Fostering Business Development and Digitalisation in Georgia

1. Recommendations for Georgia’s SME development strategy 2021‑2025

Abstract

At the request of the Ministry of Economy and Sustainable Development of Georgia and with the support of the EU4Business Initiative, the OECD, in co-operation with GIZ, assisted the Georgian government in preparing a new SME Development Strategy 2021-2025 and a first related Action Plan.

This chapter summarises the main issues identified by the OECD for each of the Strategy’s seven dimensions, and recommends additional specific policy measures to be considered for future action plans. It also suggests key performance indicators to monitor progress in the strategy’s implementation

Priority 1: Strengthening the institutional framework and operational environment for SMEs

State of play

Over the past five years, Georgia has considerably improved the institutional and operational environment for businesses with the implementation of its SME Development Strategy 2016-2020. SMEs now benefit from an improved institutional and regulatory framework, which is reflected in international assessments such as the OECD SME Policy Index: Eastern Partner countries 2020 (the “SMEPI”), in which Georgia stands out as the best performer among EaP countries, including on the SMEPI’s “Pillar A”, which assesses the institutional, regulatory and operational environment (OECD et al., 2020[1]). Georgia also considerably expanded and formalised public-private participation in policymaking: several dedicated platforms have been set up, such as the Private Sector Development Advisory Council and the Consultation Council on Georgian Trade under the MoESD, which have helped to formalise public-private consultations and hold meetings more regularly. As a result, private sector participation has become more inclusive and comments provided by the private sector have increasingly been reflected in draft laws (Institute for Development of Freedom and Information, 2019[16]).

With regards to the operational environment, Georgia has significantly expanded the availability of e-government services. The single portal www.my.gov.ge, launched in 2012 and operated by a new Digital Governance Agency under the Ministry of Justice of Georgia since 2020 (previously by the Data Exchange Agency), appears as one of the most advanced one-stop solutions of the Eastern Partner region. Already offering close to 500 services to citizens and businesses in 2019, the platform was further developed in response to the COVID-19 pandemic and now provides about 700 online services in a wide range of areas. The number of users also increased (+40% in 2020), making this governmental website one of the most visited ones according to the UNDP (2021[17]).

In addition, the government significantly reformed the insolvency and rehabilitation system, for a long time considered as one of the biggest weaknesses in the country’s business environment. A new insolvency law, “On Rehabilitation and Collective Satisfaction of Creditors”, was adopted in September 2020 and entered into force on 1 April 2021. This reform notably promotes rehabilitation and job preservation over liquidation while also emphasising creditor protection (Government of Georgia, 2020[18]). To this end, it introduces new concepts such as regulated agreements, a facilitated procedure under which the debtor can negotiate debt restructuring with creditors to aim for the continuation of the company’s activities. The law also empowers insolvency practitioners and increases the transparency of proceedings by introducing a dedicated electronic system through which applications can be filled, convocations to creditors’ meetings, minutes and decisions can be quickly published and information exchanged. In this regard, the order of the Minister of Justice №696 „On the approval of the insolvency practitioner, the production of an unified registry of insolvency practitioners and the approval of the selection terms and conditions through the electronic system of insolvency practitioners", issued on 30 March 2021, defines the types and conditions for the authorisation of the insolvency practitioner, and rules for maintaining a unified registry of such practitioners. It also determines the main issues related to certification as well as the rules and conditions to appoint a practitioner as a rehabilitation/bankruptcy manager or rehabilitation/CVA supervisor through the electronic system.

The Government of Georgia also approved the “Law on Entrepreneurs”, which came into force in 2021 and aims at improving the legal framework, regulating internal corporate relations and increasing transparency in this area while promoting entrepreneurial freedom. Additionally, the National Agency of Public Registry aims to create an electronic portal provided by the law to promote digitalisation.

Moreover, the Government of Georgia has taken several steps to facilitate SMEs’ access to information on new laws and regulations. Regarding approximation with EU standards for instance, businesses can turn to information centres and to the dedicated web portal dcfta.gov.ge. Yet SMEs continue to report finding it difficult to stay up-to-date on regulatory changes and related opportunities, according to interviews with private sector associations.

In addition to strengthening its regulatory environment, Georgia has also achieved significant progress in developing regulatory impact assessment (RIA). RIA is a policy tool used to analyse the costs, benefits and effects of a new or existing regulation, allowing the government to evaluate their policies and adapt them if needed. It now has to be performed for a set of identified business-related draft laws introduced by the Government, and a dedicated methodology has been adopted early 2020 (Government of Georgia, 2020[19]). Nevertheless, the regulatory impact specifically on SMEs through an “SME test” is not systematically considered. Such an “SME test” evaluates the specific impact of regulations on SMEs through an ex-ante and ex-post analysis of the costs and benefits of the initiative, and involves SMEs and their representative organisations in the process.

Unsurprisingly, the economic crisis triggered by the pandemic has led to significant difficulties for companies, including an increase in business failures (see Figure 0.6 in the Introduction). Georgian SMEs have been particularly affected by containment measures, which caused a sharp drop of revenues and liquidity shortages: in October 2020, 82% and 86% of small and medium firms, respectively, reported having experienced decreased liquidity or cash flow availability since the pandemic began (against 68% of large firms) (World Bank, 2020[15]). Some 5.4% of small and 2% of medium businesses were confirmed or assumed permanently closed by October 2020 (0.4% of large ones), but this number is expected to rise as governmental support measures are gradually lifted.

Way forward

Promote restructuring and entrepreneurial fresh start

In light of the long-lasting COVID-19 crisis and the decrease of governmental emergency support measures, many companies are likely to encounter financial difficulties. SMEs are particularly vulnerable in that regard, given their limited financial reserves and free cash flow. The number of business failures is therefore expected to rise. In order to limit the spike bankruptcies and liquidations of financially distressed but otherwise viable companies, it is becoming increasingly important to help businesses detect bankruptcy warning signs, and to promote entrepreneurial rehabilitation. Georgia has, as recommended by the OECD, added an objective on promoting rehabilitation in the Strategy. In view of this goal, Georgia could consider the following measures:

• Implement an early-warning system: several types of early-warning mechanisms exist to help entrepreneurs understand the risk of insolvency and take action to avoid failure. These can be self-tests, training courses for entrepreneurs in need, and/or advisory services, such as Denmark’s EarlyWarning programme (see Box 1.1).

• Promote alternative dispute resolution mechanisms: Insolvency proceedings can be quite costly and are rarely the most suitable option for SMEs suffering financial difficulties. Strengthening out-of-court procedures, such as arbitration and mediation, and prioritising them whenever possible, would offer entrepreneurs faster and cheaper ways to find common grounds with creditors and help them avoid selling their assets when fearing insolvency. The above-mentioned “regulated agreement” introduced by the new insolvency law is a welcome step in this regard, and should be used whenever possible.

• Enact a strategy to promote second chance: the recent improvements in the insolvency regime could be complemented by a dedicated second-chance policy, i.e. a policy to facilitate the rehabilitation of honest entrepreneurs who failed and enable them to make a fresh start. Such a strategy could be based on the possibility of being discharged from debt after a set period, to remove discriminatory provisions such as stricter rules on access to finance, and offer support services for a fresh start (e.g. training and mentoring, as done by the DanubeChance2.0 project (Box 1.1)).

Box 1.1. Good practice examples on early warning and second chance

Early Warning Denmark (EAD)

Launched in 2007, Early Warning Denmark is a national programme offering free, impartial and confidential advice to SMEs in financial distress and at risk of insolvency. Bringing together about 100 volunteering advisors (experienced managers, business owners and specialists), 15-20 insolvency lawyers and 8 early warning consultants, EAD unfolds in three steps after receiving a company request:

 

Evaluation studies have highlighted the programme’s efficiency, showing that surviving companies that participated in it have maintained or improved their performance indicators. As for those that declared bankrupt, they did so with a lower debt to the public sector than firms that had not participated in the programme. Over 5 500 SMEs have taken part in the programme since its beginning, half of which managed to survive. As many companies decide to ask for these services once the situation is already critical, EAD is currently considering ways to engage with companies at an earlier stage.

DanubeChance2.0

This multi-year project was launched in 2018 to foster second-chance entrepreneurship in the Danube area (Austria, Bosnia and Herzegovina, Bulgaria, Czech Republic, Croatia, Germany, Hungary, Moldova, Romania, Serbia, Slovakia, Slovenia, and Ukraine). Its comprehensive approach consists of business acceleration and re-structuring services such as a self-assessment methodology, trainings and mentoring. It builds on partnerships with public and private stakeholders (tech parks, ministries, entrepreneurship centres, research centres, SME agencies, business networks).

