyzstan.
SME IN KYRGYZSTAN
 Definition of SMEs in Kyrgyzstan
Agriculture, hunting and Trade and repair services,
forestry, fish farming, hotels and restaurants,
construction, mining, transport and
manufacturing, production communication, finance,
and distribution of energy, education, healthcare and
gas, and water other services
Large enterprises 201 and more 51 and more
Medium-sized enterprises from 51 to 200 from 16 to 50
Small enterprises up to 50 up to 15
Micro enterprises up to 15 up to 7
Source: Decree of the Government of the Kyrgyz Republic “On the basic scheme of the classifier
of types of enterprises” # 78 of 17 February 1998 (with amendments from 29 August 2002).
Figure 1. Share of SMEs in GDP (in per cent, 2001-2018)

Source: National Statistical Committee of Kyrgyz Republic (NSCKR).

• Large disparity in the
growth of numbers of Figure 2. Number of SMEs in Kyrgyzstan (2001-2018)
individual entrepreneurs
and small and medium-
sized enterprises -
taxation and registration
practices in Kyrgyzstan

• Micro-SMEs have
advantages in the
simplified taxation regime
- regular patent payment

• Patents have flat rates

and does not require
book-keeping

• Small enterprises are

more inclined to
liquidation and have low
motivation for
transformation into
medium-sized firm

• Individual entrepreneurs
in the informal sector are
less motivated to
transform into the legal
entities

Source: National Statistical Committee of Kyrgyz Republic (NSCKR).

• Growing number of Figure 3. Share of SMEs in Employment (in per cent, 2001-2018)

employees in SMEs do Share in total employment Small businesses

not result in the Medium-sized enterprises Individual entrepreneurs
growth of share of
SMEs in GDP
20.3 20.5
19.1 19.3 19.7
18.5
16.9
16.0 16.6 16.9
15.6
14.2 14.9 15.5 14.6 15.2
12.6 12.6 12.8 12.8 13.2 13.8 13.0
11.8 12.2 11.8
10.9
9.0 9.4 10.0
8.6
7.4 7.9 8.4
6.2 6.8
3.7
2.7 2.7 2.6 2.4
2.3 2.3 2.2 2.3 2.2 2.4
2.0 2.1 2.0 2.0 2.3
1.9 2.2 1.8 2.2
1.7 2.0 1.6 2.3
1.6 2.3 1.6 2.2 2.2 2.3 2.2
1.5 1.5 1.5 1.4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: National Statistical Committee of Kyrgyz Republic (NSCKR).

• Main export items of SMEs
are agricultural products
(fruits, vegetables, cotton) Figure 5. Share of SMEs in Export and Import of Kyrgyzstan (in per cent, 2001-2018)
and textile products. 70.0
60.0
• Main destination of export of 50.0
SMEs in Kyrgyzstan - countries 40.0
of Eurasian Economic Union 30.0
(EEU). 20.0 2001
10.0
2008
• After EEU membership share 0.0
of individual entrepreneurs 2018

Small Businesses

Small Businesses
Medium-sized

Medium-sized
entrepreneurs

entrepreneurs
Total SMEs

Total SMEs
Peasant Farms

Peasant Farms
Individual

Individual
enterprises

enterprises
and peasant farms exporting
to EEU countries considerably
increased, in contrast share of
exports of SMEs to EEU
countries decreased
(Hasanova, 2019) Export Import

• Total GVC participation in Source: National Statistical Committee of Kyrgyz Republic (NSCKR).
2017 was estimated as 44.9
per cent, while in 2011 it was
52.4 per cent (Holzhacker and
Skakova, 2019)
 CURRENT STATE OF SMEs
• SMEs in Kyrgyzstan have important contribution to
production and employment
• However, there is no evidence that constant growth of
number of SMEs generated analogues growth in
productivity
• Growth of SMEs is mainly related with individual
entrepreneurs and peasant farms, while small enterprises
have been shown comparatively limited growth in number
• Development of SME sector based on individual
entrepreneurship does not provide with strong perspective
of competitiveness of SMEs in export markets
 Government Policy and Issues
• There has been different government policy actions during the last twenty years
oriented for SMEs, though their implementation and efficiency is questioned.

