Suboptimal Size: Factors Preventing the Growth of Russian Small and Medium-Sized Enterprises

Abstract

The Russian manufacturing sector has an underdeveloped SME sector both in terms of employment and contributions to GDP in comparison with other economies, with evident signs of stagnation over the past few decades. However, little is known about the capacity of SME sector, i.e., the opportunities to grow and thus exploit the benefits from economies of scale. The paper attempts to estimate the impact of internal and external factors on a firm’s competitiveness in the context of optimal enterprise size.

The main conclusion is that that the satisfaction of Russian SME managers has been increasing due to factors such as the sufficient supply of qualified personnel, modern infrastructure, developed partnerships, the expansion of the geographical scope of available markets and favorable institutional conditions for entrepreneurship. In contrast, serious constraints to SME growth in Russia discourage entrepreneurs and lead to poor decisions by managers such as exploiting shadow schemes, leaving the market or growth in the form of nominally independent firms under the informal “umbrella” of one owner. Formidable bureaucratic barriers and significant transactional costs increase the vulnerability of small businesses to administrative pressure. In order to survive and remain on the market, Russian companies have to adapt to the existing institutional environment, and must be larger compared to their counterparts in developed economies.