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Apply an SME test in the process of adopting new regulations

Compliance costs of regulation are often disproportionately high for SMEs. RIA can help estimate these costs, and identify potentially less costly solutions and/or mitigating measures. Georgia could consider applying SME-specific RIA systematically with the introduction of an “SME test”, for which the European Commission’s “Better Regulation Toolbox” offers practical guidance (European Commission, 2017[20]). This approach should be accompanied by public-private consultations to discuss the results and identify opportunities to lower compliance costs for small firms.

Step up awareness-raising initiatives on changing regulations for SMEs

In addition to the above-mentioned DCFTA information centres, where SMEs can find information regarding the reforms and legislative initiatives within the framework of the Free Trade agreement with the EU, the government could develop more initiatives to raise SMEs’ awareness of new laws and regulations. As recommended by the OECD, Georgia added a dedicated objective to the Strategy on the strengthening of the public-private dialogue. Other measures could be considered, e.g. events, social media campaigns, television advertising and print information campaigns.

Conduct impact evaluation of government-sponsored support programmes

The Strategy envisages a strengthening of existing government programmes to support SMEs and the development of new ones. To this end, financial resources for flagship government programmes and implementing agencies are expected to increase substantially every year until 2025 (+29% for Enterprise Georgia’s Produce in Georgia and +421% for GITA by 2025) (Government of Georgia, 2021[21]). It is therefore increasingly important to monitor these programmes and their impact, to ensure that they achieve their policy objectives. Enterprise Georgia has started working in that direction: within GIZ’s project Clusters4Development, the agency is currently developing an impact assessment framework to be piloted at the end of 2021. To this end, Syspons GmbH, its German partner, has conducted a Monitoring and evaluation capacity assessment of the agency and helped identify relevant impact indicators, which will be disaggregated notably by firm size and gender. Building on this, a good practice in terms of methodology would be to use econometric estimations of the “treatment effect”, i.e. make comparison between samples of SMEs who received and did not receive support. Surveys of beneficiaries and consultations with stakeholders can also provide qualitative feedback.

Broaden statistics on SMEs

The production of quality statistics is essential to evidence-based policymaking. The national Statistics Office of Georgia (Geostat) has made significant progress over the past years in producing and disseminating statistics on SMEs: it revised the SME definition to include number of employees as well as company turnover, making the definition compliant to EU standards and the data internationally comparable. It also started performing regular surveys to monitor a variety of aspects such as number of employees, wages, ownership by gender and business location, and publishes since 2018 data on exports by business size. However, size-disaggregated data remain unavailable for some critical areas, such as digitalisation, gender, and SME financing. As the government intends to undertake substantial work on these topics, the Strategy could treat these areas as priority directions for the expansion of size-disaggregated statistics. International databases can serve as examples, such as the OECD ICT Access and Usage by Businesses Database for indicators on SME digitalisation and the OECD Scoreboard on Financing SMEs for access to finance.

Table 1.1. Overview of recommendations to strengthen the institutional and operational environment

Recommendation	Status	Details
Promote restructuring and entrepreneurial fresh start	◑	An objective dedicated to developing the bankruptcy and rehabilitation system was added to the Strategy. It foresees further legislative changes and measures to foster rehabilitation. In addition, Georgia should consider introducing an early-warning system and initiatives to promote second chance. These initiatives could start as small-scale pilots.
Apply an SME test in the process of adopting new regulations	●	The Strategy foresees the application of the SME test to legislative changes. Its effective implementation should be ensured, and public-private consultations to discuss the results considered.
Step up awareness-raising initiatives on changing regulations for SMEs	◑	An objective dedicated to developing public-private dialogue (PPD) and awareness-raising for SMEs on changing regulations was added to the Strategy. It includes additional awareness-raising activities and the strengthening of public-private dialogue platforms. However, the impact of these activities could be better monitored, e.g. by tracking the share of comments to government strategies, action plans, laws and regulations received during PPDs that have been reflected in the final versions by the Government.
Conduct impact evaluation of government-sponsored support programmes	●	A provision was added to the Strategy to introduce an impact assessment framework for some state-sponsored programmes, which should be conducted for four programmes by 2025.
Broaden statistics on SMEs	◑	The Strategy includes an objective on improving SME statistics, and precisions were added to the logical framework to specify the new areas covered, which include gender. Moving forward, Georgia could consider producing statistics on SME digitalisation and financing.

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.2. Suggested KPIs to monitor the improvement of the institutional and operational environment

KPI		Description/rationale	Baseline (2019)	Target (2025)	Source of data
SMEs output growth		This indicator was initially planned as an overall target for the whole Strategy, but it appears more suitable for Priority 1: a better institutional environment helps firms to operate, and can thereby increase activity (i.e. output).	GEL 27.7 bln	20% increase	Geostat
OECD SME Policy Index score for “Institutional and regulatory framework”		This SMEPI indicator includes institutional framework, RIA and PPD, and is thereby closely related to this priority.	4.20	Improved score	OECD SME Policy Index
Impact assessment performed for selected state support programmes		This indicator goes in line with the OECD recommendation to evaluate both existing and new SME support programmes.	1 programme	4 programmes	LEPL Enterprise Georgia’s report
% of trained staff reporting that they will use the skills learned at the training in their daily work		This is an outcome indicator, suggested to replace “% of trained staff”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	70%	Progress report of SME Action Plan (AP)
Change in the number of business entities operating in the relevant market following decisions by the Competition Agency		This is an outcome indicator, suggested to replace “number of investigations conducted”, which was rather an output indicator.	n/a	Positive change	Annual report of Georgian National Competition Agency
Increase in the number of jobs in the relevant market following decisions by the Competition Agency		This is an outcome indicator, suggested to replace “number of recommendations issued by the Competition Agency”, which was rather an output indicator.	n/a	Positive change	Annual Report of Georgian National Competition Agency
% of users who find e-government services 1) useful and 2) easy to use		This outcome indicator can help assess the quality of services. It could be automated e.g. by a screen with 2 simple questions appearing on the page when the user has finished using the service, i.e. before logging out.	n/a	80%	My.gov.ge
% of insolvency procedures which resulted in rehabilitation rather than liquidation of the enterprise	This outcome indicator can help assess the effectiveness of the new Insolvency law.	5%	No less than 15% in total	Report of the Ministry of Justice of Georgia

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Priority 2: Fostering the development of entrepreneurial skills and raising the entrepreneurial culture of SMEs

State of play

Georgia has achieved important improvements in human capital development since 2016, making it the top performer among EaP countries on the SME skills dimension in the OECD SMEPI 2020 (OECD et al., 2020[1]). In particular, entrepreneurial learning has been given greater importance in the Georgian education system, notably through the “Unified Strategy for Education and Science 2017-2021” and related action plans (Ministry of Education and Science of Georgia, 2017[22]). Entrepreneurship is now considered as a key competence and has been introduced in national school curricula at all levels of education.

Moreover, entrepreneurship and skills development has been fostered by the introduction of several non-formal learning initiatives. For example, GITA has launched FabLabs (Fabrication Laboratories), where people can access tools and knowledge to develop and test their projects, including start-up ideas. 22 of them have been established across the country as of early 2021, covering 12 cities in nine regions (FabLab Georgia, 2021[23]).

The creation of a labour market information system (LMIS hereafter – lmis.gov.ge) constituted an important achievement of the previous SME Strategy. Established in 2016, it addresses labour market information shortfalls by providing regularly updated data on market trends, e.g. employment, demand for workforce, wages, investments, and education (including vocational education).

Yet, despite important progress, indicators suggest that there is a persistent need for skills development in the country. Graduates’ skills do not always correspond to employers’ expectations. SMEs continue to cite this skills mismatch as one of the main problems they face (Figure 1.1), and employers cite the lack of required qualifications as the main obstacle to filling announced vacancies (Labour Market Information System, 2020[24]). Georgia’s scores in international rankings on the skillset of graduates and ease of finding skilled employees also remain low (ranked 125^th and 120^th out of 141, respectively, in the Global Competitiveness Report 2019 (World Economic Forum[25])).

Figure 1.1. Main obstacles encountered by SMEs

Source: (World Bank, 2019[26]).

Moreover, although several steps have been taken towards the development of vocational education and training (VET), recent LMIS surveys reveal that only 15% of enterprises in Georgia have employees with VET backgrounds (Labour Market Information System, 2020[24]). The co-operation between enterprises and VET institutions is still in its infancy, with only 2% of enterprises co-operating with VET schools, although 10% declared their need and/or wish to do so in the near future, e.g. through internships or work-based learning.

Finally, the effects of the COVID-19 pandemic on the education system and on the labour market call for additional measures to ensure the continuity of trainings and help workers adapt to labour demand. Containment and social distancing have increased the need for online training (OECD, 2020[27]), which would also help reaching remote areas, and the pandemic has highlighted the importance of digital skills, an area where there is still ample room for improvement. Georgia ranks 125^th out of 141 in the (World Economic Forum, 2019[25]) Global Competitiveness Report (see also the dedicated figure in 2). In addition, economic lay-offs are on the rise as a result of the crisis; unemployment was up 24% in Q2 2021 y-o-y. It is therefore essential to facilitate the reallocation of affected workers across sectors and occupations (OECD, 2021[28]).