– For instance, in 2007 the Law “On State Support of Small Business” was adopted . Though
several actions in terms of changes in legislations and government regulations have been
done, it can be argued that government policy specifically targeting SMEs was not
implemented (Hasanova, 2019)

– However, recently, the Government initiated the Program for Development and Support of
SMEs for 2019-2023, which has not approved yet

• Analysis of current state of SMEs in Kyrgyzstan indicates several issues for their
development. These issue can be listed as following:
– Institutional inefficiency related with the poor law enforcement and regulatory burden
– Access to financial resources for SMEs still remains as limited.
– Lack of Infrastructure
– Ineffective tax administration and patent system that do not create incentives for micro-SMEs
to transform into small and medium-sized enterprises
– Shortage of skilled labour force and lack of skills of entrepreneurs
 LITERATURE REVIEW
• Engagement of most part of enterprises in developing countries into the GVC can
be characterized by the export of primary goods or goods with low level of
processing (Pietrobelli, 2008)

• Upgrading of local firms into the international level is complicated process and the
first optimal strategy in this process can be selling products in local (national) and
regional markets, and, then, through gaining the experience may expand into the
international market (Bazan & Navas-Aleman, 2004)

• Main determinants of export activity of firms

– External and internal factors (Aaby & Slater, 1989).
– External factors: social, and political conditions
– Internal factors: firm size, experience in exporting activities and managerial characteristics
(Baldauf et al., 2000)
• Firm size - expected to have positive contribution to export performance (Singh, 2009).
• A firm’s experience - is noted to have positive impact on engagement of firms in international market
(Brouthers and Nakos, 2005). On the other hand, younger firms can be more engaged into the export
activities compared to firms with longer experience because of cost disadvantages and obstacles in
access to resources in the national market (Kirpalani & Macintosh, 1980; Cooper &
Kleinschmidt,1985).
• Innovation activity of firms (Basile, 2001; Rodriguez and Rodriguez, 2005; Golovko and Valentini, 2011)

– There are no systematic empirical studies on the SMEs and their participation in global value-
chains in Kyrgyzstan case.
EMPIRICAL ANALYSIS
 DATA
• Data source: Enterprise Survey supported by the European Bank for
Reconstruction and Development (EBRD), the European Investment Bank (EIB) and
the World Bank Group (WBG)

• The survey includes questions about the enterprise organizational information,

production, market of production sales, obstacles and innovation activities.

• In this study two waves of the survey are used: 2013 and 2019.
– 2013 wave includes 270 enterprises
– 2019 wave includes 360 enterprises.
– Out of the total sample 115 enterprises are observed in both waves.
– Our total final sample consists of 422 observations
• 158 observations from 2013 wave and 264 from 2019 wave

• Firm size criteria used in this study follows definitions given in the survey:
– Micro firms with employees less than 5 employees
– Small firm with employees between 5 and 19
– Medium firm are enterprises with number of employees from 20 to 99
– Large firms with more than 100
 METHODOLOGY
• Dependent variable:
– 0 – if firm sells product at local market
– 1 – if firm sells product at national/international
market
• Because of the dummy variable characteristic of dependent
variable we use binary response probit model(Wooldridge,
2009):
𝑃𝑃(𝑦𝑦𝑖𝑖 = 1|𝑥𝑥𝑖𝑖 ) = 𝐺𝐺(𝛽𝛽0 + 𝛽𝛽1 𝑥𝑥1 + ⋯ + 𝛽𝛽𝑘𝑘 𝑥𝑥𝑘𝑘 ) = 𝐺𝐺(𝛽𝛽0 + 𝑥𝑥𝑥𝑥) (1)
𝑧𝑧
𝐺𝐺(𝑧𝑧) = 𝛷𝛷(𝑧𝑧) ≡ � 𝜙𝜙(𝑣𝑣)𝑑𝑑𝑑𝑑 (2)
−∞

𝜙𝜙(𝑧𝑧) = (2𝜋𝜋)−1/2 exp⁡

(−𝑧𝑧 2 /2) (3)
 DESCRIPTION OF VARIABLES
Dependent variable
National and 0- sale of products to local market;1 – sale of products to national and
international market international market
Explanatory variables
Manager characteristics
Gender 0 - Manager is male, 1- Manager is female
Experience The years of experience of the top manager in the sector
Firm characteristics
Years since Years since establishment of the firm
establishment

Squared years since Squared years since establishment

establishment

Location in capital city 1- firm is located in capital city; 0 – other

Foreign participation Firm has private foreign individuals or companies as owner (0-No, 1-Yes)

Innovation in process During the last three years, has this establishment introduced any new or
significantly improved methods for the production or supply of products or
services? (0-No, 1-Yes)

Qualified labour force How much of an obstacle is inadequately educated workforce to your firm? 0 –
No obstacle, 1- minor, moderate, major and severe obstacle.

