Report No. 54371-BY Belarus Trends and Issues in the Services Sector Belarus Economic Policy Notes: Note No.3 June 25, 2010 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Document of the World Bank CURRENCY AND EQUIVALENT UNITS (as of June 25, 2010) Currency Unit = Belarusian Rubel (BYR) US$ 1.00 = BYR 3,017 GOVERNMENT FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS BEEPS Business Environment and IBRD International Bank for Enterprise Performance Survey Reconstruction and Development Belstat National Statistical Committee of the IFC International Financial Corporation Republic of Belarus IMF International Monetary Fund BOP Balance of Payments LP Labor Productivity BS Business Services MICs Middle Income Countries COMTRADE Commodity Trade Database, NBB National Bank of Belarus United Nations Statistical Division NSOEs Non-state enterprises CPI Consumer Price Index OECD Organization for Economic DB Doing Business Cooperation and Development DPL Development Policy Loan R&D Research and Development EBRD European Bank for Reconstruction Rosstat Federal State Statistics Service of and Development Russian Federation ECA Europe and Central Asia Region SMEs Small and Medium Enterprises Eurostat European Statistical Agency SOEs State-owned Enterprises FDI Foreign Direct Investments TFP Total Factor Productivity FSU Former Soviet Union ULC Unit Labor Costs GDP Gross Domestic Product VA Value Added HICs High Income Countries VAT Value Added Tax HR Human Resource WITS World Integrated Trade Solution WTO World Trade Organization Vice President : Philippe H. Le Houerou Country Director : Martin Raiser Sector Director : Luca Barbone Sector Manager : Benu Bidani Task Leader : Marina Bakanova ii ACKNOWLEDGEMENTS This Policy Note was prepared by a team comprising Marina Bakanova (Task Team Leader, ECSP3), Alexander Gotovsky (Consultant), Olasupo Olusi, and Maryna Sidarenka (ECSP3). The team gratefully thanks the Government Interagency Working Group led by the Deputy Minister of Economy Ms. Tatiana Starchenko for guidance, cooperation, and support at all stages of the preparation of this Note. The intensive efforts of the Ministry of Economy, the Ministry of Finance, the Ministry of Industry, the National Bank of Belarus, and other agencies in helping prepare this report are gratefully acknowledged. The team is particularly grateful to the First Deputy Chairman of the National Statistics Committee (Belstat) Ms. Irina Kostevich and other staff of the Belstat for the high quality and timely statistical support. In addition, the team benefited greatly from discussions with representatives of the donor community in Belarus, local think tanks, and independent experts. This Note reflects findings of the various missions during 2008-2009 as well as feedback received during workshops in June and October 2008 and a high- level seminar in March 2010. The team also benefited from the visits of the following enterprises: Atlant (main product ­ refrigerators), Zdravushka (dairy products), Belarus tractor plant, Belkommunmash (trams and trolleybuses), and Belaz (heavy trucks). Peer Reviewers were Celestin Mongaand Albert Zeufack. The Note was prepared under the guidance and advise of Luca Barbone, Benu Bidani and Asad Alam. Martin Raiser advised the team and provided detailed comments on the draft Note. Valuable inputs and suggestions were also received from Zeljko Bogetic, Pablo Saavedra, Chris Jarvis, Shuang Ding, Dmitry Kovtun as well as other Bank and IMF colleagues. Liudmila Mazai and Larysa Hrebianchuk provided excellent support during the entire preparation process. iii Table of Contents Main messages ............................................................................................................................... vi Trends and Issues in the Services Sector ......................................................................................... 1 I. Services Sector in Belarus: General Trends ........................................................................ 1 II. Business services ................................................................................................................. 6 III. Trade in services ................................................................................................................ 13 IV. Business environment and regulatory issues ..................................................................... 17 V. Conclusions and policy implications ................................................................................. 22 References ................................................................................................................................. 24 Annex A1................................................................................................................................... 25 Annex A2................................................................................................................................... 29 Tables Table 1.1: Sectoral GDP and employment shares and contributions to growth ............................. 3 Table 2.1: Use of business services by industrial enterprises .......................................................... 7 Table 3.1: Trade in services growth: Belarus and neighboring countries ..................................... 14 Table A1.1: Business services outsourcing by ownership type of provider .................................. 25 Table A1.2: Factors of outsourcing ............................................................................................... 26 Table A1.3: Factors of provision of BS in-house .......................................................................... 27 Table A1.4: Unsatisfied demand for business services ................................................................. 28 Figures Figure 1.1: GDP per capita and share of services in GDP. ............................................................. 2 Figure 1.2: Structure of Value Added at factor cost, 2001, % total* .............................................. 2 Figure 1.3: Structure of Value Added at factor cost, 2008, % total* .............................................. 2 Figure 1.4: Sectoral shares in employment, percent total, 2001-08 ................................................ 3 Figure 1.5: TFP growth in industry ................................................................................................. 4 Figure 1.6: TFP growth in services ................................................................................................. 4 Figure B 1.1: Employment structure, % total .................................................................................. 5 Figure B 1.2: Value Added structure, % total ................................................................................. 5 Figure B 2: Structure of VA: Belarus and comparative countries. .................................................. 5 Figure 1.7: Labor productivity by sector (national-wide LP=1) ..................................................... 6 Figure 1.8: Growth in Labor Productivity (national-wide LP growth=1) ....................................... 6 Figure 2.1: Choice of business services provider: logistics............................................................. 8 Figure 2.2: Choice of business services provider: development of new products........................... 8 Figure 2.3: Choice of business services provider: HR services, personnel selection and training .. 8 Figure 2.4: Choice of business services provider: servicing of technological equipment ............... 8 Figure 2.5: Extent of business services use in the last 2-3 years ................................................... 10 Figure 2.6: Changes in outsourcing in the last 2-3 years............................................................... 11 Figure 2.7: Use of new product development services and sales during crisis ............................. 12 Figure 2.8: Use of HR services and export during crisis ............................................................... 12 Figure 3.1: Export, Import and Balance of trade in goods, $US millions ..................................... 13 Figure 3.2: Export, Import and Balance of trade in services, $US millions .................................. 13 Figure 3.3: Structure of services export, 2001, % total ................................................................. 14 Figure 3.4: Structure of services export, 2008, % total ................................................................. 14 Figure 3.5: Services export growth by type of services and by period.......................................... 15 Figure 3.6: Structure of services import, 2001, % total ................................................................. 15 Figure 3.7: Structure of services import, 2008, % total ................................................................. 15 iv Figure 3.8: EBRD reform indices: Belarus and neighboring countries, 2009 ............................... 16 Figure 4.1: Percent of firms identifying issue as major constraint to growth............................... 17 Figure 4.2: Percent of firms identifying issue as most serious obstacle to growth ....................... 17 Figure 4.3: Belarus: most severe obstacles for services firms growth as compared to neighboring countries, percent of firms identifying issue as most serious obstacle to growth.......................... 18 Figure 4.4: Percent of firms indentifying labor skill levels as major or severe constraint for firm growth............................................................................................................................................ 18 Figure 4.5: Formal training: Belarus and selected countries ......................................................... 