Way forward

Use re-skilling programmes to help laid-off workers transition to new jobs

The final version of the Strategy outlines the severe impact of the COVID-19 crisis on the economy, but it could be complemented by additional measures to tackle this. Some sectors, such as retail, catering and tourism, have been particularly affected by the crisis, and others like manufacturing, construction, and wholesale trade are at high risk (Human Rights Education and Monitoring Center, 2020[29]). While the job losses will continue to rise in these sectors, others such as technology, especially online platforms, and care services have increased workforce needs (European Training Foundation, 2021[30]) (OECD, 2021[28]). Although some of the effects of the COVID-19 pandemic on the job market are temporary, as they are associated with government restrictions, some changes caused by the crisis, such as the shift towards an increased use of technology, will have long-term consequences. Policies supporting the matching of workers with employers’ needs, and thereby facilitating labour reallocation towards in-demand and more productive sectors, will therefore be critical for an effective recovery. Several tools can foster the re-skilling of laid-off workers, and could constitute interesting policy options: beyond the provision of trainings, developing skills assessment tools would enable individuals to better identify their crosscutting competencies and guide them to new job ideas, thereby facilitating their transition. Australia’s Skills Match tool offers an interesting example in that regard: it allows job seekers to enter their working experience and skills and receive information on jobs that require their professional knowledge and abilities. In addition, the platform offers informative material on careers, labour market trends and employment projections, together with links to a number of relevant websites (JobOutlook, 2021[31]).

Strengthen industry/VET schools linkages

As outlined above, skills mismatch appears to be a persistent issue, while the LMIS survey highlighted the substantial unmet demand for VET students among enterprises. Incentivising companies, and notably SMEs, to co-operate with VET schools could help address this mismatch. This could be achieved by increasing opportunities for internships, apprenticeships, and work-based learning through both financial and non-financial measures – e.g. tax breaks, partial wage subsidies, formal partnerships between schools and firms, and/or SME involvement in the design of training.

Foster the development of online-based solutions for VET modules

The COVID-19 pandemic highlighted the need for online solutions for VET modules to help meet the increased demand for distance learning. In addition to providing online trainings, Georgia could consider developing teachers’ digital skills, and creating a dedicated platform for all stakeholders (VET teachers, employers, learners) to share information and resources. Croatia, for instance, has set up a portal (http://nastava.asoo.hr) where stakeholders from various sectors can upload VET material (European Commission, 2020[32]). Users can thereby access trainings easily and free-of-charge, and the content published can serve as an example to develop additional modules.

Adopt a comprehensive approach to develop digital skills

Digital skills are increasingly in demand in the labour market, being now required for most occupations (OECD, 2021[28]). They are particularly important for SMEs in order to reap the benefits of digital technologies (e.g. reaching new clients through e-commerce, improving manufacturing with digital tools, developing customer insight through data analytics, etc.) and adapt to increasingly digitalised economies and societies. They can be classified in four categories, which can allow policymakers to understand which types of skills help people get the most out of digital technologies:

• Foundation skills, e.g. literacy and numeracy: these enable individuals to develop and acquire higher order cognitive skills needed in digital economies and societies, and help them adapt to an environment of fast and ever-changing technologies and labour market requirements. These are usually acquired in the formal education system;

• Generic digital skills, e.g. accessing information online and using software, which can be useful for all workers. On-the-job training on these can be very useful, especially for low-skilled workers;

• Advanced digital skills, e.g. skills needed to develop IT products and services such as programming, developing applications, managing networks), acquired by digital specialists;

• Complementary skills, e.g. cognitive skills, interpersonal skills (information processing, self-direction, problem solving, communication), managerial and organisational skills, allow to work in a digitalised environment.

While the Strategy plans to expand digital skills trainings, Georgia could step up its efforts in this field by adopting a comprehensive approach to digital literacy, building on the numerous policy options – e.g. needs assessment, trainings, resources, and multi-stakeholder initiatives1.

Box 1.2. Building a multifaceted approach to digital skills

Assessing SME needs

Self-diagnosis tools can be very useful to help SMEs identify their needs. The Chambre des Métiers of Luxembourg for instance has introduced Digicheck, an online self-assessment covering six topics – communication, management, human resources, security, regulation, and production and services. After a 10-15 minutes questionnaire, the tool generates a digital maturity profile and recommendations. The respondent can also consult an expert to discuss results. Such tools also enable the collection of anonymous data on digital skills gap.

Creating dedicated tools

Trainings: e.g. on how to digitalise processes, digital marketing/use of social networks, cybersecurity.

Handbooks: providing free and easily accessible guides – Singapore’s Infocomm Media Development Agency offers sector-specific handbooks for SMEs (the Industry Digital Plans).

Single portal: creating a single information portal, such as Spain’s Acelera PYME, can help raise SMEs’ awareness of available services and extend the reach to regions.

Fostering multi-stakeholder initiatives

Official accreditation of competencies: setting a common reference framework for ICT knowledge enables to set standards, ensure the quality of programmes and learning outcomes, and ease the recruitment processes. The EU e-competence framework, built for SMEs in all industry sectors and encompassing 40 e-competences with 5 proficiency levels, is a good example in this regard.

Awareness-raising/peer-learning activities: dedicated events can also increase SMEs’ awareness of the topic and resources available, and of the ways to introduce digital tools. The Federation of Finnish Enterprises organises free annual events all over the country, with conferences and peer-learning activities, and targeted at entrepreneurs at the early-stages of their digital transformation.

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Table 1.3. Overview of recommendations to foster entrepreneurial skills development

Recommendation	Status	Details
Use re-skilling programmes to help laid-off workers transition to new jobs	○	The Strategy does not entail measures on re-skilling.
Strengthen industry/VET schools linkages	◑	A specific reference to increasing the cooperation between VET schools and SMEs was added to the Strategy, accompanied by an indicator on the number of work-based learning programmes. Additional measures could be considered in the future, as outlined above.
Foster the development of online-based solutions for VET modules	○	Some VET modules had been moved online in 2020, following the COVID-19 outbreak. Further online-based VET solutions are currently not defined as a priority for the MoESD.
Adopt a comprehensive approach to develop digital skills	◑	An objective on developing digital literacy was added, referring to the LogIn Georgia project (see Part 2), as well as an indicator on participants to digital skills trainings, which is expected to rise. Additional measures could be considered to foster SME digitalisation, as outlined in Box 1.2 and in Part 2.

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.4. Suggested KPIs to monitor skills development policies

KPI	Description/rationale	Baseline (2019)	Target (2025)	Source of data
% of training participants reporting that the skills learned at the training will help them to improve occupational safety in their business or to improve compliance with safety regulations	This is an outcome indicator, suggested to complement “number of trainings held”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	0	80%	Report of LEPL Labour Inspection Service
% of trained entrepreneurs that think the skills and knowledge received during the training will be useful in improving/starting their own business	This is an outcome indicator, suggested to replace “number of trained entrepreneurs”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	65%	Report of LEPL Enterprise Georgia LEPL Innovation and Technology Agency Georgian Chamber of Commerce and Industry (GCCI)
Number of graduates from short-term vocational training-retraining programmes	This is an outcome indicator, suggested to replace “number of newly enrolled students”, which was rather an output indicator.	444 students annually	1 500 students annually	Report of the Ministry of Education and Science of Georgia
Number of introduced professional programmes with dual approach	This indicator was added by the MoESD upon OECD suggestion to add an indicator specific to work-based learning.	Up to 35	Up to 45	Report of the Ministry of Education and Science of Georgia
Number of LMIS users that find a job	This is an outcome indicator, suggested to replace “number of LMIS users”, which was rather an output indicator. It can help assess the services’ effectiveness.	908 persons, including 699 women	10% increase	Report of MoH
Number of trained companies reporting that the skills learned at the training will be helpful to implement Responsible Business Conduct/Environmental, Social and corporate Governance principles in their operations	The OECD initially suggested to use the “number of participating companies that have implemented RBC/ESG principles in their operations” as outcome indicator, but given that companies are not obliged to implement them, the MoESD opted for this other indicator.	n/a	70%	Reports of LEPL Enterprise Georgia

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Priority 3: Improving access to finance

State of play

Over the implementation period of the previous SME Strategy, access to finance for SMEs became easier. Overall credit conditions for small firms improved: the average interest rates on loans to SMEs have decreased, more sharply for loans in foreign currency than for those in national currency, and the spread between interest rates on loans issued to SMEs and those provided to large firms has been reduced. The SME loan portfolio of commercial banks has been growing, showing a compound annual growth rate of 21.4% between 2015 and 2019 (National Bank of Georgia, 2019[34]).

