45390 June 2008 About the AuthorS "Dividing the Wheat from the Chaff": how YuriY KuzmYn research Analyst, joined the to Get at the true Picture of entrepreneurship iFC bee Project in ukraine in 2003, after having worked for behind misleading Statistics ­ lessons from the Parliament and several think tanks. Yuriy is coordinating survey and other ukraine's example research activities for the project and for the FiAS-iFC tax Compliance Costs Survey. In recent years, a growing emphasis has been +7.1 percent a year. In short, entrepreneurship Florentin blAnC put on results measurement and also on using in Ukraine appeared more developed (higher operations officer, joined iFC hard data to evaluate and steer policy. Given numbers) and simultaneously less dynamic in 2004 to lead the tajikistan the significant efforts in many countries to (lower growth) according to WBG eD. efforts Sme Policy Project, after simplify business entry, this has led to an inter- got underway to try to understand this dis- having managed nGo work in est in using data from business registries to crepancy. In this SmartLesson, we share what Central Asia. in 2006, he transferred to the ukraine compare the number of businesses and the dy- we learned in the process. business enabling environ- namics of entrepreneurship across countries. ment project. Significant differences between the officially APProvinG mAnAGer reported figures on entrepreneurship (which The World Bank Group Entrepreneurship Data- Sanda liepina, Senior base (WBG ED), a joint effort led by the IFC Small operations officer, iFC AS eCA get reflected in international indices) and the real situation mean that the design of reform and Medium Enterprise (SME) Department and interventions and solutions can be seriously the World Bank Development Research Group, is misguided. the government as well as the do- known as the most comprehensive dataset on nor community, and not least IFC, need to cross-country firm entry data available today. It take this into account when designing pro- includes cross-country, time-series data on the grams aimed at fostering private sector devel- number of total and newly registered businesses opment. Paraphrasing the well-known slogan and was collected directly from the registrars of "what gets measured, gets done" ­ "wrong companies via questionnaires. On the other hand, measurement will lead to wrong actions!" the IFC Ukraine Business Enabling Environment project has for several years been collecting data Measuring is essential...but mea- on the number of registered and active companies suring what? in order to structure the sample for business envi- ronment surveys and to provide basic data on the When asked last year about the survival rate evolution of entrepreneurship in the country. of Ukrainian companies, the IFC Business en- abling environment (Bee) project team was unable to respond immediately, as such data It is worth noting that the discrepancy is al- are not computed by the State Statistics Com- ready considerable when one looks at compa- mittee of Ukraine. the team volunteered to nies. When attempting to count sole propri- look into the data and try and calculate it. etors, the gap between registered and active worsens ­ in Ukraine, though no official data the routine process (we thought) of examin- are available, it is estimated that only about ing both databases in order to calculate the one quarter (24 percent) of the 1.98 million survival rate suddenly yielded some startling registered sole proprietors are active.1 and unexpected results. the most striking dif- ferences were that WBG eD reported more Lessons Learned than twice the number of companies than the IFC Bee project had thought there were in 1) "Global-local": your key to better data Ukraine. In addition, the annual growth rate in the number of companies appeared to be officers working for a national statistics agen- much less according to WBG eD than accord- 1 According to "Omnibus" survey conducted by IFC BEE project in Ukraine ing to the Bee project +4.3 percent,against in 2007. IFC SmartLeSSonS -- JUne 2008 1 the rules that govern what statistical offices do largely Evolution of business in Ukraine reflect institutional and ad- ministrative arrangements Density of enterprises per 1,000 active 26.7 that exist in their country. population, 2006* 11.8 therefore indicators of busi- ness demography may differ Enterprise entry rate, average for 2005- 5.9% from country to country. For 2006 (newly registered to total registered) 7.1% the purpose of our work in WBG ED database Ukraine, we adopted the Annual growth rate in active enterprises, 4.3% definition used by eurostat: average for 2005-2006* 7.1% IFC Ukraine BEE "the enterprise is the small- database est combination of legal units that is an organiza- * Based on data on registered enterprises for WBG ED and active enterprises for IFC UA BEE; tional unit producing goods for the sake of comparison with WBG ED, data on sole proprietors are not included. or services, which benefits Source: State Statistics Committee of Ukraine; WBG ED from a certain degree of au- Chart 1. Enterprise demography in Ukraine ­ conflicting pictures... tonomy in decision-making, especially for the allocation of its current resources. An cy may not have sufficient legal or economic expertise, or enterprise carries out one or be familiar with international practice. often they do not more activities at one or more locations. An enterprise may want to provide more information than required in their be a sole legal unit.2" this definition is consistent with the work plan. When one fills a request to compute aggregates