19 v Main messages The overall state of the services sector Belarus has pursued a deliberate policy of supporting industrial and agricultural growth at the expense of services. Moreover, this policy has gone beyond benign neglect of this important sector while promoting other priority segments of the economy. In fact, the regulatory environment and the quality of the business climate have additionally constrained the development of many labor intensive services. As a result, the size of the sector and its contribution to growth and employment is low for the country's level of development. This is a serious problem for Belarus's long-term growth prospects as its favored sectors--industry, agriculture, and exports -- are facing a loss of competitiveness even in their traditional markets, and the recovery of global and domestic demand is bound to be very gradual. If the regulatory and administrative barriers are reduced, growth in the services sector could act as a potent engine of growth, both through increased productivity and synergies with manufacturing growth. The focus on business services and trade in services The underdevelopment of market services and, especially, business support services may be holding back the supply and the growth of manufacturing and FDI. Excessive regulations prevent entry and growth of the services sector, hampering competition, productivity, quality, availability and affordability of services for consumers (private and public, households and businesses). With gradual changes in the incentives structure from enterprises being forced to meet quantitative targets towards efficiency and innovation, the demand for high-quality specialized business services is likely to increase. Moreover, a wide range of services is potentially attractive for FDI should further liberalization and privatization progress, removing barriers to entry not only for foreign suppliers, but also for new domestic (private) firms. Business climate for the services sector The services sector, home of many small and medium-size enterprises (SMEs) in Belarus, has been a "foster child" of government's policy. Firms in this sector are facing major hurdles of the investment climate such as excessive tax and administrative burden, difficult access to resources, and skills shortages. Also, unresolved issues in ensuring intellectual property rights might become a serious impediment for growth in the R&D and human-capital intensive business services. The lagging services sector reform impedes FDI inflow and further growth: reducing the barriers that restrict FDI in services may help accelerate productivity growth in the manufacturing sector. Towards more balanced growth strategy Belarus's economic structure has been highly distorted in favor of large state industrial and agricultural companies at the expense of SME and the private sector, especially in services. While this structure was able to deliver high growth rates in the context of a favorable external environment and underpriced energy supplies, this is much less likely to be the case going forward. As a result, it might be prudent to adopt a more balanced growth strategy aimed at rebalancing growth in Belarus towards a more efficient economic structure in the medium term. Such a structure would be more open to entry, operation, and growth of the private sector in general, and the services sector in particular. Importantly, services could play a greater role in generation of jobs and incomes. This strategy needs to be implemented through a set of policies addressing both across-the-board and sector-specific obstacles to private sector development and growth. vi TRENDS AND ISSUES IN THE SERVICES SECTOR 1. Policy-makers in many fast growing countries increasingly recognize the importance of growth of the services sector, both export and domestic services.1 The services sector has been a major growth area during the transition from socialism and a primary incubator of new jobs.2 2. The objective of this Policy Note is to analyze trends and issues in the development of the services sector in Belarus in order to understand its untapped growth potential, especially that of market services. To that end, the Note starts with an analysis of general trends compared to the countries at a similar level of development, as well as compared to the neighboring transition economies. Next, it analyzes the development of business support services in Belarus as a crucial growth area with positive spillovers to the manufacturing sector and the economy as a whole. The Note continues with an overview of trends in trade in services as trade openness is one of the important channels for improving services sector performance. And, finally, the Note looks at the business environment in which the services sector operates vis-à-vis the manufacturing sector and other countries in the region. The Note concludes with a summary of major findings and some policy implications. 3. The analysis is complicated by the fact that services are a very heterogeneous sector, and there are coverage and statistical issues. In general, data on services (both from national and international sources) are weak. In addition, the analysis of the services sector and, especially, of the use of cross-country comparisons is complicated by the fact that Belarus uses old Soviet classification of branches of the national economy, while the new classification, which is compatible with international classifications of economic activities, will be in effect only from January 1, 2011. Since new data series are still under construction and given that their preliminary use does not change major conclusions of the Note (as shown in Box 1), the analysis reported here is based on the data according to the old classification. 4. The analysis is based on various sources, including official statistics, provided to the team by the National Statistics Committee (Belstat) and the National Bank of Belarus (NBRB), as well as on international statistical sources (the World Bank, the IMF, the Eurostat, and the OECD). It uses extensively the results of the Business Environment and Enterprise Performance Surveys (BEEPS), conducted jointly by the World Bank and the EBRD. The analysis of the development of business support services (BS) is based on the results of a survey of 516 industrial enterprises in Belarus, specially commissioned for this Note. I. SERVICES SECTOR IN BELARUS: GENERAL TRENDS 5. The share of services in GDP in Belarus is significantly lower than it what would be expected, given its income level. Empirically, for most countries, the higher GDP per capita, the higher the share of services in GDP; Belarus, however, is below the trend line of services to GDP compared to the other growing economies (Figure 1.1). The underdevelopment of the services sector may impede further country growth, especially in the context of competitiveness challenges faced by industry and exports in the context of a much more constrained post-crisis environment. 1 Many countries could be a good example of this, for instance, Republic of Ireland, India, Philippines, South Korea, and Malaysia. 2 See, e.g. World Bank (2008). Figure 1.1: GDP per capita and share of services in GDP. 90 80 70 HUN POL LTU Services to GDP, % 60 UKR ROM RUS 50 BLR 40 ARM 30 20 10 0 2.0 2.5 3.0 3.5 4.0 4.5 5.0 GDP per capita, 2005 PPP US$ Source: WB staff calculations on WDI data. 6. The contribution of services to growth in Belarus has been relatively moderate and declining, especially since 2000. The services sector contributed over 50 percent to growth in middle-income countries (MICs) and almost 90 percent in high-income countries (HICs) between 1995 and 2005, and the trend is expected to continue.3 In Belarus, at odds with the international experience, the value-added structure has been shifting further away from services, and contribution of the services sector to growth has fallen. Between 2001 and 2008, the share of industry and construction in the country's value added increased by almost 11 percentage points and reached 46 percent, approaching the pre-independence level.4 The growth was increasingly driven by industrial and construction growth: these sectors were responsible for 2/3 of overall GDP growth in 2008 as compared to 30 percent in 2001. The share of trade and catering increased by 3 percentage points, but the share of other services shrank by 12 percentage points. Even such traditional services as transport and communications played a smaller role in 2008 as compared to 2001 (Figures 1.2-1.3 and Table 1.1). Figure 1.2: Structure of Value Added at Figure 1.3: Structure of Value Added at factor cost, 2001, % total* factor cost, 2008, % total* 10.6 Agriculture&Forestry Agriculture&Forestry 9.0 32.0 Industry&construction 21.6 Industry&construction Transport and Transport and 35.3 communications communications Trade and catering 12.9 Trade and catering 9.9 46.2 12.3 Other services Other services 10.3 Source: WB Staff calculations on Belstat data. *In 2005 constant prices. 3 McKinsey (2010). 4 Among all FSU countries, Belarus (after Armenia) had the most severe structural distortions such as a degree of over-industrialization (measured by the difference between actual and predicted share of industry in GDP) (see, De Melo at al., 1997). 2 7. The services sector already provides half of employment in Belarus, but employment growth become sluggish during the decade before the global crisis. Services were responsible for 54 percent of jobs in 2008 as compared to about 40 percent in 1991. However, much of the employment growth in services took place during the earlier decade, in the 1990s. Since 2001, it has slowed down substantially with the share of services in total employment increasing by less than 3 percentage points.5 Moreover, despite a high rate of economic growth during 2001-08, which brought Belarus to the club of upper middle-income countries (MICs), the structure of employment in Belarus was surprisingly stable (Figure 1.4). As in other MICs and transition economies, there was further reduction in agricultural employment. At the same time, contrary to the experience in many MICs, the share of industrial employment increased in Belarus, while the share of all market services but trade and catering shrank. During 2005-08, compared to 2001-04, there was a redistribution of employment from agriculture to industry and trade and catering with no changes in other services (including transport and communication). Most remarkable was the decline in the contribution of other services to GDP growth (Table 1.1). Between 1995 and 2005 the services sector accounted for 85 percent of net job growth in MICS and for all net job growth in HICs.6 It is yet to happen in Belarus. Figure 1.4: Sectoral shares in employment, percent total, 2001-08 100.0 90.0 Other market services 80.0 Non-market services 70.0 Industry and 60.0 construction 50.0 Trade and catering 40.0 Transport and communications 30.0 Agriculture and forestry 20.0 10.