In addition, the government has started developing a market of different alternative bank financing instruments. It introduced measures to develop microfinance and to support the uptake of new financing instruments, notably through regulations and training on fundraising for start-ups. A new Law on Investment Funds adopted in 2020 defines a legal framework for collective investment schemes and defines the different types of investment funds (Government of Georgia, 2020[35]). However, the potential of alternative finance remains largely untapped, and additional instruments could be promoted, in order to match the different needs and priorities of businesses. Leasing and factoring for instance are not yet widespread practices, and VC and business angel activity remain at a nascent phase. Digitalisation also offers new financing solutions that could provide SMEs with alternatives to bank financing, e.g. peer-to-peer and platform-based lending, which could support projects that traditional banks usually deem too small or too risky.

Several initiatives to foster financial literacy have been implemented. Georgia adopted a National Strategy for Financial Literacy after conducting an assessment of the population’s financial literacy levels in 2016. The National Bank of Georgia (NBG) offers a financial education programme for micro and small enterprises, reaching a reported 1 200 beneficiaries in 2019. The NBG is also preparing brochures and trainings for entrepreneurs in agriculture, and financial literacy is taught in all Georgian schools since 2019 (National Bank of Georgia, 2019[34]).

Following the outbreak of the COVID-19 crisis, the government quickly introduced a wide range of financial instruments to support firms and counter liquidity shortages ensuing from the lockdowns and generalised slowdown of economic activity. Enterprise Georgia’s credit guarantee scheme was increased to GEL 330 mln (USD 107 mln) in 2020, thereby securing a credit portfolio of GEL 2 bln in total with a 90% guarantee on new loans and 30% on restructuring. Firms also benefitted from improved co-financing conditions, e.g. with an extension of the loan/leasing co-funding period up to 36 months (from the previous 24). Some sectors that had been particularly affected were provided additional help, such as small hotels, restaurants, kindergartens and fitness facilities, which received 70-80% interest subsidies for existing loans, depending on the currency of the loan.

Despite these important measures, access to finance has remained one of the biggest long-term obstacles for SMEs, as outlined in the 2019 Enterprise Surveys (Figure 1.1). SMEs still face more difficulties to access financing than large firms: 20.6% of small firms are faced with rejection when applying for a loan, which is the case for only 2.6% of large firms. Yet the gap between them could be further reduced. Moreover, the importance of this issue is reflected in other dimensions of the Strategy, such as internationalisation, innovation, women entrepreneurship and the green economy (see relevant sections below).

Finally, while the Strategy acknowledges the impact of COVID-19 on businesses, further steps should be taken to prepare for the post-COVID era. As financial support measures are gradually phased out, firms risk moving from a liquidity to a solvency crisis: while the unprecedented amounts of governmental support have enabled many firms to weather the crisis during lockdowns, entrepreneurs are now highly likely to be faced with excessive debt levels, which calls for adapted public policy measures. Exit-from-lockdown policies should be based on several principles – promoting reopening and jobs, balancing protection and reallocation, and preventing avoidable bankruptcies (Blanchard, Philippon and Pisani-Ferry, 2020[36]). As the generosity of support measures is being gradually reduced as economies are reopening, measures for workers and firms should continue, but with some adjustments: while employment support should focus on the sectors that have been most affected by the crisis, loan guarantees should still be granted to viable and solvent firms. However, viable but insolvent firms should rather be incentivised to work out restructuring plans.

Way forward

Adapt COVID-19-related financial support packages to the post-crisis period

In light of the risk of a solvency crisis highlighted above, policymakers could:

• Consider converting state-guaranteed loans into quasi equity instruments in return for higher corporate income taxes to be paid for a given period in the future. This would lower debt liabilities on firms’ balance sheets and increase the equity buffer, while improving their viability as operating businesses and ultimately lowering the risk of insolvency. This option might be preferable for small firms compared to proper equity as it requires less monitoring and avoids overburdening the state with small equity claims.

• Target sectors that have been hit hardest and/or slowest to re-open: as governments gradually reduce the overall support provided to firms and workers, they should try to maintain some support for sectors that have been most affected, such as services and tourism and might need more help and time to recover.

Strengthen the legal environment for alternative and digital financing instruments

Further steps could be taken to foster the development and uptake of a wider range of financing instruments, such as online-based lending, fintech and crowdfunding. Setting up a strong legal framework for alternative and digital finance solutions could help foster the emergence and growth of these practices. In that regard, Georgia could consider introducing regulatory sandboxes (EU4Digital, 2020[37]) (Attrey, Lesher and Lomax, 2020[38]) (Box 1.3). They are an effective tool to foster innovation in fintech and inform regulatory practice, building on the NBG’s draft regulation on Establishing Regulatory Laboratory (Sandbox) Framework, for instance to introduce equity-based crowdfunding.

Box 1.3. Regulatory Sandboxes

Regulatory sandboxes are defined as concrete frameworks that provide a structured experimental context, ensuring a safe environment to test innovative technologies, products, services or approaches. In particular, they provide a waiving legal space that is structured on a case-by-case basis, which allows for the necessary flexibility. They serve as a foundation for informed regulatory design since they enable to collect evidence-based knowledge that informs regulators on the effects of the innovative tools, and guides the design of an appropriate regulatory framework.

The Abu Dhabi Global Market’s Digital Sandbox

Supported by the Financial Services Regulatory Authority, the programme allows to experiment financial and digital products as well as services, with the aim of fostering the financial inclusion of marginalised populations in the Middle East and North Africa (MENA) region. The sandbox has enabled the testing of a variety of innovations, including Application Programme Interfaces (API), which allows for computers interconnection while easing user experience. This technology is also at the basis of a partnership with the ASEAN Financial Innovation Network that will ultimately allow sandbox participants to access the opportunities offered by international markets.

Innovation Link in the United Kingdom

It aims at innovating energy markets by enabling the trial of innovative business products, services, and models that do not fall within existing regulations. It assesses the necessity and provides entrepreneurs with advice on how to implement new tools under existing regulations. A sandbox solution was needed in only three cases, e.g. a waiver to test a new tariff based on smart home technology.

Sandbox Notification in Thailand

This sandbox targets innovation in the ICT sector to promote the adoption of 5G. It allows carrying out testing on different frequencies in a number of regions that are outside the existing regulations. The access to the use of the sandboxes is open to any other interested party that would like to apply 5G technology in their domain, in order to incentivise experimentation.

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Further develop venture capital and business angels ecosystem

In line with OECD recommendations, an objective dedicated to further developing the VC and business angels ecosystem was added to the Strategy. This could be achieved by aligning the Law on Investment Funds with advanced EU VC regulations and by introducing additional legal provisions, such as a legal definition of business angel. Co-investment schemes and capacity building for VC managers could also be considered. A 2020 report by (EU4Digital, 2020[37]) provides a detailed analysis and recommendations on these topics.

Broaden financial education initiatives

Finally, to complement the financial education initiatives foreseen, additional measures could be considered to improve the evidence base on the financial literacy levels of entrepreneurs. The OECD International Network on Financial Education (INFE), a project gathering public institutions from over 125 countries, recently developed a dedicated survey to measure SMEs’ financial literacy, which could serve as a useful reference for data collection and monitoring (OECD, 2020[39]).

Table 1.5. Overview of recommendations to improve SMEs’ access to finance

Recommendation	Status	Details
Adapt COVID-19-related financial support packages to the post-crisis period	○	The Strategy does not refer to specific measures on adapting COVID-related financial support programmes. The recommendation should still be considered to tackle the effects of the crisis while ensuring fiscal sustainability in the long run.
Strengthen the legal environment for alternative and digital financing instruments	◑	The government has reported having reflected this recommendation in the Action Plan. However, the logical framework only mentions leasing and factoring. The monitoring of the effective implementation of measures should therefore be ensured.
Further develop venture capital and business angels ecosystem	●	A dedicated objective was added to the Strategy, and the logical framework targets a twofold increase of the annual financial investment volume by 2025.
Broaden financial education initiatives	●	The Strategy entails an objective on further improving financial literacy, and the OECD/INFE tool will be used for monitoring purposes.