one used in the 1993 System of national accounts and In- from their datasets, at best they provide what one specifies ternational Standard of Industrial Classifications. in the request letter. no wonder that if any question is slightly vague, the request will be an- Table 1: Number of Enterprises and Corporations per Different Definitions swered in a haphazard way. In addition, statistics in each country InDIcator reGIstereD have their peculiarities in terms of definitions. to deal with these issues in Ukraine, we used our lo- cal experience of how business total entities in business registrar as of Janu- 1,330,200 statistics are structured and our ary 1, 2007 global knowledge of what should be considered as an enterprise. of them: our project found that, while not being a major part of official sta- total enterprises (per WBG eD) 830,719 tistics on businesses, data on ac- tive companies in Ukraine are total enterprises (per IFC Ukraine Bee) 632,759 available. to separate entities that correspond to the interna- total corporations (per WBG eD) 494,730 tionally acceptable definition of enterprise, from others that are total corporations (per IFC Ukraine Bee) 443,046 registered in the state registrar, but do not carry out commercial activity or do not fit the eurostat definition, required joint work by the project's legal experts aiming to have indicators that could be comparable across and economists to match the list of `legal and organiza- countries, we applied these criteria to include only certain tional forms set by national legislation with the above defi- types of legal entities registered in the Ukraine Business nition. registry. namely: Cooperation between local World Bank Group teams and o leGAl FormS: We include market-oriented legal the WBG eD team can help in understanding the specifics forms (e.g., limited liability companies, partnerships), of each country's statistics and gathering more reliable sta- but exclude business units in the central and local gov- tistics that reflect better the real situation of entrepreneur- ernment sectors, associations, and unions. Due to the ship and allow meaningful international comparisons. sub-optimal quality of the data, we also exclude sole proprietors3 (which are also excluded from the WBG 2) Define what you count ED data for Ukraine); Despite the fact that international definitions of enterprises 2 Council Regulation (EEC) No 696/93 of 15 March 1993 on the statistical units for the observation or businesses do exist, there are still ample variations, and and analysis of the production system in the Community. 3 According to results of a population survey conducted by IFC in April-May 2007, the number of active sole proprietors is about a quarter of the official data on registered sole proprietors. 2 IFC SmartLeSSonS -- JUne 2008 o oWnerShiP: We exclude business units owned by the those,whichpaytaxes.thisisaslightsimplification,ofcourse, central or local government; and but by and large acceptable7. the data on active businesses o ACtivitieS: Production, construction, distributive thus comes from the State tax administration and are trades, and services are covered, but agriculture, public matched by the State Statistics agency on a quarterly basis administration, non-market, and extraterritorial activi- with data from state registrar. ties are not. This is mainly to comply with the current coverage of statistical business registrars in most OECD 4) Wrapping it up: Wrong picture, wrong conclusions, and EU countries4 - agriculture is typically excluded be- wrong policies ... cause of its specificities, which mean it is difficult to aggregate "farms" and "enterprises" in a meaningful the data reported to WBG eD significantly overstates en- way. terprise density in Ukraine, making the country look "more developed" than it really is. Since in the country statistics on registered enti- ties tend to be Comparison with WBG Entepreneurship Database used by policy- (thousands of entities) makers and the Total entities in business 1,133 government, registrar as of Jan 1, 2007 601 this false image Total enterprises 831 of a country (as per WBG ED) 474 with an enter- prise density Total corporations (as per 495 "equivalent to WBG ED) 290 Registered the eU aver- Total enterprises 633 Of those in practice - age" (once one (as per IFC Ukraine BEE) 380 Active* includes sole * Since WBG ED does not provide data on active entities, the respective number w as derived from IFC Ukraine BEEdataset. proprietors, of Source: State Statistics Committee of Ukraine; WBG ED which the vast majority are in- Chart 2. A closer look:Which businesses are active? active!) is wide- spread. this means that, in- about 60 percent out of over 1.1 million Ukrainian legal country and outside, the considerable problems that af- entities (not counting sole proprietors) satisfied this defini- fect enterprise development and limit market entry, en- tion of enterprise in 2006. on the contrary, the dataset pro- terprise growth, and competition are underestimated. So vided to WBG eD was not filtered to eliminate categories too is the rate of annual growth in entrepreneurship, that are excluded from the eurostat definition of an enter- meaning that it is faster than usually believed, but from a prise (see table 1 for details). Business statistics regularly much lower base. published by the Ukrainian State Statistical Committee does not make use of the above definition, either. the differ- What this discrepancy in data shows, on the other hand, ences apply both to "enterprises" and to "corporations" as is the effect of bad regulation. Since market exit in defined