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 Source: WB Staff calculations on Belstat data. Table 1.1: Sectoral GDP and employment shares and contributions to growth Contribution to GDP Share in Share in GDP, % growth employment, % 2001- 2005- 2001- 2005- 2001- 2005- 2004 2008 2004 2008 2004 2008 Agriculture and forestry 10.5 9.3 0.6 0.5 12.7 11.0 Industry and construction 36.7 43.5 3.3 5.7 34.9 35.8 Transport and communication 11.9 10.7 0.5 0.8 7.4 7.5 Trade and catering 10.3 11.9 1.1 1.7 9.0 9.7 Other services 30.6 24.5 1.2 0.6 36.2 36.1 Source: WB Staff calculations on Belstat data. 5 But even in the 1990s, in spite of the decline in the share of industry in employment, Belarus was still far above the market economy benchmark (as well as Russia and Ukraine); moreover, the adjustment practically halted (see, Raiser, M., Schaffer, M., and Schuchhardt, J. (2004)). 6 McKinsey (2010). 3 8. Total factor productivity (TFP) growth in the services sector was relatively modest but also relatively flat compared to industrial TFP growth. TFP growth in the services sector during 2003-07 was on average 6.2 percent per annum compared to 8.6 percent in industry during the same period. TFP growth in industry first almost doubled between 2003 and 2004 (to 18 percent) but then decelerated sharply to the 2003 level during 2005; deceleration continued since then, and industrial TFP growth fell to less than 1 percent in 2007 (Figure 1.5). TFP growth in services shows different dynamics: while there had been some deceleration since 2004, it was very gradual, so in 2007 TFP growth in services was still at a rather respectful level ­ 5.6 percent (Figure 1.6). Figure 1.5: TFP growth in industry Figure 1.6: TFP growth in services Source: WB Staff calculations on Belstat data. 4 Box 1: Tracking trends in structural change: old versus new classification An analysis of time series on Value Added (VA) and employment based on a new classification of economic activities (OKED) shows that the share of industry and construction in total employment remained practically unchanged since 2000, as did the share of non-market services. The share of employment in agriculture, forestry, and fishing fell, while the share of employed in market services increased, almost entirely due to an increase in employment in trade (wholesale and retail) (Figure B1.1). The new classification permits the separation of employment in trade from employment in hotels and restaurants (in OKONX, these two sectors were accounted together as trade and catering) and shows that employment in hotels and restaurants declined over the period (this was disguised by an overall increase in employment in trade and catering). This is a very unusual development, signaling serious issues with business climate. Underdevelopment of this sector makes country less attractive for international business, investment, and leisure travelers. Hotels and restaurants are also the sector potentially attractive for foreign investment: so far, only one hotel from an international chain has been opened in Belarus. The OKED breakdown shows an increase in the share of industry and construction (albeit to a smaller extent than the breakdown by OKONX would suggest) and a reduction in the share of agriculture, forestry, and fishery. Shares of both market and non-market services increased, but the latter by a larger extent than the former, mostly due to an increase in the share of public management, reflecting increasing government involvement into economic affairs (Figure B1.2). Figure B 1.1: Employment structure, % total Figure B 1.2: Value Added structure, % total 100.0% 100.0% 90.0% 90.0% 80.0% 80.0% 70.0% 70.0% Non-market services (L-O) Non-market services (L-O) 60.0% 60.0% Market services (G-K) Market services (G-K) 50.0% 50.0% 40.0% Industry and construction (C-F) 40.0% Industry and construction (C- 30.0% F) 30.0% Agriculture, forestry and fishing Agriculture, forestry and 20.0% (A-B) 20.0% fishing (A-B) 10.0% 10.0% 0.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2000 2001 2002 2003 2004 2005 2006 2007 Source: WB Staff calculations on Belstat data. Cross-country comparisons based on the compatible classification support the conclusion on Belarus's highly distorted economic structure biased towards industry, construction, and agriculture with market services playing a significantly smaller role compared to their role in other transitional MICs (Figure B2). Figure B 2: Structure of VA: Belarus and comparative countries. 50.0% 45.0% Agriculture, forestry and 40.0% fishing (A-B) 35.0% Industry and construction 30.0% (C-F) 25.0% 20.0% Market services (G-K) 15.0% 10.0% Non-market services (L-O) 5.0% 0.0% Belarus Russia Czech Lithuania Poland Rep Sources: Belstat, Rosstat, Eurostat. 5 9. There are no signs of catching up of labor productivity in industry and non-traditional market services. Labor productivity in two traditional sectors of market services, transport and communication and trade and catering, was higher than the economy-average and labor productivity in industry and construction across the two periods. However, in 2005-08 the difference between industrial labor productivity and productivity in the transport and communication sector became smaller, while the trade and catering sector maintained its productivity advantage vis-à-vis industry and construction. As far as other market services are concerned, these sectors were lagging behind other sectors of economy, both in terms of the labor productivity level and the rate of labor productivity growth (Figures 1.7-1.8). Hence, there is a potential for improvement in productivity and efficiency of the sector that would contribute to an increase in productivity and efficiency of the economy as a whole. Figure 1.7: Labor productivity by sector Figure 1.8: Growth in Labor Productivity (national-wide LP=1) (national-wide LP growth=1) 1.8 1.4 1.6 1.2 1.4 2001-04 1.0 1.2 2001-04 1.0 0.8 0.8 2005-08 0.6 2005-08 0.6 0.4 0.4 0.2 0.2 0.0 0.0 Source: WB staff calculations on Belstat data. II. BUSINESS SERVICES 10. Business services are mainly supplied to other enterprises, while the public sector and households can also use these services (especially legal, architectural and engineering, and technical testing activities). Many of these services could be provided in-house by enterprises themselves or purchased (outsourced) from service providers, which enables the client enterprise to focus on its core activities. Rapid growth in business services is typically an outcome of specialization in a market economy. As companies focus increasingly on their core functions, they buy more non-core services from third parties (i.e. outsource). The business services industry has been growing much faster than the market sector as a whole in MICs and HICs, and it has been an important job-creating machine. Apart from its dynamism, the business services sector is widely regarded as strategic because of its contribution to the modern knowledge economy. Availability of high quality and wide variety of business services may impact decisions about the FDI location. Access to high-quality business services has a positive effect on all sectors of economy ­ users of these services. Many empirical studies have found a significant positive productivity effect of business services use.7 7 For instance, an increase in the use of BS in 1988-90 by 1 percent resulted in VA growth by 2.6-4.2 percent in four EU countries ­ Italy, France, Germany, and the UK. For more examples of empirical findings regarding a positive link between BS use and productivity see, Henk L.M.Kox (2004). 6 11. This section draws on the results of the survey of 516 industrial enterprises representing eight major industrial sub-sectors, conducted in August 2009. The main objectives of the survey were to (i) look at the demand-side of market for business services in Belarus, i.e. to identify factors, affecting the use of different business services, and their outsourcing; (ii) access major constrains for business services development and a link between the use of business services and enterprise performance. 12. The intensity of business services outsourcing depends on the type of business services. The survey results suggest the following: (i) in Belarus, a rather small percentage of firms does not use business services at all ­ this is true in relation to all business services; (ii) Belarusian industrial enterprises, as a rule, outsource marketing and advertising; logistics, transportation and freight storage; after sales servicing of the information system (software, hardware, networks, etc.); and development and follow-up of design, technical and other types of documentation business services; (iii) such business services as servicing of technological equipment (except warranty servicing), managerial consulting, analytical and information support, and HR services, personnel selection and training are often outsourced but also frequently provided in-house; (iv) such business services as legal and accounting services and, development of new lines of products are provided mostly in-house; and (v) other business services are often or regularly outsourced. These business services include audit and the quality management system (50 percent of respondents), testing, control and technological-engineering maintenance of specific equipment and products, certification, privatization, patent services, and office cleaning (Table 2.1). Table 2.1: Use of business services by industrial enterprises (% of answers for every type of BS) DO NOT NEVER SOMETIMES Outsourcing on use outsource; outsource a REGULAR at all prefer provide BASIS in-house Legal services 2.8 51.7 42.1 3.4 Marketing, advertisement 2.2 13.8 53.5 30.5 Accounting services 1.2 68.9 25.3 4.6 Logistics, transportation and freight 7.0 16.9 48.9 27.2 storage After sales servicing of the information 1.8 11.3 49.8 37.2 system (software, hardware, networks, etc.) Development and follow-up of design, 3.8 16.6 51.5 28.1 technical and other types of documentation Servicing of technological equipment 1.0 36.9 53.7 8.4 (except warranty servicing) Development of new lines of products 7.9 56.2 29.8 6.1 Managerial consulting, analytical and 8.5 27.3 50.0 14.3 information support HR services, personnel selection and 1.4 27.5 57.6 13.5 training Other (specify) 0.0 0.0 30.8 69.2 Source: Business Services Survey, 2009. 