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.6. Suggested KPIs to monitor the improvements in access to finance

KPI	Description/rationale	Baseline (2019)	Target (2025)	Source of data
SME investment in fixed assets	This indicator was suggested as impact indicator for the Priority, to replace SME productivity (now used as overall target for the Strategy). It enables to monitor the Priority as it is most directly affected by the availability of finance.	GEL 2.5 billion	15% increase	Geostat
% of companies participating in State Financing Programmes that are able to access financing from non-state sources after their participation in the State Financing Program	This outcome indicator was suggested to help assess the impact of State Financing Programmes.	10%	40%	GITA’s report
% of training participants reporting that the skills learned at the training will help them better manage their business finances	This is an outcome indicator, suggested to replace “number of activities and events”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later.	n/a	80%	NBG’s report
Actual financial literacy score for entrepreneurs	This indicator goes in line with the recommendation on collecting data on financial literacy of entrepreneurs using the OECD/INFE survey tool. As there is no baseline (no survey has been carried out before), the OECD suggested to simply use “improved level of financial literacy score for entrepreneurs”.	n/a	Improved level of financial literacy score for entrepreneurs (vs score of 2021 survey)	OECD/INFE survey report
Loans with real estate collateral	This indicator gives a useful indication of the extent of pledging, and is already available on the NBG website.	GEL 19.1 billion	GEL 28.7 billion	NBG’s report
Annual financial investment volume from VC and “Business angels” funds	This outcome indicator goes in line with the dedicated objective added upon OECD recommendation. To obtain data, the OECD suggested to request from VC and similar funds to report to financial regulator.	USD 0.5 million	USD 1 million	GITA’s report

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Priority 4: Promoting export growth, market access and SME internationalisation

State of play

Georgian SMEs’ exports increased over the last Strategy period (+41% since 2015, despite the COVID-19 induced drop in 2020) (Figure 1.2). This growth has been driven by medium sized firms, while smaller ones have stalled. Since 2015, the share of exports generated by medium size enterprises has increased by nearly 10 percentage points (from 28.8% to 37.8%), while small firms’ share has decreased by 13 percentage points (from 30.9% to 17.7%) (Geostat, 2021[40]). This rise in exports goes in line with improvements in the overall trade environment, which are reflected in international indicators such as the OECD Trade facilitation indicators, notably on information availability (OECD, 2019[41]). This is notably due to a number of platforms now providing up-to-date and easy-to-access information on trade requirements: the Revenue Service Customs platform offers information on the rules and administrative procedures in place, while the Unified Electronic System of Licenses, Permits and Certifications gathers information on the necessary licenses and permits in a number of domains (UNECE, 2018[42]).

Figure 1.2. Exports of Georgian firms by size

Source: (Geostat, 2021[40]).

Among the recent key achievements to foster SME internationalisation, Georgia has introduced measures to improve SMEs’ knowledge of the export opportunities offered by the DCFTA and the related requirements. Indeed, the application of the DCFTA, signed in 2014 and entered into force in 2016, has been bringing Georgia closer to the EU through the gradual approximation of Georgian legislation, standards and rules to that of the EU, reducing tariffs and increasing the efficiency of customs procedures, and thereby helping Georgian firms tap into the EU’s market potential2. However, Georgian businesses need to be aware of and stay up to date with the legislative and regulatory changes, and related requirements. To this end, DCFTA information centres, mentioned in Priority 1 above, have been established in Gori, Kutaisi, Zugdidi, Sighnaghi and Batumi, providing entrepreneurs with dedicated trainings (e.g. on EU market standards), advisory and consulting services. 6 410 SMEs have reportedly benefitted from these (GIZ, 2020[43]).

In addition, five clusters have been created in co-operation with GIZ to help SMEs and other stakeholders from a given sector connect with one another. Priority sub-sectors have been identified to this end – apparel, film production, furniture/interior design, ICT and honey. Such clusters enable cost optimisation, and harmonisation of standards, improvement of sales, performance and skills; they also facilitate the introduction of innovations through enhanced cooperation. They also promote the internationalisation of SMEs in a variety of ways, e.g. by involving international experts and consultants, by organising international workshops to enhance member companies’ skills as well as international conferences that allow for knowledge sharing and networking, and by fostering international cooperation with sectoral companies abroad.

Moreover, Enterprise Georgia has extended its assistance to SMEs seeking to export through various services, such as trainings on export management. It has also developed online training courses on export basics, available at www.tradewithgeorgia.com, and published an “export guide” for interested businesses. An export readiness test was introduced to help businesses assess their marketing abilities and competencies to access foreign markets, and adapt services based on their export capacity. The uptake of this programme remains at a nascent stage.

Although exports to the EU have been growing since 2015, Georgian firms continue to export primarily to neighbouring markets. However, in relative terms, exports to Commonwealth of Independent States (CIS) countries are declining, from over half of the total until 2019 to 45% in 2020 (Figure 1.3).

Figure 1.3. Exports of Georgian firms by country groups

Note: CIS countries refer to Commonwealth of Independent States (Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine).

Source: (Geostat, 2021[40]).

In terms of products, exports remain little diversified and mainly low-value added, with three sectors representing 80% of total exports – manufacturing (35%), wholesale and retail trade (25%), and transportation and storage (20%) in 2020. More than 50% of exports were made up by copper ores (23%), motor cars (12%), ferroalloys (7%), wine (6%), and spirituous beverages (4%) (Geostat, 2021[40]).

This issue can be partially explained by persisting information barriers: interviews with private sector associations suggested that Georgian SMEs, especially in the regions, often lack knowledge of what is needed by foreign markets, especially the EU, and what products are most exportable. Furthermore, despite progress in raising awareness of market requirements, SMEs still struggle to meet all standards and regulations due to limited human and financial resources. Yet providing timely information to exporting companies is all the more important in times of crisis (OECD, 2020[44]). Another issue lies in high shipping costs and lengthy delivery times, which impede SMEs competitiveness on international markets.

Finally, Enterprise Georgia does provide some financial help for SMEs’ internationalisation, such as co-financing of participation costs in international fairs/events, and some banks offer a few trade financing options, but trade-specific financial instruments are otherwise lacking. Over the past years, the Georgian government has considered establishing an export credit agency, but it has not yet materialised. According to interviews with private sector associations, SMEs still report access to trade finance as one of the main barriers to exporting, notably due to their limited cash flow.

Way forward

Help SMEs identify market opportunities

The lack of information on demand in foreign markets still impedes SME exports, notably to the EU. In order to tackle this issue, it is essential to help Georgian SMEs improve their knowledge about market trends and competitors, to assess market needs and identify segments that they could tap. Conducting market studies would be a way to deepen the understanding of target markets, and identify niches and opportunities to foster integration in both emerging regional value chains and the EU market.

Increase advisory and training capacities to improve knowledge of market requirements

Furthermore, to improve SMEs’ knowledge of foreign market requirements, Enterprise Georgia could build on the existing services mentioned above and increase the uptake of programmes. The new Strategy foresees some trainings and information sessions, but, in addition, developing export “help desks”, in regions and/or online, in line with the EaP Trade Helpdesk that is currently being implemented by EU4Business (EU4Business, 2021[45]), is an option that could be considered. The support agency could outsource some skills to industry associations, such as the Export Development Association, to provide SMEs with more tailored information and advice.

Singapore for instance offers interesting examples of initiatives to improve SMEs’ knowledge of market opportunities and requirements (Box 1.4).

Box 1.4. Enterprise Singapore: Go Global

Go Global is the initiative of Enterprise Singapore, the government agency for enterprise development, to foster enterprises’ internationalisation. The initiative has implemented various instruments to help businesses access a new market, e.g. markets studies, capacity building, networking, and financial support. The agency has been particularly successful in providing comprehensive support on market information and in outsourcing the provision of these services.

Building knowledge of markets

The initiative offers guides, training sessions, and consultancy services to equip entrepreneurs’ with the tools to carry out market studies. On one side, the Overseas Market Workshops provides first-hand experience of the market environment, by organising experts’ lectures, as well as corporate and site visits. On the other side, the SME Centre Business Advisors offer tailored consultancy services to guide SMEs through the different steps of market analysis, helping them to assess which markets best fit their company. In particular, they help entrepreneurs identify priorities, and consider the main opportunities and issues, resulting from Trade agreements and tariffs regimes, as well as from potential partners.

Partnering with external stakeholders

In order to reach a higher number of companies and ensure to cover all their needs, Enterprise Singapore has partnered with the main entrepreneurial stakeholders. It relies on GlobalConnect@SBF, an initiative of Singapore Business Federation, i.e., a local business association, to provide expertise on the different markets, on how to establish operations, and how to connect with potential partners. It also collaborates with specialised SME centres to perform tailored capability assessments and provide consultancy on how to bridge the gaps. In addition to these, the agency also collaborates with some local stakeholders in China and India, two of the main markets for the country, to enhance international collaboration and ease the access to these crucial markets.

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Help reduce SME shipping costs and time

Measures could be introduced to reduce the high shipping costs and delivery times. Indeed, while Georgian SMEs selling online may have quality products, the logistics to deliver from Georgia to EU markets lead to longer delivery times, and therefore lower competitiveness. Storing goods in warehouses in target markets is useful to this end, to have them ready to be quickly dispatched. To support that, the Strategy could include provisions on raising SMEs’ awareness of such warehousing options and increasing their access thereto, e.g. by subsidising costs for first-time users. This could build on the pilot initiative currently being implemented by EU4Digital (EU4Digital, 2021[46]): the latter was launched in Armenia, Azerbaijan, Georgia, and Germany to support retailers and marketplaces to place the products for sale abroad and facilitate cross-border delivery. From Georgia, two women-led businesses participated in the pilot. As a follow-up, EU4Digital is providing additional consultations to the EaP countries on the adoption of the virtual warehouse.