Credit If firm has credit line from financial institutions (0-No, 1-Yes)

Competition to If firms compete against unregistered firms (0-No, 1-Yes)

unregistered firms
Industry

Food and tobacco Firm is in food manufacturing sector (0-No, 1-Yes)

Manufacturing Firm operates in industry with low technology level following Eurostat
industries with low classification (Grodzicki, 2014) (0-No, 1-Yes). These sectors are textiles, textile,
technology level leather and footwear, wood and of wood and cork, pulp, paper, printing and
publishing, manufacturing n.e.c, recycling.

Manufacturing Firm operates in industry with medium and high technology level following
industries with medium Eurostat classification (Grodzicki, 2014) (0-No, 1-Yes). These sectors are
and high technology chemical, rubber, plastics and fuel, chemical, rubber, plastics and fuel, basic
level metals and fabricated metal, machinery, electrical and optical equipment,
transport equipment.
 DESCRIPTIVE STATISTICS
Total (2013 and 2019 waves) 2013 wave 2019 wave
Total sample SME Total sample SME Total sample SME
per per per per
Observation cent Observation cent Observation per cent Observation per cent Observation cent Observation cent
Sales Market 422 360 158 141 264 219
Local 193 45.73 183 50.83 86 54.43 83 58.87 107 40.53 100 45.66
National 192 45.5 152 42.22 59 37.34 50 35.46 133 50.38 102 46.58
International 37 8.77 25 6.94 13 8.23 8 5.67 24 9.09 17 7.76
 Total (2013 and 2019 waves) 2013 wave 2019 wave
Total sample SME Total sample SME Total sample SME
Manager characteristics Observation Mean Observation Mean Observation Mean Observation Mean Observation Mean Observation Mean
Female manager 422 0.24 360 0.26 158 0.22 141 0.23 264 0.26 219 0.27
Experience of the manager 422 18.55 360 18.40 158 18.28 141 18.09 264 18.71 219 18.59
Firm characteristics
Years since establishment 422 20.67 360 19.22 158 20.89 141 20.48 264 20.54 219 18.41
Square of the years since
establishment 422 616.89 360 492.22 158 508.40 141 481.52 264 681.58 219 499.08
Foreign participation 422 0.16 360 0.14 158 0.11 141 0.09 264 0.20 219 0.17
Credit or loan from financial
institutions 422 0.27 360 0.26 158 0.27 141 0.27 264 0.27 219 0.25
Insufficient qualified labor force 422 0.63 360 0.61 158 0.61 141 0.60 264 0.64 219 0.61
Location in capital city 422 0.37 360 0.37 158 0.32 141 0.33 264 0.40 219 0.40
Innovation in process 422 0.03 360 0.03 158 0.03 141 0.04 264 0.03 219 0.03
Competition to unregistered firms 422 0.47 360 0.49 158 0.52 141 0.53 264 0.45 219 0.47
Industry types
Food and tobacco 422 0.12 360 0.10 158 0.11 141 0.11 264 0.12 219 0.10
Manufacturing industries with low
technology level 422 0.09 360 0.09 158 0.11 141 0.11 264 0.07 219 0.08
Manufacturing industries with
medium and high technology level 422 0.18 360 0.16 158 0.18 141 0.17 264 0.19 219 0.16
ESTIMATION RESULTS
 ESTIMATION RESULTS: Probit model
marginal effects
Total data 2013 data 2019 data
Total sample SMEs Total sample SMEs Total sample SMEs
Manager and firm characteristics

Gender of CEO (1= if -0.182 -0.0526 -0.101 -0.00106 -0.300 -0.164

female) (0.157) (0.169) (0.294) (0.313) (0.196) (0.217)

Experience of CEO (in -0.00110 0.00129 -0.00801 -0.0106 0.00514 0.0102

years) (0.00575) (0.00657) (0.00983) (0.0110) (0.00769) (0.00915)

Years since -0.0414** -0.0561** -0.0534 -0.0560 -0.0469* -0.0642*

establishment (0.0156) (0.0204) (0.0457) (0.0494) (0.0191) (0.0252)