7 13. Outsourcing business services to SOEs or non-SOEs (NSOEs) varies depending on the type of business service. After sales servicing of information systems (software, hardware, networks, etc.), logistics and accounting services, marketing and advertising are mostly outsourced to private companies. Both SOEs and private companies are used (almost at par) as providers of legal services, servicing of technological equipment, managerial consulting, analytical and information support. SOEs companies are dominant providers of development of new lines of products; development and follow-up of design, technical and other types of documentation; and HR services. In general, the use of foreign organizations (both residing in Belarus and from abroad) is not very common with a higher incidence in case of outsourcing of servicing of technological equipment (20.9 percent), development of new products (18.1 percent), marketing and advertising (15.6 percent), and logistics and transport services (15.1 percent) (Table A1.1 in Annex A1). 14. Private companies might not be in an equal position with state organizations: ceteris paribus, SOEs tend to outsource business services to SOEs. For those business services that are likely to be provided by private companies (i.e. logistics services), the distribution of answers is almost equal for SOEs and NSOEs. However, for business services that are still supplied by state organizations alongside with the private sector, SOEs tend to outsource the services to state organizations (Figures 2.1-2.4). The suppressed competition, in turn, affects adversely quality and availability of the services provided, as well as their prices. Figure 2.1: Choice of business services Figure 2.2: Choice of business services provider: logistics provider: development of new products Figure 2.3: Choice of business services Figure 2.4: Choice of business services provider: HR services, personnel selection and provider: servicing of technological training equipment HR services, personnel selection and training Servicing of technological equipment Providers: SOEs Providers: SOEs Users: SOEs 70.3 3.7 25.4 0.7 Users: SOEs 46.8 38.6 6.4 8.3 Providers: NSOEs Providers: NSOEs Providers: Foreign companies based Providers: Foreign companies based in Belarus in Belarus 50.0 47.0 1.8 1.2 Providers: foreign companies from 31.2 56.3 3.8 8.7 Providers: foreign companies from Users: NSOEs Users: NSOEs abroad abroad Source: Business Services Survey, 2009. 8 15. Quality, price, and shortage of respective expertise in-house are the factors determining outsourcing. Quality (use of professionals of high qualification) is a dominant reason for outsourcing such business services as accounting, development of new products, managerial consulting, analytical and information support. The price factor (cost saving) dominates the decision to outsource logistics services. For all other business services the major factor is shortage/absence in house of required skills/equipment (Table A1.1 in Annex A1). 16. Cost-saving and availability of specialized skills are important factors behind continuation of provision of business services in-house; the inertia of enterprises management seems to be the dominant factor. With some variations by type of business services, a tradition/habit of having all business services in-house seems to be either the dominant or second most important factor. 409 out of 503 companies responded to this question (or 81.3 percent responses) by checking the box we always do this in-house for at least one of business services (Table A1.3 in Annex A1). The inertia might not only be physiological. Most likely, a more fundamental reason is the lack of a real competitive pressure on enterprises and the delay in restructuring. Since we always did this on our own is the dominant factor for having most of professional and employment services in-house, this could also be a symptom of understating these services and considering business as usual in these areas as a factor not affecting the enterprise performance. The cost-saving factor could be rather misleading because it does not take into account a higher quality of services by specialized business service providers and, thus a possibility to get higher value for money from outsourcing. Availability of qualified technical staff as a reason for not outsourcing such services as development and follow-up of design, technical and other types of documentation, and new products development might have a more practical explanation: Belarus has had rather good engineering school and well-established traditions of having substantial R&D departments at large enterprises. In addition, there might not be enough specialized supply of these services (see further in the text). Also for these business services, the risk of information leakage seems to affect the decisions of having the services in- house, which points to another very important problem, namely, securing intellectual property rights. Unresolved issues in this area might become a serious impediment for growth in the R&D and human-capital intensive business services. The regulatory framework has been cited as an impediment for outsourcing of logistics and transport services much more frequently than in relation to all other business services. 17. In the last two-three years the use of all business services has increased, but many companies have maintained status-quo. On average, there has been no change in intensity of use of any business services on 60 percent of industrial enterprises. At the same time, if the change has happened, positive dynamics has been observed in relation to all services with especially strong dynamics for such business services as marketing and advertising and after sales servicing (Figure 2.5). 9 Figure 2.5: Extent of business services use in the last 2-3 years Balance of answers No change 80 70 60 50 40 30 20 10 0 Source: Business Services Survey, 2009. *Balance of answers: difference between percents of responses ["start using" and "increase usage"] and ["decrease usage"] for every type of BS. 18. Development of business services market (outsourcing) has been slow. Similar to the overall use of business services, no changes in relation to outsourcing occurred at 65 percent of companies. However, unlike in the overall use of business services, dynamics of outsourcing represents a mixed picture: it has been positive for marketing and advertising, logistics, after sales servicing, development of technical documentation, managerial consulting, and HR services; while it has been negative for legal and accounting services, service of technological equipment and development of new products, i.e. companies have developed or started to use more of these services in-house (Figure 2.6). Thus, the results of the survey show not only the growing importance of such business services as marketing and advertising, but also increasing propensity to outsource these business services. Marketing and advertising are the areas of competitive disadvantages for exporters, identified in the 2008 Competitiveness Survey of industrial enterprises. Both the increase in the use of these services and the recourse to more specialized (off-house) companies signal attempts to address this issue and, indeed, this was behind some success stories in export-oriented machinery sector companies.8 8 See, World Bank (2010)_b. 10 Figure 2.6: Changes in outsourcing in the last 2-3 years 80 Balance of answers No change 70 60 50 40 30 20 10 0 -10 Source: Business Services Survey, 2009. *Balance of answers: difference between percent of responses ["completely outsourced and closed (or substantially reduced) our subdivision" and "outsource more often"] and ["do in-house more often"] 19. There is a strong, unsatisfied demand for business services, which directly affects competitiveness. Problems with an unsatisfied demand could stem both from the lack of information and from underdevelopment of the business services industry. 352 out of 516 companies (68.2 percent of total) responded to the question about external business support services that such services were needed but not-available. As such, the following business support services were cited most frequently: development of new technologies, high-skilled personnel training, setting up a modern information system at the enterprise, and development of new competitive products (Table A1.4 in Annex A1). These business services directly affect efficiency of production and competitiveness of output. Management and logistics services follow these four by the frequency of responses. Underdevelopment of such services may impede further growth of the Belarusian manufacturing sector and its competitiveness both at external and domestic markets. 20. There is some evidence that an increase in the use/outsourcing of business services prior to the crisis may have increased the resilience of an enterprise during the crisis. Positive relations between enterprise performance and business services use were identified for different business services. More intensive use of R&D and HR services seem to be among important factors affecting enterprise performance. Companies with increased sales during the crisis were using/outsourcing development of new products more actively (Figure 2.7), while companies with positive growth rates of export during the crisis appeared to intensify the use/outsourcing of HR services, personnel selection, and training (Figure 2.8). 11 Figure 2.7: Use of new product Figure 2.8: Use of HR services and export development services and sales during during crisis crisis Source: Business Services Survey, 2009. 