Consider expanding use of trade financing options

As access to trade finance remains a major issue for SMEs, the government could foster the development of trade financing options to help firms overcome financing barriers such as the lack of cash flow and trade related risks, e.g. of non-payment when payments are made at delivery. These could be offered for instance through a range of instruments, such as export factoring, export loans, export credit insurance, or letters of credit (OECD, 2020[47]).

Develop e-commerce skills and practices

Georgia, like other countries, is experiencing a sharp increase in e-commerce as a result of widespread social distancing measures. Several initiatives have been implemented to help SMEs engage with online trade, such as the trainings on digital skills offered by the GCCI. As a follow-up to these, the latter developed a new one-off project “Free webpages for business” with the support of the Chamber of Commerce of Munich and Upper Bavaria, a competition that will select and help 100 entrepreneurs develop a personalised website free-of-charge. Building on these initiatives, additional steps could be taken – e.g. expanding digital skills courses building on the existing successful sessions, and further aligning standards with that of the EU3.

Table 1.7. Overview of recommendations to foster SME internationalisation

Recommendation	Status	Details
Support SMEs in identifying market opportunities	●	Provisions were integrated in the Strategy to improve knowledge about market trends and competitors through market studies and other instruments.
Increase advisory and training capacities to improve knowledge of market requirements	◑	The Strategy plans training and information sessions, notably on DCFTA opportunities. To further improve SMEs’ knowledge of market requirements and opportunities, Georgia could consider developing help desks and outsourcing some skills.
Help reduce SME shipping costs and time	○	Enterprise Georgia reported looking into warehousing and logistic hubs programmes, but the topic is not covered by the Strategy and no measure to create such a programme has been planned yet.
Consider expanding use of trade financing options	○	The Strategy does not foresee the expansion of trade financing tools.
Develop e-commerce skills and practices	◑	Consulting services and trainings are planned. In addition, Georgia should adopt a legal framework regulating e-commerce practices and enhance consumer protection, in line with EU standards and DCFTA requirements (see Part 2 for more detail).

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.8. Suggested KPIs to monitor progress in SME internationalisation

KPI	Description/rationale	Baseline (2019)	Target (2025)	Source of data
Positive feedback based on surveys of beneficiary companies	This outcome indicator was suggested to help assess whether events have helped participants establish international business relationships.	n/a	70%	LEPL Enterprise Georgia’s report
% of trained participants targeting the EU market, confirming the use of trained DCFTA knowledge in daily work	This is an outcome indicator, suggested to replace “number of trainings/events”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	60%	LEPL Enterprise Georgia’s report

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Priority 5: Supporting ICT adoption, innovation and R&D for SMEs

State of play

Georgia has taken considerable steps to enhance its policy and legal framework for innovation, which has been acknowledged in the latest edition of the SMEPI (OECD et al., 2020[1]). In particular, Georgia developed an Innovation Strategy with the support of USAID in 2019. The Agency assessed the country’s innovation ecosystem and identified its strengths and weaknesses, notably its relatively weak talent pool, low research capability, limited access to finance and lack of support for high-growth entrepreneurs (USAID Georgia, 2019[48]). In June 2016, Georgia also adopted a Law on Innovations which defines the various structures to support innovation (incubators, accelerators, technology transfer centres, etc.), and sets principles for innovation financing and commercialisation (Government of Georgia, 2016[49]).

In addition to these framework improvements, the innovation infrastructure in the country has been expanded. Georgia now benefits from above-mentioned FabLabs, three Techparks, five innovation centres and two regional innovation hubs, ensuring regional coverage. GITA plans to open four additional regional innovation hubs and innovation centres (GITA, 2021[50]). A network of innovation laboratories is also being developed: three have been created so far in co-operation with universities and the private sector, offering trainings and events (e.g. hackathons) to enhance digital skills as well as working spaces for start-ups.

Table 1.9. Types of innovation infrastructure in Georgia

	Description	Number	Coverage
FabLabs	Based on a concept from the MIT, offer individuals the infrastructure to carry out digital fabrication, i.e. designing and producing by using digital tools.	22	9 in Tbilisi , 2 in Batumi, 2 in Kutaisi, 1 in Mestia, 1 in Gurjaani, 1 in Akhaltsikhe, 1 in Kobuleti, 1 in Tsalenjikha, 1 in Poti, 1 in Ambrolauri, 1 in Rustavi, 1 in Zugdidi
Techparks	Gather technological, educational and professional resources, including incubators, training centres, laboratories, and working spaces.	3	Tbilisi, Zugdidi, and Telavi
Innovation centres	Offer the same services as techparks, but locally and on a smaller scale.	5 (2 are planned to open)	Kharagauli, Baghdadi, Choporti, Akhmeta, and Rukhi
Regional innovation hubs	Aim at connecting innovation centres with each other, while offering industrial, well-equipped innovation laboratories.	2 (2 are planned to open in Batumi and Tbilisi)	Zugdidi and Telavi
Innovation laboratories (innovation labs)	Help young people develop the necessary skills to create innovative businesses.	3	GeoLab, Gamelab Iliauni and CG multilab GIP: all located in Tbilisi

Source: (FabLab Georgia, 2021[23]), (GITA, 2021[50]), (GITA, 2021[51]), (GeoLab, 2021[52]), (ILIA State University, 2021[53]), and (GIPA, 2021[54]).

GITA has also introduced a wide range of financing tools to support innovation, in particular with the help of the World Bank GENIE project (Georgian National Innovation Ecosystem). These include a co-financing grant programme (max. 90% of the project’s overall budget) with a GEL 2 mln annual budget (approx. USD 640 000), which attracts thousands of applications each year and benefitting 95 start-ups with grants up to GEL 100 000 (USD 32 000) as of July 2021. Another initiative offers to co-finance up to 50% of a project, up to GEL 650 000 (USD 208 000). Start-ups can also be supported in the development of a prototype with micro-grants. Information on these programmes is easily accessible online on a dedicated website, grants.gov.ge4.

Despite the initiatives described above, Georgia still has room for improvement to strengthen its innovation ecosystem and innovation support to SMEs, as reflected in international rankings such as the (World Economic Forum, 2019[25]) Global Competitiveness Index and INSEAD’s Global Innovation Index 2020.

Spending on Research & Development remains relatively low in Georgia, at 0.3% of GDP against 2.5% in the OECD (OECD, 2021[55]). In that regard, it can also be noted that smaller companies tend to invest less: only 4.4% of small Georgian companies and 18.4% of medium ones reported R&D expenditures in 2019, while 21.6% of large firms did so (World Bank, 2019[26]). Only 2.1% of GERD (Gross Expenditure on R&D) was financed by businesses in 2020, against 65% in EU countries (INSEAD, 2020[56]).

Moreover, while GITA has been developing a wide range of initiatives to foster the emergence and scaling up of innovative firms and digital start-ups, support for innovation in non-IT sectors is still limited and could be further developed, as further explained in Part 2. This dimension of the Strategy is primarily oriented towards ICT and Internet access, which is one of the Government’s current policy priorities, rather than innovation and R&D. Yet innovation should not be understood merely as the introduction of a new digital product, just like digitalisation is not only about the IT sector or technology adoption. Helping all firms, regardless of their sector, be more innovative and, where relevant, digitalise some processes and/or products and services, would increase their resilience to future shocks – especially SMEs.

Way forward

Provide indirect financial incentives for innovation

GITA’s financial support to innovative firms could be complemented by indirect or expenditure-based financial incentives to firms. Hyper-depreciation schemes and/or tax credits can be used to foster businesses’ investment in technology, and have proven successful in OECD/EU countries. As an example, Italy has introduced such measures through its Impresa 4.0 National Plan: firms could benefit from a 150% increase in the ordinary depreciation deduction for investments in certain industrial equipment (40% in the case of super-depreciation), which substantially reduces the tax burden over the years. In addition, a tax credit of 50% is applied for firms that increased their R&D expenditure (Ministry of Economic Development of Italy, 2021[57]).

Introduce financing tools targeted at supporting the digital transformation in non-IT sectors

Existing financing tools introduced by GITA focus mainly on the IT sector. Yet the digital transformation of all firms, including in non-IT sectors, can yield significant benefits (see Part 2). Further measures could therefore be considered – Part 2 outlines a blueprint for policymakers as well as detailed recommendations for that purpose (see from page 84 onwards). The Digitalisation Pilot of the EU’s Competitiveness of Enterprises and SMEs (COSME) Loan Guarantee Facility could serve as a reference for the classification of eligible processes to receive funding for digital transformation initiatives.

