STEPAN ZEMTSOV: DIGITAL TECHNOLOGIES IS A CHANCE FOR SMEs TO SURVIVE AMID THE ERA OF CRISIS
Stpan Zemtsov, Senior researcher of the Innovation Economics Department of the Gaidar Institute, told the “Vestnik Kavkaza” on reluctance of small and medium-sized businesses to switch to the online mode amid quarantine.
He said: “This is primarily about the most affected areas, i.e. consumer services provided to people, hotels, restaurants, sports, culture, entertainment. Around 80% of these businesses were unable to quickly switch to remote forms of service delivery, and for many, the business model did not expect this change. I mean, it is difficult to cut hair online”.
Stepan Zemtsov noted: “Another factor affected those who were able to quickly respond, the small businesses that are very adaptive, and this concerned digital technologies that are not massively used in many regions. There is a strong digital inequality in Russia: while 87% of households in Moscow have access to broadband Internet and can use online services, in the North Caucasus Federal Okrug, for example, less than 68% of households have web access at the average.
Moreover, this is only one of three failures of digital inequality. The second failure is lack of internet skills, especially typical for elderly people. Even in Moscow, only 50% of households used internet to buy goods and services while in the Republic of Dagestan this figure is less than 15%. The third failure concerns entrepreneurs who do not use digital technologies to promote their product. Even in Moscow, almost 50% of internet smart businesses do not place orders online, and in the Republic of Dagestan, for example, there are over 80%. This restricts the ability to adapt to the current environment”.
Quarantine measures and the following economic crisis are able to destroy a large part of businesses. According to Stepan Zemtsov, “up to 80% of businesses representing the most affected industries, may close under “pessimistic scenario”. From the point of statistics, it seems not so much, since all these sectors add up to 2.5% of the SME sector turnover, 5% of employment, 11% of the total number of SMEs, and yet, this is 600.000 firms and individual entrepreneurs and about 1 million employees. The chances of survival are higher for businesses using digital technologies (website, online orders, online payments, remote access, customer base, etc.), as well as also due to the bankruptcy of competitors and provision of state support”.
Herewith, Stepan Zemtsov focused on another major concern. ”The most affected industries demonstrate a very strong multiplicative effect: if one company closes, then the loss of each RUB 1 million of its turnover accounts for the loss of RUB 2.9 million of other companies. In total, this means a decrease in turnover by RUB 5.7 trillion for the economy (7.5% of the SME sector). This is, however, rather significant, given the fact that the entire turnover in 2018 amounted to RUB 76 trillion. At the same time, according to multiplier, such sectors as trade, construction, real estate and transportation can be strongly affected, causing a much larger scale of problems, because over 60% of employment, 80% of the sector’s turnover and 65% of all SMEs are concentrated in these sectors”.
If quarantine is extended until June without proper state support for employment and lending, then all sectors will be affected according to multiplier, and then there is a possibility that up to 3 million SMEs will close, temporary or permanently. This is more than a half. Our pessimistic estimates confirm the similar forecast of the Chamber of Commerce. Although Moscow monitors the quarantine more strictly than in the regions the capital's small business is more likely to survive, as it is more focused on online services.
At the same time, it should be noted that this is not about the total loss of businesses that are closing down. There is a chance that, having paid off the debts, entrepreneurs will be able to start working again.
By all means, not everyone will do it, many will simply be disappointed in doing business, as the state support in time of crisis was insufficient,” concluded the Gaidar Institute expert.
More information on results of the research can be found in the following publication:
Maria Antonova, Vera Barinova, Vladimir Gromov, Stepan Zemtsov, Alexander Krasnoselskikh, Nikolay Milogolovov, Alexandra Potapova, Yulia Tsareva. Development of small and medium-sized business in Russia in the context of national project implementation. – М.: Publishing House “Delo” RANEPA, 2020. p.88
Stepan Zemtsov noted: “Another factor affected those who were able to quickly respond, the small businesses that are very adaptive, and this concerned digital technologies that are not massively used in many regions. There is a strong digital inequality in Russia: while 87% of households in Moscow have access to broadband Internet and can use online services, in the North Caucasus Federal Okrug, for example, less than 68% of households have web access at the average.
Moreover, this is only one of three failures of digital inequality. The second failure is lack of internet skills, especially typical for elderly people. Even in Moscow, only 50% of households used internet to buy goods and services while in the Republic of Dagestan this figure is less than 15%. The third failure concerns entrepreneurs who do not use digital technologies to promote their product. Even in Moscow, almost 50% of internet smart businesses do not place orders online, and in the Republic of Dagestan, for example, there are over 80%. This restricts the ability to adapt to the current environment”.
Quarantine measures and the following economic crisis are able to destroy a large part of businesses. According to Stepan Zemtsov, “up to 80% of businesses representing the most affected industries, may close under “pessimistic scenario”. From the point of statistics, it seems not so much, since all these sectors add up to 2.5% of the SME sector turnover, 5% of employment, 11% of the total number of SMEs, and yet, this is 600.000 firms and individual entrepreneurs and about 1 million employees. The chances of survival are higher for businesses using digital technologies (website, online orders, online payments, remote access, customer base, etc.), as well as also due to the bankruptcy of competitors and provision of state support”.
Herewith, Stepan Zemtsov focused on another major concern. ”The most affected industries demonstrate a very strong multiplicative effect: if one company closes, then the loss of each RUB 1 million of its turnover accounts for the loss of RUB 2.9 million of other companies. In total, this means a decrease in turnover by RUB 5.7 trillion for the economy (7.5% of the SME sector). This is, however, rather significant, given the fact that the entire turnover in 2018 amounted to RUB 76 trillion. At the same time, according to multiplier, such sectors as trade, construction, real estate and transportation can be strongly affected, causing a much larger scale of problems, because over 60% of employment, 80% of the sector’s turnover and 65% of all SMEs are concentrated in these sectors”.
If quarantine is extended until June without proper state support for employment and lending, then all sectors will be affected according to multiplier, and then there is a possibility that up to 3 million SMEs will close, temporary or permanently. This is more than a half. Our pessimistic estimates confirm the similar forecast of the Chamber of Commerce. Although Moscow monitors the quarantine more strictly than in the regions the capital's small business is more likely to survive, as it is more focused on online services.
At the same time, it should be noted that this is not about the total loss of businesses that are closing down. There is a chance that, having paid off the debts, entrepreneurs will be able to start working again.
By all means, not everyone will do it, many will simply be disappointed in doing business, as the state support in time of crisis was insufficient,” concluded the Gaidar Institute expert.
More information on results of the research can be found in the following publication:
Maria Antonova, Vera Barinova, Vladimir Gromov, Stepan Zemtsov, Alexander Krasnoselskikh, Nikolay Milogolovov, Alexandra Potapova, Yulia Tsareva. Development of small and medium-sized business in Russia in the context of national project implementation. – М.: Publishing House “Delo” RANEPA, 2020. p.88