21. Most of the conclusions derived from the descriptive statistics based on the survey data have been supported by an econometric analysis. We have looked at the determinants of changes in demand for services (overall and for outsourcing) as well as on the impact of the extent of use of business services and outsourcing on enterprise performance prior and during the crisis. The methodology of analysis and models employed are provided in Annex A2. In short, the major findings are as follows: Size matters for the intensity of use of business services and outsourcing: an increase in demand for business services and their outsourcing is unlikely to come from small companies. This is an important finding confirming the importance for larger companies to reap the benefits of specialization. Market structure matters for demand for marketing and advertizing services: sectors with a large number of producers at domestic and external markets (wood, construction materials, food, and light industries) are likely to increase the use of these services while less competitive sectors are not. The stronger the competition, the stronger the demand for outsourcing ­ firms in light and food industries have increased outsourcing of marketing and advertising services. Company's form of ownership and affiliation to the "GDP-forming" group9 matters for the demand for R&D services (development and follow-up of design, technical and other types of documentation, and development of new lines of products): SOEs and GDP-forming enterprises are more likely to use the services either in-house or through increased outsourcing. This result, however, should not be treated as if SOEs and GDP- forming enterprises are more prone to innovation. A more plausible explanation is that these companies experience stronger pressure to innovate (both administrative and market) compared to other companies because (i) they are subject to more control from the state and subject to innovation targets; (ii) they are often recipients of the state support linked to innovation activities; and (iii) they are more dependent on export than small private companies and, thus, are under the external market pressure to innovate. At the same time, these companies are also subjects of a whole spectrum of targets and controls, so that more detailed and thorough analysis of all types of interventions is 9 So called GDP-forming (valoobrazyiushchiye) enterprises are the most important enterprises in the economy, the operation of which (including meeting the quantitative targets) is under special control of the authorities. In 2009, there were 172 GDP-forming enterprises, out of which 160 were industrial enterprises. These 160 enterprises were responsible for about 55 of total industrial output in 2009. 95 GDP-forming industrial enterprises participated in the survey. 12 needed to understand which ones work in favor of innovation, which ones are just redundant and which one works in opposite direction. The use of business services and outsourcing matters for enterprise performance, but their impact has been different before and during crisis. Before the crisis, sales of firms using more extensively accounting services, service technical equipment, and managerial consultancy were unlikely to be reduced. On the other hand, sales and exports of firms using more extensively marketing services were likely to have increased, and there was a positive correlation between sales and outsourcing of marketing services. Exports of firms (SOEs and GDP-forming enterprises) outsourcing after sales services, documentation development, and HR services increased significantly. During the crisis, the use of marketing services and their outsourcing have not helped improve performance of enterprises. In fact, sales and export have fallen more among the firms using these services.10 Sales of firms outsourcing technical servicing of equipment have increased. Export of firms, which expand efforts on developing new products (in-house or outsourcing) as well as those outsourcing documentation development services are likely to have increased too. III. TRADE IN SERVICES 22. Exports of services grew at a very high rate, but so did imports; so surplus in trade in services was offsetting a declining share of merchandize trade deficit. Total services export increased almost 4.3 times in 2008 as compared to 2000, but imports increased almost 5-fold. Thus, while the surplus in trade in services was maintained, it compensated for a smaller share of deficit in merchandize trade (Figures 3.1-3.2). Figure 3.1: Export, Import and Balance of Figure 3.2: Export, Import and Balance of trade trade in goods, $US millions in services, $US millions 40,000 5,000 Exports 30,000 4,000 Imports 20,000 3,000 Service trade balance 10,000 2,000 0 1,000 -10,000 0 Imports -20,000 -1,000 Exports -30,000 -2,000 Merchandise trade balance -40,000 -3,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: NBRB; WB Staff calculations. 23. Compared to its regional peers, Belarus's performance in trade in services has been mixed. Indeed, in 2005-08 as compared to 2001-04, Belarus's services export growth accelerated much stronger than it did in neighboring countries, but so did import of services. Belarus also managed to maintain a higher rate of real growth of services export than Ukraine and Russia, 10 Of course, use/outsourcing of marketing services did not cause decline in sales. The return to advertising/marketing efforts is obviously rather low when demand is very low and declining. 13 though the price factor also dominated changes in trade in services as it did with merchandize export (Table 3.1). Table 3.1: Trade in services growth: Belarus and neighboring countries Belarus Lithuania Poland Russia Ukraine 2001- 2005- 2001- 2005- 2001- 2005- 2001- 2005- 2001- 2005- Average for the period 2004 2008 2004 2008 2004 2008 2004 2008 2004 2008 Services exports growth, current prices, %* 15.0 25.0 23.3 13.3 6.7 27.4 21.1 25.6 19.9 22.8 Services imports growth, current prices, %* 16.0 27.9 24.5 20.1 10.5 22.8 19.7 23.1 21.8 23.7 Services exports growth, constant 2000 prices, %* 8.7 3.8 10.2 7.2 2.8 27.7 11.4 2.4 10.3 1.3 Services imports growth, constant 2000 prices, %* 11.5 10.8 31.9 22.8 8.2 22.9 16.8 19.2 14.2 8.4 *2005-2007 for Lithuania. Sources: WB staff calculations on data from WITS/COMTRADE, WDI, ECA Regional database. 24. Not surprisingly for a transit country, transport services play a dominant and increasing role in Belarus's export of services. Transport services represent by far the largest category in service exports; their share in total services exports increased from the already high 55 percent in 2001 to over 70 percent in 2008. The share of all other services in Belarus's services exports fell (Figures 3.3-3.4). Within transport services, the share of pipeline services increased from 1/3 in 2001 to over 40 percent in 2008. Given Belarus's geographical location and infrastructure, it is not a surprise that export of transport services are of crucial importance. For instance, transport services export accounted for over 60 percent of Lithuanian services exports and almost 1/3 of Polish services exports. What is, however, less usual, is a reduction in the share of travel services (more than two times) and of other business services. The share of the latter fell from 15 percent of total services export in 2001 to 10 percent in 2008. Figure 3.3: Structure of services export, 2001, Figure 3.4: Structure of services export, % total 2008, % total Transport services Transport services 1.2 1.7 Travel services Travel services 0.4 0.1 10.0 0.0 14.8 Communications services 0.1 Communications services 3.8 0.6 2.3 0.3 Construction services Construction services 0.3 3.4 4.1 Insurance setvices Insurance setvices 4.7 8.5 Financial services Financial services 55.0 Computer and information Computer and information services services 18.5 Royalties and licensing 70.3 Royalties and licensing services services Other business services Other business services Other services Other services Source: WB staff calculations on NBRB data. 25. Growth in exports of all services, except for travel services, has accelerated since 2005. Export of transport services grew at a higher rate than other exports of services during 2005-08 (Figure 3.5). Growth in travel services exports decelerated substantially, which should be considered as a rather worrisome trend, pointing not only to the problem of underdevelopment of 14 domestic services, but also to the failure to attract an increasing amount of business and tourist travelers to the country. Figure 3.5: Services export growth by type of services and by period 45.00 40.00 35.00 30.00 25.00 2001-04 20.00 2005-08 15.00 10.00 5.00 0.00 Transport services Travel services Other business services Other services Source: WB staff calculations on NBRB data. 26. On the imports side, transport services became increasingly important, while travel services declined. The share of transport services in total services imports increased from less than 16 percent in 2001 to almost 50 percent in 2008. The importance of all other services in imports, especially travel services import, fell during this period (Figures 3.6-3.7). Figure 3.6: Structure of services import, 2001, Figure 3.7: Structure of services import, % total 2008, % total 2.0 1.8 15.7 25.1 23.5 Transport services Transport services Travel services 49.4 Travel services Other business services Other business services Other services Other services 25.3 57.2 Source: WB staff calculations on NBRB data. 27. Services are yet to become an important sector for FDI. By contrast, in many transition economies, it is precisely the services sector that attracts large amount of FDI, and this process is strongly linked to trade liberalization, opening domestic market for foreign firms, privatization of state monopolies, and domestic policies and regulations. FDI in the Belarusian banking sector increased substantially, albeit from a very low initial level from 0.2 percent of GDP in 2007 to 1.1 percent in 2009 (or from less than 5 percent of total inward FDI in 2007 to 30 percent in 2009). This is the result of the two processes: (i) positive changes in rules and regulations in banking sector (i.e. abolition of the golden share rule, lifted ceiling on foreign capital participation, transition to IFRS), and (ii) initiated privatization of state-owned banks (i.e. BPC-bank). A wide 15 range of services (from telecommunications to professional services) are potentially attractive for FDI areas should further liberalization and privatization progress, removing barriers to entry not only for foreign suppliers, but also for new domestic (private) firms. 