Consider demand-side policies

Moreover, demand-side innovation policies could be leveraged, as they spur innovation without requiring additional programme spending. In terms of public procurement, for instance, upgrading standards by introducing functional specifications in the process, instead of letting bidders compete only on cost, could provide more incentives for the diffusion of innovations. Moldova for instance has integrated such an objective in its public procurement framework through the adoption of its 2015 Law on Public Procurement. These incentives should go along with safeguards against corruption risks, as public procurement is one of the government activities most vulnerable to corruption (OECD, 2016[58]) (OECD, 2017[59]).

Deepen research / industry linkages

Finally, university/industry research collaboration is still highlighted as one of the main weaknesses of Georgia’s innovation framework (INSEAD, 2020[60]). A dedicated objective was added to the Strategy upon OECD recommendation. Specific actions could be considered during the implementation of the Strategy. Measures could include monitoring GITA’s Technology Transfer Pilot Programme, a promising initiative launched in 2019 with the help of the EU and World Bank to support the commercialisation of scientific projects and partnering with public universities and research institutions, and, if positive, ensuring its continuation.

In addition to these, it should be noted that innovation appears as a crosscutting dimension, and can thus be fostered by policy recommendations described in other priorities of the Strategy – such as regulatory sandboxes (Box 1.3).

Table 1.10. Overview of recommendations to support innovation and R&D among SMEs

Recommendation	Status	Details
Provide indirect financial incentives for innovation	○	Such incentives have not been included in the Strategy.
Introduce financing tools targeted at supporting the digital transformation in non-IT sectors	◑	A reference to supporting the digital transformation of SMEs was added to the Strategy, but only a few non-financial tools are foreseen (e.g. trainings on digital skills). The government could still consider introducing dedicated financial tools in future action plans upon availability of public funds. More details on potential support measures are outlined in Part 2.
Consider demand-side policies	○	The Strategy does not foresee demand-side policies.
Deepen research / industry linkages	●	An objective on deepening research/industry linkages was added to the Strategy. GITA reported plans to set up a national technology transfer office to support the commercialisation of projects developed in universities and research labs.

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.11. Suggested KPIs to monitor innovation policies

KPI	Description/rationale	Baseline (2019)	Target (2025)	Source of data
Number of SMEs that have developed (at prototype level) an innovative product or service among beneficiaries of State support programmes	This outcome indicator was suggested to assess the impact of State support programmes. The number could be tracked with a survey of programme participants at the beginning of the programme, followed by yearly updates.	27	100	GITA’s report
Number of tech transfer projects brought to commercialisation stage	This outcome indicator was suggested for the objective on deepening research/industry linkages, which was added as recommended by the OECD.	0	Minimum 1	GITA’s report

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Priority 6: Encouraging women’s entrepreneurship

State of play

Over the past years, Georgia has been paying increasing attention to women’s entrepreneurship and its role in the country’s economic and social development. Women’s entrepreneurship is now a stand-alone priority of the new SME Development Strategy. The overall environment has improved for female entrepreneurs, as reflected in international rankings: in the Global Gender Gap Report 2021, for instance, Georgia moved up 25 places from the previous year (World Economic Forum, 2021[61]).

This is due to various policy measures taken in recent years. The institutional framework has been strengthened with the creation of a sub-committee on women entrepreneurship within the Private Sector Development Advisory Council in early 2018, which complements the Inter-Agency Commission for Gender Equality established in 2017. The sub-committee aims at better identifying women entrepreneurs’ needs and holds several sessions throughout the year, gathering women entrepreneurs from state agencies and representatives from the Women in Business Association. As for the legal framework, a number of recently enacted laws, such as the Labour Reform adopted in September 2020, have included gender-sensitive provisions. Moreover, the recent changes to the electoral code introduced quotas in parliament and local assemblies, to enhance women’s political involvement.

In addition, women’s participation in governmental programmes has also increased: as an example, in 2018, 45% of participants in the “Produce in Georgia” programme were women, against 40% in 2016. Some of the measures taken by the Ministry of Economy and Sustainable Development in response to the COVID-19 crisis have enhanced this trend, as preconditions to enter economic support programmes were alleviated and women applicants benefitted from extra points in their applications’ assessment (UNDP, 2020[62]).

Georgian women have valuable assets, such as their high levels of education, which are comparable to men’s (Figure 1.4). et this is not reflected in employability, wages and entrepreneurship, where considerable gender gaps persist. Women’s potential remains untapped because of persisting barriers: in terms of access to finance, for instance, data show that they encounter more difficulties when trying to get a loan than men do, especially in regions/outside the capital city, often because they lack collateral demanded by banks (Figure 1.5). They also appear disadvantaged in terms of entrepreneurial skills and networks, which they struggle to get access to (Griessbach and Ettl, 2020[63]).

Figure 1.4. Educational attainment by gender, 2020

Source: (World Economic Forum, 2021[61]).

Figure 1.5. Barriers in access to bank finance, by gender, 2019

Source: (World Bank, 2019[26]).

Moreover, the underrepresentation of women in STEM (science, technology, engineering and mathematics) fields remains an issue. The percentage of female Georgian tertiary education graduates in STEM fields is only 19%, against 53% men (World Economic Forum, 2021[61]). Similarly, only 12% of women are employed in these sectors, compared to 30% globally (EU4Digital, 2020[64]).

Finally, women have been particularly affected by the COVID-19 crisis, largely because many were working in hard hit sectors such as tourism and trade. In addition, their burden of housework, which was already disproportionate, has substantially increased as a result of containment measures: 42% of women reported spending more time on domestic tasks, while this is the case for only 35% of men (UN Women, 2020[65]).

Way forward

Develop gender-tailored support programmes

A few initiatives targeting women specifically exist in Georgia, such as the EBRD’s Women in Business programme, offering events, workshops, and facilitated access to funding, and USAID/Georgia and Crystal Fund initiative, which fostered skills development and access to finance for over 2 000 women entrepreneurs between 2015 and 2020. Georgia does not have specific Government programmes to support women’s entrepreneurship. Yet, since women often face more barriers than men do, support programmes such as training and mentoring, access to loans, and incubators, could be tailored to them and delivered to women-only group of beneficiaries in order to better address their specific needs. In terms of access to finance for instance, in addition to women’s lack of collateral, investment allocation is likely to be influenced by gender bias, all the more so given the lack of women in the decision-making process (Innovation Finance Advisory, 2020[66]). On the demand side, women appear to be more risk averse, which can have an effect on the choice of financing sources, as they are more likely to lean towards self-funding over external financing, thereby limiting their opportunities. Halabisky (2018[67]) therefore underlines the importance of promoting financing solutions that specifically target women to overcome these gender-based challenges. Governments can for example invest in women-led VC in exchange of an equity stake, as done for instance in Ireland with the Competitive Start Fund for Female Entrepreneurs. This fund provides an equity investment of up to 10% and EUR 50 000, aimed at helping women starting a company in selected sectors scale up. A similar gender bias affects angel investments, i.e. early stage investments offered by individuals. To counter it, governments can for instance step up financial education training for women, to help them improve the quality of their loan applications and financial pitches, and raise their awareness of financing options.

Improve data collection on gender-related issues

In order to tailor support measures to women’s needs, enriching databases and deepening research on the topic is essential. To that end, it would be beneficial to conduct regular studies on barriers to women’s entrepreneurship and labour market participation in general, in order to monitor the impact of existing programmes, track the evolution of women’s situation, assess the policy impact, and identify and remaining challenges to adapt state support accordingly.

Step up awareness-raising activities to bridge the gender gap

Finally, women still suffer from social and gender stereotypes (Griessbach and Ettl, 2020[63]). In addition to the popularisation of the Women Empowerment Principles foreseen in the Strategy, the Government of Georgia could plan public awareness-raising campaigns promoting gender equality and targeting the whole society, especially in rural areas. These could for instance showcase successful women entrepreneurs from different backgrounds and sectors (Halabisky, 2018[67]). Additional measures could be implemented to encourage women to go into STEM education, building on GITA’s events for women in tech. Finland, for instance, has developed such targeted programmes, which also include financing tools and mentoring (EU4Digital, 2020[64]).

Table 1.12. Overview of recommendations to support women’s entrepreneurship

Recommendation	Status	Details
Develop gender-tailored support programmes	○	The Strategy does not foresee the development of gender-specific programmes. However, one of its objectives aims at increasing women’s participation in existing programmes, which is a welcome measure.
Improve data collection on gender-related issues	◑	The Strategy now specifies that SME statistics by gender will be improved, and plans to monitor women’s participation in support programmes. In addition, future action plans could include conducting regular studies on barriers to women’s entrepreneurship, to produce some qualitative analysis.
Step up awareness-raising activities to bridge the gender gap	◑	This recommendation has been reflected in the action plan, and the Strategy now emphasises the importance of promoting women’s participation in STEM fields. Information sessions on women’s empowerment principles are planned, but additional activities, as outlined above, could be considered.

