Presented to the 4th International Conference “An Enterprise Odyssey: Tourism - Governance and Entrepreneurship”, Croatia 11-14 June 2008. Research identifies current patterns and trends, motivations and obstacles for entrepreneurship in the Russian service sector. It focuses on high propriety sub sectors in the service sector that are highly attractive for entrepreneurs and factors making those sub sectors particularly attractive; geographic, demographic and other factors affecting demand for services; major obstacles in the service sector affiliated with entrepreneurial business venture start-ups; key governance and support factors on the part of local and federal government; and finally common patterns of decision making in entrepreneurial business venture start-ups.

1. Presented to the
4th International Conference
“An Enterprise Odyssey:
Tourism - Governance and Entrepreneurship”
Dubrovnik, Croatia 11-14 June 2008
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ENTREPRENEURSHIP IN THE
RUSSIAN SERVICE SECTOR:
TRENDS AND DEVELOPMENTS
Anatoly ZHUPLEV
Loyola Marymount University
Los Angeles, USA
Dmitry SHTYKHNO
Plekhanov Russian Academy of
Economics
Moscow, Russia

2. Background
“Long-term success in economic development
… depends to a significant degree on a
growing network of small entrepreneurial
enterprises” (Neace, 1999)
Financial dislocations and collapses of the
1990s and extremely poor legal environment
in Russia did not allow for any meaningful
growth of SMEs in service industry until
deregulation started in 2001
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3. Recent GDP Trends
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By 2005 Russia’s GDP in real terms reached almost 90% of the pre-
reform level of 1990
The share of its GDP generated by the service sector is still low (2006)
High growth in the construction (13.2%), retail trade (12.5%) and
transport (2.5%) sectors

4. Roots and Prevalent Types of Russian SMEs
Entrepreneurial potential in Russia stems from
vast natural resources and well-educated
population
Prevalent types of Russian SMEs
• 1st type: small-scale and individual manufacturing of goods,
retail trade, hotel and food services, construction,
transportation, and health care - subject to local natural
conditions, consumer preferences, and traditional local
specialization in the nationwide context
• 2nd type: suppliers of parts and services for large enterprises
– not numerous but have strong potential
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5. Prevalence Rates of Entrepreneurial
Activities: Russia versus Other Countries
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Country Nascent
Entrepreneurial
Activity
New Business
Owners
Early-Stage
Entrepreneurial
Activities
Established
Business
Owners
Russia 3.5% 1.7% 4.9% 1.2%
China 6.7% 10.5% 16.2% 9.0%
Germany 2.9% 1.7% 4.2% 3.0%
Italy 2.2% 1.4% 3.5% 3.0%
Japan 1.6% 1.4% 2.9% 4.8%
USA 7.5% 3.3% 10.0% 5.4%

6. Almost 1 mln SMEs in Russia in 2006
• 7.2 per 1000 of population
to compare with EU – 45, Japan - 49.6, USA – 74.2
Distribution of SMEs in Russia by federal districts:
• Central and North-Western >50% (including 25% in
Moscow)
• Southern 9.7%
• Ural 6.7%
• Far Eastern 4.8%
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Distribution of SMEs in Russia

7. Priority Subsectors
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Distribution of SMEs in Russia, % of the total number of SMEs (2006)

8. Recent Initiatives Legislative Reforms and
Developments in the SME Sector
The Foundation for Assistance to Small
Innovative Enterprises (FASIE) in 1994
The law evolves to streamline the number
and extent of inspection procedures, the
licensing of economic activities, the taxation
of SMEs and the registration of new
businesses since 2001
Simplified tax regime for SMEs in 2002
‘One-stop shop’ approach to business
registrations in 2002 8

9. World Bank’s Ratings of Doing Business in Russia
Ease of... Rank 2008 Rank 2007
Doing Business (overall) 106 112
1. Starting a Business 50 45
2. Dealing with Licenses 177 172
3. Employing Workers 101 102
4. Registering Property 45 44
5. Getting Credit 84 156
6. Protecting Investors 83 81
7. Paying Taxes 130 126
8. Trading Across Borders 155 155
9. Enforcing Contracts 19 19
10. Closing a Business 80 81
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10. Obstacles in SME Start-ups and
Operation (1)
Taxation system
Lack of finance and credit facilities, state
credit lines requirements
Impoverishment of the population severely
limiting effective demand
Obsolete equipment for small-scale
manufacturing and limited availability of new
one
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11. Obstacles in SME Start-ups and
Operation (2)
Lack of knowledge about economics
management and business procedures
Lack of insurance services for small business
Bureaucracy and administrative barriers (red-
tape)
Corruption and racket
Lack of incentives for long-term business
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12. Decision-Making Patterns in SMEs:
Soviet Heritage
Most of entrepreneurs have never received any
formal business education
In USSR service industry was neglected for
political reasons
“Service business does not require special
knowledge and skills”
First entrepreneurs: former managers of state-
owned companies, former "cooperators“, “deal
genius“, professionals, Soviet era
entrepreneurs/ black market masters
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13. Decision-Making Patterns in SMEs:
Current
Quick learners
Strong demand for business education
Not strong consumption of specialized
information services
Growing number of female entrepreneurs
Still “being a servant” has derogatory
connotation attached
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14. SMEs in the Service Sector in Moscow
Restaurant business is one of the fastest-
growing (10,000 enterprises with total
capacity of almost 700,000 seats)
Accommodation business: shifting from the
development of four- and five-star hotels to
building a network of medium-class hotels
Consumer services business: least
developed due to lack of support and
governance in earlier years
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15. Conclusion
 Remaining problems: restraining taxation system,
limited access to financing, relatively low consumer
spending power among general population, lack of
SME training, non availability of business services
 The stage of "wild business" in the post-Soviet
transformation appears to have passed, there is a
need for transparent business rules
 Macro-economic environment and government
efforts in streamlining legal environment contribute
to the continuing increase in entrepreneurial
potential
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16. Thank you
Comments and questions
are welcome
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ENTREPRENEURSHIP IN THE RUSSIAN
SERVICE SECTOR:
TRENDS AND DEVELOPMENTS