28. Of the 20 countries covered by the Investing Across Borders indicators in the Eastern Europe and Central Asia region, Belarus is the least open to foreign equity ownership. It imposes severe restrictions on foreign ownership in many sectors, in particular in the service industries. Sectors such as fixed-line telecommunications services, electricity transmission and distribution, and railway freight transportation are completely closed to foreign ownership. In several other sectors, including media and insurance, foreign ownership is limited to a less-than- 50 percent stake. In addition, a comparatively large number of sectors is dominated by government monopolies, including, but not limited to those mentioned above. Those monopolies, together with a high perceived difficulty of obtaining required operating licenses, make it difficult for foreign companies to invest. 11 The attractiveness of FDI in services is because of their role not only as a channel of technology diffusion, but also as an enhancer of a competitive pressure allowing for reduction of prices and/or increase in quality and variety of services. Availability of high-quality, sufficient variety, and relatively low-cost domestic services, in turn, will impact decisions on further FDI, not only in services, but also in manufacturing. Figure 3.8: EBRD reform indices: Belarus and neighboring countries, 2009 Russia index of infrastructure reform Ukraine index of reform of non-bank financial institutions index of banking sector reform Poland index of competition policy Lithuania index of price liberalisation index of enterprise reform Belarus 0 1 2 3 4 5 Source: EBRD Transition Report 2009. 29. Services sector reform has been very slow, apparently outside the government priority reform agenda. Belarus is lagging behind most of transition economies in the progress in transition reforms. This is true in relation to reforms in the services sector, as suggested by various indices of the quality of relevant policies (Figure 3.8). Slow reform together with unresolved business climate issues (discussed in the next section of this Note), may explain relatively poor performance of the services sector as well as declining competitiveness of the manufacturing sector.12 Empirical studies of economies in transition have found high correlation between these policies with inward FDI, as well as a statistically significant link between the 11 Investment Climate Advisory Services of the World Bank Group (2010). 12 See, World Bank (2010)_b. 16 policies and the countries' growth performance over time.13 Moreover, inward FDI in services affects positively productivity growth performance of downstream firms. 14 Reducing the barriers restricting FDI in services may help accelerate productivity growth in the manufacturing sector and vice versa the lagging services sector reform impedes FDI inflow and further growth. IV. BUSINESS ENVIRONMENT AND REGULATORY ISSUES 30. The services sector is not the focus of the policy to improve business environment. In spite of serious steps undertaken by the Government of Belarus (GOB) since 2007 to improve business environment, it still remains in many aspects far from being conducive for private business growth and development. Many service activities are new for the post-socialist economy. In addition, small-scale privatization (involving privatization of traditional domestic market services) is normally completed earlier than the large-scale privatization (or, as in case of Belarus, progressed somewhat further). Hence, the services sector is represented by a large number of small- to medium-sized firms, mostly private, many of them being relatively new. The services sector in Belarus suffers from being perceived as a less productive and less important sector. The manufacturing sector has been targeted in all policy improvements, while the improvements have had little impact, if any at all, on the environment for services sector growth. 31. The services sector also faces higher hurdles to growth compared to the manufacturing sector. Business environment in Belarus is less conducive for firm's growth, being it manufacturing or services as compared to the ECA average. Moreover, barriers to growth are higher for services sector firms than for manufacturing ones. And, firms in other sectors (which in the BEEPS survey include all other services but retail trade, such as wholesale, IT, hotels and restaurants, transport and logistics, as well as construction) are facing even higher barriers for growth (Figure 4.1). Figure 4.1: Percent of firms identifying issue Figure 4.2: Percent of firms identifying issue as major constraint to growth as most serious obstacle to growth 70 30.0% 60 manufacturing 25.0% 50 40 services 20.0% 30 other sectors 20 ECA average for all 15.0% sectors Manufacturing 10 10.0% 0 Services transportation access to finance customs&trade tax rates labor skills level licensing&permits 5.0% regulations business 0.0% Access to Business Inadequately Tax rates finance licensing and educated permits workforce Source: BEEPS. 32. The most severe constraints to services firms' growth in Belarus are high tax rates, skills shortages, business licensing and regulations, and access to financing; however, the severity of these constraints seems to be more rigorous than for manufacturing. Figure 4.2 shows how many firms identified a particular issue as the most serious obstacle to growth. This is a 13 Eschenbach, F. and B. Hoeckman (2006). 14 See, Arnold, J., B. Javorcik and A. Mattoo (2007), Ana M. Fernandes and Caroline Paunov (2008). 17 new question in the BEEPS survey, allowing for assessment of the severity of a particular business environment problem/issue and for ranking problems by their severity. Tax rates and inadequately educated workforce are identified as the top two most severe obstacles to growth for both manufacturing and services sectors. However, the severity of the problem is greater for the services sector, especially as far as labor skills are concerned. The third top most severe obstacle for growth of services firms is business licensing and permits; it also ranks high but somewhat lower for the manufacturing sector (5th top). In terms of a percentage of firms, identifying access to finance as a severe constraint to growth, the services sector looks the same as the manufacturing sector; however, in terms of ranking, it appears the 4th top severe constraint to growth for services sector firms as compared to #3 for manufacturing firms. Figure 4.3: Belarus: most severe obstacles Figure 4.4: Percent of firms indentifying labor for services firms growth as compared to skill levels as major or severe constraint for neighboring countries, percent of firms firm growth identifying issue as most serious obstacle to growth 35.0% 60 30.0% 50 25.0% 40 Belarus 20.0% Belarus Lithuania Lithuania 15.0% 30 Poland Poland Ukraine Ukraine 10.0% Russia 20 ECA Russia 5.0% ECA 10 0.0% Access to Business Customs and Inadequately Practices of Tax rates 0 finance licensing and trade educated competitors in permits regulations workforce the informal 2008 2005 2002 Sector Source: BEEPS. 33. High tax rates are the most severe obstacle to services growth in most ECA countries, but in Belarus the problem appears even more acute. High tax rates are perceived as the most severe obstacle to services firms' growth not only in Belarus, but also in all neighboring countries except Ukraine (where it ranks #2 after political instability) as well as for the ECA region as a whole. However, the percentage of firms that identified this problem as the top obstacle is substantially higher in Belarus than in all neighboring countries (except Lithuania) and ECA average. Moreover, only in Belarus more services firms identified this problem as the top obstacle than manufacturing firms; in all countries and in the region as a whole the situation is reverse (Figure 4.3). This finding points to not only well-known problem of high tax burden in Belarus, but also to the fact that this burden is biased against services firms. 34. Despite recent reforms to reduce the rates and streamline the tax system, there remains a large tax policy agenda, especially in services. The rates of local taxes on goods and services were unified to the lowest (on goods) rate of 5 percent on January 1, 2009.15 In the presence of a solid national-wide Value Added Tax (VAT), the sales tax increased the tax burden and tax compliance costs, and created an inefficient duplication. From January 1, 2010 sales tax on goods was eliminated completely but not local tax on services. Contributions to innovation funds also 15 Prior the rate of local tax on services was 10 percent. 18 create various distortions in the system (due to their pervasiveness and differentiation as well as due to their nature of essentially turnover taxes), with the services sector companies suffering the most. Thus, unequal tax treatment of goods and services producing sectors remains an issue. 35. Skills shortages have emerged as a severe new problem for Belarusian firms. Inadequately educated workforce was ranked rather high among the most severe constrains to growth in all neighboring countries and in the ECA region as a whole (Figure 4.4). For the ECA region it was ranked as the fifth most severe constraint to growth of services firms, but it is ranked #2 for Belarus, #3 for Poland, #4 for Lithuania and Russia, and #6 for Ukraine. As in case with tax burden, only in Belarus, the percentage of services firms identifying skills shortages as the most severe obstacle for growth was higher than the percentage of manufacturing firms. 36. Moreover, in none of the neighboring countries, the change in perception of skills shortages as an obstacle for growth was as drastic as in Belarus. In general, a striking result from the latest BEEPS is a dramatic increase in the percentage of firms identifying workers' education and skills as a major impediment to their growth prospects (Figure 4.4). The advantages of most of ECA countries were seen in educated and skilled labor force and, indeed, until 2005 this was not an area typically identified by firms as a constraint. The situation changed during boom years of 2005-08, especially in Belarus.16 In none of the neighboring countries the perception of skills shortage as a major constraint to growth increased as drastically as in Belarus. 