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.13. Suggested KPIs to monitor improvements in policy support to women’s entrepreneurship

KPI	Description/rationale	Baseline (2019)	Target (2025)	Source of data
% of training participants on women’s empowerment principles reporting that the content learned will help them promote gender equality in their business	This is an outcome indicator, suggested to complement “number of information sessions”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	65%	LEPL Enterprise Georgia’s report
% of training participants on digital skills reporting that the skills learned at the training will help them improve their business practice	This is an outcome indicator, suggested to replace “number of women participants in trainings”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	70%	Progress report of the SME Development Strategy
% of training participants on capacity building of state institutions reporting that the skills and knowledge received will be useful in their activities in terms of gender-based approaches	This is an outcome indicator, suggested to replace “number of trainings”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	70%	Progress report of the SME Development Strategy

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Priority 7: Developing the green economy

State of play

For the first time, green growth is a stand-alone priority in the new SME Strategy. This reflects the increasing efforts made by the Georgian government to integrate environmental considerations in the economic development and align its environmental policies with international standards. Under the last Strategy, several policy documents defining overall environmental priorities and objectives were adopted, such as the Third National Environmental Action Programme 2017-2021 and the Waste Management Strategy 2016-2030. A number of measures that were implemented following these policies have resulted in an overall improvement of the green economy indicators in the (OECD et al., 2020[1]) SME Policy Index compared to the 2016 edition (from 2.48 to 3.05).

Georgia has also implemented green measures in response to the COVID-19 pandemic, including measures improving air quality, energy consumption, agricultural practices, and waste management, and, unlike most countries in the region, COVID-19 policies in Georgia did not entail potentially negative environmental implications, such as the reduction of environmental checks, the slowdown of green policy reforms or the re-allocation of funds towards healthcare (OECD, 2021[68]). In 2021, Georgia updated a report on Nationally Determined Contributions report that presents more ambitious measures to promote the low carbon development of the economy. Moreover, the Georgian government is currently working on a Green Growth concept, strategy and action plan, in cooperation with international partners such as the EU4Environment programme. Additional plans targeting specific sectors are being drafted, such as tourism with Georgia’s ecotourism strategy for 2020-2030, which aims at positioning the country as a leader in the field. Other sectoral strategies include green provisions, e.g. Georgia’s Agriculture and Rural Development Strategy 2021-2027, which foresees measures fostering sustainable practices in farming and forestry, as well as promotion of application of energy-efficient and renewable energy technologies in rural households and enterprises.

Despite these efforts, challenges remain. Finalising the long-awaited Green Growth Strategy would be essential to ensure a comprehensive and co-ordinated approach towards greening. At this stage, SME-specific greening policies remain fragmented and only focus on some sectors. Yet supporting SMEs’ green transition should be among the key priorities for the country, since their aggregate impacts are considerably greater than those of large firms: even if SMEs have a lower environmental footprint than large firms individually, their preponderance makes their aggregate impact considerably greater. Adopting greener practices can also have a positive economic impact on firms themselves, as it would also help businesses cut operational costs, e.g. by minimising the amount of energy used and of waste generated. In addition, SMEs can support the greening of the economy by offering green products and services. In that regard, this priority is closely linked to the one on innovation, for start-ups can be a driver of green innovations.

Way forward

Set more concrete definitions and goals in the Strategy document

Providing efficient support to Georgian SMEs requires a strategic vision for green growth. The new SME Strategy offers an important opportunity to provide that vision and sets out a clear ambition for the legislative framework and specific support. Clarifications have been added to the Strategy regarding the areas of the economy to be covered by the upcoming Green Growth Strategy and legislative framework, but the document could have benefitted from more details, e.g. on the timeline. Moving forward, the government should ensure that the Green Growth Strategy sets clear definitions, timeframe and targets.

Task Enterprise Georgia with leading support for SME greening

Along with an overarching vision, measures for SME greening would benefit from a more co-ordinated approach. Enterprise Georgia is currently working on incorporating support to green economy in its programmes as part of the IBRD Georgia Relief and Recovery for MSMEs (Micro Small and Medium Enterprises) project. Building on this, it could play a role of a single agency responsible for co-ordinating of different actors in greening efforts and acting as a point of contact for SMEs. Embedding the Green Economy Development in its portfolio would provide a conduit to greatly improve companies’ awareness of the benefits and opportunities of the Green Economy, while providing a means for direct support to interested SMEs.

Target efficiency measures to SMEs

In the area of energy efficiency, Georgia is working on the adoption of an updated Energy Efficiency Directive and National Energy and Climate Plan. However, small enterprises often have trouble accessing these types of programmes, unless the programme is designed in such a way to facilitate it. Some of the efficiency measures foreseen should therefore be tailored to SMEs specifically. As access to bank finance remains one of the main issues, the measures should try to tackle this issue, for instance by developing loans from alternative sources such as microfinance institutions, institutional investors, and non-financial sector corporations (OECD, 2018[69]). A first step towards this direction was already taken in 2019 with the launch of the EBRD’s “Green Economy Financing Facility” that supports local partner banks in making loans available for SMEs (Green Economy Financing Facility, 2019[70]). Moreover, the Strategy provides for the development of a legislative framework, including in the area of energy efficiency, but without further specification. More detail could have been included, e.g. on regulatory improvements: regulatory tools are a useful way to encourage SMEs to improve their environmental performance. Those tools might include, for example, reduced environmental inspections for those SMEs that implement environmental management systems as well as a shift to general binding rules for sectors like agriculture (OECD, 2018[71]). These could be considered in future action plans.

Build capacity and awareness of opportunities from green economy

Finally, raising awareness of opportunities among Georgian SMEs is of crucial importance, as they are often not conscious of the benefits to going green, and that it can make economic sense in the long term to invest in eco-innovative approaches. In that regard, the Strategy plans several information meetings, notably on eco-innovation. As part of the EU4Environment programme and in partnership with international organisations, Georgia is developing awareness-raising initiatives such as workshops, seminars and conferences, notably with regard to energy- and resource efficiency, clean production and green finance. Additional tools could complement these, such as broader communication and tools for information provision, working with business associations as well as collaboration with universities and other educational centres.

Table 1.14. Overview of recommendations to develop the green economy

Recommendation	Status	Details
Set more concrete definitions and goals in the Strategy document	◑	The objectives on developing a green growth Strategy and a legislative framework now benefit from more details on the areas to be covered, but the government should ensure that clear definitions and targets are set in future policy documents, such as the action plans and Green Growth Strategy.
Task Enterprise Georgia with leading support for SME greening	○	Although Enterprise Georgia is working on stepping up its support to the green economy, the Strategy does not plan to task any stakeholder with leading support for SME greening.
Target efficiency measures to SMEs	◑	The Strategy foresees the development of an effective legislative framework, including in the area of energy efficiency, but more details could have been added. Regulatory improvements for SMEs could be considered during the implementation period.
Build capacity and awareness of opportunities from green economy	◑	Information sessions on eco-innovation are planned, and their impact on SMEs will be monitored. Additional tools could complement this approach, as outlined above.

○ Not incorporated ◑ Partly incorporated ● Incorporated

Table 1.15. Suggested KPIs to monitor progress in SME greening

KPI	Description/rationale	Baseline (2019)	Target (2025)	Source of data
Number of companies with which information meetings were held	This indicator was suggested to replace the “number of information meetings”, in order to track SMEs’ participation in them.	n/a	Information session with no less than 100 companies	LEPL Enterprise Georgia’s report
% of training graduates who consider that the skills acquired will help them conduct environmental protection activities	This is an outcome indicator, suggested to replace “number of trainings”, which was rather an output indicator. To obtain the data, a simple survey among training participants could be done some time after the training, e.g. an email sent to them 3 - 6 months later	n/a	60% training graduates	Progress report of the SME Development Strategy

Note: This table only includes the KPIs that have been added to the Priority upon OECD recommendation. It does not reflect exhaustively the comments provided by the OECD, e.g. on improving KPIs that were already included in the initial draft of the logical framework. Baseline and target values are those included in the adopted version of the logical framework.

Notes

← 1.  See Box 1.2 and the dedicated section in 2, which provides a detailed assessment of the state of digital skills in Georgia, the related policies implemented, as well as several policy options to foster their development

← 2.  For more information on the benefits of the EU-Georgia DCFTA, see https://trade.ec.europa.eu/access-to-markets/en/content/eu-georgia-deep-and-comprehensive-free-trade-area.

← 3.  For more detail on how to harmonise regulatory frameworks, develop e-commerce skills and practices, see Part 2.

← 4.  Further detail are available in Part 2, Box 2.3