Square of the years 0.000539** 0.000798* 0.00127 0.00130 0.000568* 0.000835*

since establishment (0.000200) (0.000324) (0.000838) (0.000894) (0.000233) (0.000375)

Foreign capital 0.940*** 1.166*** 1.462** 1.702** 0.765** 0.931**

participation in the (0.209) (0.258) (0.464) (0.615) (0.240) (0.292)
ownership structure

Credit or loan from 0.381* 0.481** 0.605* 0.714* 0.336 0.486*

financial institutions (0.151) (0.168) (0.268) (0.293) (0.192) (0.221)

Insufficient qualified -0.132 -0.219 0.226 0.178 -0.358* -0.484*

labor force (0.136) (0.148) (0.243) (0.267) (0.180) (0.199)

Location in capital city 0.581*** 0.548*** 0.501 0.585* 0.617*** 0.542**

(0.146) (0.158) (0.264) (0.291) (0.184) (0.199)

Innovation in process 0.179 0.463 0.724 0.770 0.149 0.444

(0.390) (0.454) (0.728) (0.742) (0.480) (0.579)

Competition to 0.308* 0.373* 0.280 0.352 0.366* 0.451*

unregistered firms (0.135) (0.149) (0.232) (0.258) (0.175) (0.193)
ESTIMATION RESULTS: Probit model marginal effects (2)

Total data 2013 data 2019 data

Total sample SMEs Total sample SMEs Total sample SMEs
Industry type

Food and tobacco 0.650** 0.663** 0.687 0.903* 0.810** 0.798*

(0.219) (0.253) (0.361) (0.399) (0.297) (0.366)

Manufacturing 0.502* 0.542* 0.735* 0.708 0.508 0.587

industries with low (0.236) (0.247) (0.374) (0.399) (0.327) (0.341)
technology level

Manufacturing 0.428* 0.402 1.132*** 1.232*** 0.214 0.0878

industries with medium (0.186) (0.211) (0.321) (0.357) (0.243) (0.284)
and high technology
level

Constant -0.00309 -0.0487 -0.601 -0.763 0.254 0.219

(0.263) (0.300) (0.666) (0.716) (0.302) (0.350)

Observation 422 360 158 141 264 219

Log likelihood -249.9 -208.1 -86.07 -72.60 -152.8 -124.8
R2 0.141 0.166 0.210 0.240 0.143 0.173
 Probability rates of statistically significant factors affecting engagement
into national and international market

Manufacturing industries with

medium and high technology…
Manufacturing industries with
low technology level

Food and tobacco

Competition to unregistered
firms

Location in capital city

Insufficient qualified labor force

Credit or loan from financial

institutions
Foreign capital participation in
the ownership structure
Square of the years since
establishment

Years since establishment

-0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 0 0.5 1 1.5 2 -1.00 -0.50 0.00 0.50 1.00 1.50

Total (2013 and 2019 waves) 2013 data 2019 data

 FINDINGS
• Curvilinearity of the effect of firm experience on export performance
– At the initial stage firms may experience difficulties in selling products out of local market, but
after some experience gained it will have positive influence (for instance, Brouthers and
Nakos, 2005)
– Significant in 2019 data only –dynamics of competition environment after accession to the
Eurasian Economic Union (EEU) ?

• Foreign participation in ownership structure of firms has positive effect on their

involvement in national and international markets

• Availability of financial resources is important determinant for export performance

• Qualified labor force is one of the serious obstacles for export performance of firms

• Location in capital city have positive effect over the scaling up the market of firms
– Potential issue of intraregional development disparity in Kyrgyzstan and necessity to develop
infrastructure so that to increase internationalization of firms from non-capital city location

• SMEs in the food and tobacco industry and manufacturing industries with medium and
high technology level have higher probability to leverage the value chains
 POLICY IMPLICATIONS
• Further development of infrastructure:
– Development of non-capital city regions with sustainable access to
national and international markets with necessary transportation and
other infrastructure

• Government policy oriented to attract foreign investment and

improving general investment climate should be associated with
transferring knowledge and skills for local producer in carrying out
partnership with foreign firms

• Enhancing access to financial resources for SMEs:

– Given the importance of medium and high technology level industries for
upgrading into the national and international markets, financial services
can be specified within these sectors of the economy

• Development of soft infrastructure for SMEs:

– Gaining knowledge on exporting activities (standards and regulations,
markets) and skills development can be targeted through the SME
support programs
THANK YOU !!!