37. This might be due to the insufficient attention given to on-the-job and formal training. An ability to adapt, retrain, and absorb on-the-job training is increasingly critical. According to the latest BEEPS, the percentage of manufacturing firms, offering formal training in Belarus is higher that the ECA average (44.4 percent as compared to 34.5 percent); however, it is significantly lower than the percentage in all neighboring countries (except Ukraine). Moreover, the percentage of employees offered formal training in Belarus is significantly lower than in the ECA region on average and in any neighboring countries (Figure 4.5). No data are available for services sector firms, but there is no reason to believe that the situation for these firms is better than for manufacturing firms. The crisis, obviously, has released this constraint, but return to a sustainable growth path may be dashed against the same bottleneck. It is needed to identify the source of the problem and to address it without any further delay since changes in the curriculum, training programs, etc. need some time and, when implemented, will results in increased availability of new skills in the labor market with some time lag. Figure 4.5: Formal training: Belarus and selected countries 70 60 50 % firms offering formal training 40 30 % employees offered 20 formal training 10 0 ECA Belarus Poland Russia Ukraine Latvia Lithuania average Source: BEEPS, 2008/09. 16 See, World Bank (2009). 19 38. Business licensing requirements are burdensome, restricting competition and hampering entry and growth. A cumbersome and excessive licensing regime remains a serious constraint for doing business in Belarus, especially, in services. It is ranked by Belarusian services firms as the third top constraint for growth. Despite some recent improvements in this area, the list of economic areas and specific activities subject to licensing requirements is excessive, while the procedures for licensing remain lengthy and costly for legal entities and individual entrepreneurs alike. At the moment, there are 53 types of licensed activities; 35 of these comprise 331 sub- licenses.17 There are currently 230,000 valid licenses, a vast majority of which (almost ¾) are for services activities (trade and catering, legal, and audit services). Licensing conditions and requirements are too broad, putting firms at risk of being unwittingly shut-down for incompliance.18 They not only put a significant burden on services firms but also restrict competition by preventing new enterprises from entering the field. Needless to say, such barriers reduce incentives of firms protected from competition to innovate and increase productivity and competitiveness. 39. In general, administrative and regulatory burden on services has been excessive. The result is the low level of competition, and low quality and variety of services at reasonable prices. Prices for some market services, which are not socially-important or which are provided by monopolists (such as legal and technical services), are regulated. Profit margins on audit services are regulated. Both prices and margins are regulated for public catering firms, though recently cafes and restaurants of the first and deluxe category were exempted from the regulation. The list of goods subject to trade margins, while substantially reduced and streamlined (the measure supported by the WB DPL), still covers 48 product groups and needs to be further reduced. In addition, trade and catering firms suffer from regulations on opening hours and requirements of local produce content (75 percent for food stores), which in any event are all but impossible to monitor, track, and verify accurately. However, this is far from being a complete list of regulations, needlessly restricting competition in the services sector. It is effective competition that keeps the quality of services high and the price of services in check. Effective competition on the domestic market also improves the international competitiveness of firms. 40. The GOB stated an ambitious target for Belarus to climb the next step in income ladder during the next 5 to 10 years. To meet this challenging target, the full potential in the services sector needs to be tapped. Binding constraints for the sector development need to be gradually lifted and appropriate hard and soft infrastructure for the sector development be provided. Malaysia is being facing similar challenge of moving to the next stage of development of high-income and knowledge-intensive economy and the key role in meeting this challenge was assigned to the liberalization and further development of services sector, which has been earmarked as a new engine of growth (Box 2). 17 According to Presidential Decree #17 of July 14, 2003 On Licensing Particular Types of Activities. A new Decree was drafted and discussed with the business community to (i) reduce the number of economic areas and activities subject to licensing requirements; and (ii) simplify licensing procedures and requirements. This has been supported by the WB DPL, but the Decree is yet to be enacted. 18 More details could be found in recent IFC (2010). 20 Box 2.1: Towards a manufacturing-services growth strategy: the case of Malaysia Malaysia has experienced solid growth over the last decades, but it has relied on an economic model predominantly based on capital accumulation and export-oriented manufacturing, with private investment rates being among the lowest in the region. The Government of Malaysia (GOM) set a target to achieve a developed country status by 2020. The new growth strategy under the Third Industrial Master Plan (IMP3), 2006-2020, is being squarely centered on boosting productivity and rebalancing growth from being driven by exports of manufacturing to increasingly driven by services-sector. Promising reforms have been announced in the areas of services and foreign direct investment to revitalize private investment, technology transfer and create higher-value employment opportunities. Some of the most important measures include the following: 27 services subsectors had been liberalized in April 2009, with no equity condition imposed. These sub- sectors are in the areas of health and social services, tourism services, transport services, business services and computer and related services. This followed by the liberalization of banking and financial services. Malaysia Ministry of International Trade and Industry (MITI) and MIDA were empowered to promote and encourage foreign investment in key manufacturing related and support services. Malaysia External Trade Development Corporation (MATRADE) has been assigned to promote export of services, such as healthcare; education; construction and related professional services; franchising; ICT; oil and gas related services. The Professional Services Development Centre (PSDC) and the National Professional Services Export Council (NAPSEC) have been established to identify potential markets for professional services. Capacity building programs for SMEs has been outlined to enhance their access to markets, adopt ICT and have greater access to financing. In particular, the Small and Medium Industries Development Corporation (SMIDEC) has been given the task to develop SMEs in several services industries such as distribution trade, logistics, professional services and manufacturing related services. National Tourism Human Resource Development Council (NTHRDC) was established to enhance the competitiveness of the tourism industry, to develop human resource and coordinate training for the tourism industry. In the retail industry, foreign-owned hypermarkets have been allowed to open outlets in Malaysia to spur growth in the retail industry. To promote investments in selected strategic services industries, foreigners are allowed to own up to 100 per cent foreign equity participation (International Procurement Centres/Regional Distribution Centres, Operational Headquarters, Market Support Services, Central Utility Facilities and other specialized services except Integrated Logistics Services in which foreign equity participation of up to 40 per cent is permitted). In addition, GOM continues to provide fiscal and tax incentives, particularly for approved services projects, tourism projects, R&D projects and training activities. The incentives are in several forms and varied from industry to industry. To attract companies to the Malaysian services sector, the GOM has in place a world-class physical and IT infrastructure and a set of tax incentives and benefits to these companies, including pioneer status or investment allowance, R&D grants, intellectual property protection, no censorship of the Internet and competitive telecommunication tariffs. Sources: Public Bank Berhad Economic Review (various issues); World Bank Malaysia Economic Monitor, November 2009. 21 V. CONCLUSIONS AND POLICY IMPLICATIONS 41. The services sector--a "foster child" of the government's industrial policy--may hold the key to unlocking the new jobs and growth potential for Belarus in the difficult environment after the global crisis. The services sector development in Belarus both in terms of its contribution to growth and employment is low given the country's level of development. The recent trend (increasing contribution of industry and declining contribution of services, especially, market services) is at odds with the experience of other growing economies. Indeed, growth in the services sector could be an additional engine of growth, both through increased productivity of the sector itself and through synergies with manufacturing growth. Labor-intensive services could also provide an important social cushion by absorbing surplus labor created during the global crisis, post-crisis, and further structural reforms. In considering the government's future policy stance towards services, the following issues deserve particular attention. 