by the WBG eD questionnaire (see table on the Ukraine is very difficult (according to Doing Business 2008, next page). Ukraine ranks 140 out of 178 countries on barriers to clos- ing a business), most companies that stop operating nev- 3) sort out the active from the inactive ertheless remain registered. as such, the difference in data can also be treated as an indicator by itself as a back- the figure of 494,730 corporations reported by WBG eD cor- log of inactive businesses. responds to registered entities and corporations in Ukraine, irrespective of their being active or not (despite the fact that Different picture, depending on the dataset the questionnaire requires the data supplier to report only you use businesses considered to be active5 - a requirement that was obviously overlooked by respondents). Given the heavy regu- Good policymaking would require data that adequately in- latory barriers to exit, however, and the absence of a system- dicate not only the number of enterprises and how this atic "clean-up" of the business registry's database, the total compares with international averages, but also the survival number of registered companies is far higher than the total rate of new businesses, which is a key indicator. the State number of active companies. Statistics Committee of Ukraine does not publish data on survival rates, nor is it possible to compute this indicator Data on active companies in Ukraine is not available directly from the business registrar, but nevertheless can be obtained Tax Administration of Ukraine with the list of legal entities provided by Unified State Register of Enterprises and Organizations of Ukraine. The matching is done on a quarterly basis by the State from official statistics6. We define here active businesses as Statistics Committee of Ukraine, and IFC Ukraine BEE data were obtained directly from it. 7 While mostly not applicable in Ukraine, there might be several reservations tor this approach in 4 Specifically, companies accounted for here are filtered by their main type of activity Industry, other countries: a) enterprises which do not file returns in a regular way due to the tax holidays Construction, Trade, Public Catering and Hotels, and Transportation Services are included; Agricul- provisions would not be in that list; b) if there are thresholds below which enterprises should not ture/Forestry, Public Administration, and extraterritorial activity are excluded. See also Eurostat- file tax returns, these enterprises are out of the list; c) if enterprises did not perform any business OECD Manual on Business Demography Statistics, OECD, p. 13 http://epp.eurostat.ec.europa.eu/ activity in a specific year and did not file tax returns, but would go back into business using the cache/ITY_OFFPUB/KS-RA-07-010/EN/KS-RA-07-010-EN.PDF. same legal entity next year, such enterprises would not be in the "tax returns" list for a given year. 5 See footnote 4 to questionnaire. Overall, using enterprises paying taxes as a proxy for active enterprises is still the best solution 6 Data on active enterprises originate from matching the list of taxpayers provided by the State available, and it is the one that the Ukraine State Statistics Committee has chosen. IFC SmartLeSSonS -- JUne 2008 3 from WBG eD (since it provides data only on overall, the lack of statistics reflecting the true registered entities, and a survival rate indica- picture, and the difficulty in making meaning- tor is applicable only to active entities). our ful international comparisons on such a basis, estimates8 show that the 1-year survival rate means that policy decisions risk being inade- for Ukraine was 91 pecent and the 2-year sur- quate ­ in this case, decisive action would be vival rate was 81 percent. this is a rather high needed to facilitate business entry, business rate, and only further research would deter- survival...and business exit! Still, if one looks mine how much is due to the business cycle at the growth rate, it appears that previous (Ukraine has enjoyed growth rate of around 7 business entry reforms (adopted partly thanks percent for several years), and how much to a to IFC and WBG support) have started to yield lack of competition, which actually can shield results... existing firms from those that do not make it over significant regulatory hurdles. Number of corporations per 1,000 of active population (2005) Argentina Congo, Rep. Chile Ukraine (WBG ED) 14.5 Bosnia and Herzegovina Turkey Zambia Guatemala Tunisia Ukraine * 8.4 Morocco Albania Ukraine ** 7.8 Since WBG ED does not include sole proprietors, they are not reflected here; * active out of total originally reported to WBG ED ** active corporations (recomputed using WBG ED definitions) Chart 3. How you count influences where you stand... DiSClAimer iFC Smartlessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. the findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of iFC or its partner organizations, the executive Directors of the World bank or the governments they represent. iFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms 8 The estimates are based on the data obtained from State Statistics Com- and conditions at www.ifc.org/ mittee of Ukraine by our special request and are computed according to the smartlessons or contact the methodology used by Euro stat (Eurostat-OECD Manual, Op. cit., p.97). `The survival rate of newly born enterprises in a given reference period is the num- program at smartlessons@ifc.org. ber of enterprises that were born in year xx-n and survived to year xx as a percentage of all enterprises born in year xx-n'. IFC SmartLeSSonS -- JUne 2008 4