42. First, the development of business support services has been very slow. In the past 2-3 years, the majority of industrial enterprises did not change either the extent or the provider of business services. The use of such business services as marketing and advertising, servicing of information systems, logistics, transport and storage services, and new product development remains low. At the same time, there is an unsatisfied demand for services, directly affecting competitiveness of industrial output, including those that require high and specialized skills (upgrading information system, modern management systems, and personnel training). 43. Second, managerial incentives seem to adversely affect demand for outsourcing. Demand for business services is likely to come from larger companies, which in Belarus are either state-owned or with a significant stake of the state. Managerial inertia stemming from the absence of a real competitive pressure on these enterprises and the delay in restructuring are major factors of having business services in-house. The cost-saving factor is also important, but it is based on direct monetary comparisons but not on the value for money concept. With the overall changes in the incentives structure from meeting quantitative targets towards efficiency and innovation, demand for high-quality specialized business services would increase. 44. Third, the underdevelopment of business support services holds back the growth in manufacturing and FDI. A large proportion of business services is still provided in-house, implying that Belarusian industrial enterprises have failed so far to reap the benefits of specialization for boosting productivity, efficiency, and competitiveness. Overburdened with a number of non-core activities, these companies continue to be unattractive for FDI and delinked from the powerful potential of the FDI technology transfer. 45. Fourth, trade openness may help improve services performance, whether they are provided by domestic or foreign firms. A wide range of services (from telecommunications to professional services) are potentially attractive for FDI should further liberalization and privatization progress, removing barriers to entry not only for foreign suppliers but also for new domestic (private) firms. The FDI and foreign firm entry to the services market would increase competition and, hence, allow for a reduction of prices and/or increase in quality and variety of services. Availability of high-quality, sufficient variety and relatively low-cost domestic services, in turn, will impact the decision on further FDI, not only in services but also in manufacturing. 46. Fifth, excessive regulations prevent entry and growth of services sector hampering competition, productivity, quality, availability and affordability of services for consumers (private and public, households and businesses). Hurdles for entry and growth of the services sector are even higher than for private manufacturing firms: (i) there is an excessive tax burden on services firms related to the remaining local tax on services; (ii) skills shortages in the services sector are more severe than in the manufacturing sector since the system of education and training 22 is not tailored to the specific needs of the sector; (iii) the administrative burden on services is higher than on manufacturing firms, including excessive licensing requirements, price, profit, and trade margins regulations on services sub-sectors (activities) which do not need them; and (iv) as in case of business services, there is an uneven playing field for private and state owned services companies, because industrial SOEs tend to outsource services to SOEs. Excessive regulations should be lifted, and legislation and institutions fostering competition should be put in place to keep the quality of services high and the price of services in check. 47. The upshot is that Belarus would be well advised to adopt a more balanced growth strategy. Such a strategy would aim to rebalance growth in Belarus towards the private sector in general, and the services sector in particular, both of which could play an important role in the creation of new jobs and incomes. This strategy needs to be implemented through a set of policies addressing both across-the-board and sector-specific obstacles to the private sector development and growth. 48. The preliminary policy recommendations arising from this analysis could be discussed and made more concrete based on the follow up analysis and close consultations with businesses, both domestic and foreign, on sector-specific obstacles as well as sector-specific levers to provide impetus to growth. They are broken down by policy actions involving SOEs, the private sector, and the state. SOE sector Restructuring: getting rid of non-core assets and non-core functions (including outsourcing of business services); Promoting privatization and FDI: reducing state ownership in utilities, banking, telecommunications, transport, and logistics; Hardening budget constraints, encouraging changes in motivation and incentives (including for innovation). Private sector Leveling the playing field for SOEs and the private sector: eliminating/cutting industrial and agricultural subsidies and preferential loans, eliminating local taxes on services, ensuring equal access to bank loans; Eliminating red tape: cutting back regulations and licensing, simplifying entry and exit. State Removing barriers to functioning markets and competition: deregulating products markets, liberalizing prices, eliminating remaining turnover taxes, improving access to land and infrastructure; Enhancing labor mobility, ensuring supply of adequate labor skills: aligning vocational training, training programs, and higher education programs to meet private sector demand, including the one coming from the services sector; Functioning markets for publicly financed services: ensuring cost-effective production of public services though public-private partnerships, competitive, and transparent procurement. 23 REFERENCES Arnold, J., B.Javorcik and A.Mattoo (2007), The productivity effects of services liberalization: Evidence from the Czech Republic, World Bank Policy Research Working Paper 4109. Eschenbach, F. and B. Hoeckman (2006), Services Policy Reform and Economic Growth in Transition Economies, 1990-2004, Review of World Economics, 142(4):746-64. Ana M. Fernandes and Caroline Paunov(2008), Foreign Direct Investment in Services and Manufacturing Productivity Growth: Evidence for Chile. World Bank Policy Research Working Paper No. 4730, September 2008. Investment Climate Advisory Services of the World Bank Group (2010). Investing Across Borders 2010. A pilot indicator set comparing regulation of foreign direct investment in 87 economies. Forthcoming. IFC (2010). Business environment in Belarus in 2009: Survey of small and medium-size businesses". Henk L.M. Kox (2004). "The contribution of business services to aggregate productivity growth," Industrial Organization 0402005, EconWPA. McKinsey Global Institute (2010). How to compete and grow: A sector guide to policy. March. De Melo et al (1997). Circumstance and Choice: The Role of Initial Conditions and Policies in Transition Economies, World Bank Policy Research Working Paper No. 1866, October 1997. Mitra, Pradeep, Alexander Muravyev and Mark E. Schaffer(2009). Convergence in Institutions and Market Outcomes. Cross-country and Time-series Evidence from the Business Environment and Enterprise Performance Surveys in Transition Economies. World Bank Policy Research Working Paper No.4819, January 2009. Raiser, Martin, Mark E. Schaffer and Johannes Schuchhardt (2004), Benchmarking Structural Change in Transition, Structural Change and Economic Dynamics, Vol.15(1), pp. 47-81. World Bank (2005). Belarus: Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth. World Bank Country Economic Memorandum. Report No. 32346-BY. Washington, DC, 2005. October World Bank (2008). Unleashing Prosperity: Productivity Growth in Eastern Europe and the Former Soviet Union. Washington, DC World Bank (2009)_a. Turmoil at Twenty ­ Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union. Washington, DC World Bank (2009)_b. Program Document for a proposed Development Policy Loan to Republic of Belarus. Report No. 50991-BY, October 21. World Bank (2010)_a. Belarus: Industrial Performance Before and During the Global Crisis. Economic Policy Note No.1. Report No. 54371-BY. Washington, DC World Bank (2010)_b. Belarus: Trade Performance and Competitiveness. Economic Policy Note No.2. Report No. 54371-BY. Washington, DC , , , . . Background paper for Belarus Economic Policy Notes, 2010. 24 ANNEX A1. Table A1.1: Business services outsourcing by ownership type of provider (Percent of answers for each type of BS*) Belarusian state Belarusian Foreign Foreign companies/orga commercial organizations organizations nizations organizations operating in abroad (individual Belarus entrepreneurs) Legal services 55.7 61.1 0.5 8.1 Marketing, advertisement 59.9 79.3 3.6 12.0 Accounting services 47.4 75.2 0.7 0.7 Logistics, transportation and 52.2 85.1 8.6 6.5 freight storage Aftersales servicing of the 25.5 91.0 2.3 1.2 information system (software, hardware, networks, etc.) Development and follow-up of 82.6 51.2 2.9 6.5 design, technical and other types of documentation Servicing of technological 61.1 69.1 8.1 12.8 equipment (except warranty servicing) Development of new types of 72.5 42.5 5.0 13.1 products Managerial consulting, 62.4 68.6 1.7 2.4 analytical and information support HR services, personnel 84.2 44.3 1.1 4.0 selection and training Other (specify) 36.0 68.0 0.0 16.0 * Sum is more than 100% due to an option of providing more than one answer. Source: Business Services Survey, 2009. 25 Table A1.2: Factors of outsourcing (frequency of answers for every type of BS*) Cost savings resulting Absence of Use of services Other from the use of services appropriate provided by high- reasons provided by outside specialists skilled specialists (please organizations (it is less (equipment) (whose skills are specify) expensive to buy within your superior to those services than to company available at your establish and/or company) maintain your own subdivision) Legal services 21.4 45.1 43.8 4.9 Marketing, advertisement 44.3 52.1 27.3 3.4 Accounting services 22.8 25.0 52.9 14.0 Logistics, transportation and 64.3 35.4 6.0 10.9 freight storage Aftersales servicing of the 29.4 57.3 34.6 3.3 information system (software, hardware, networks, etc.) Development and follow-up of 28.6 65.3 34.7 3.2 design, technical and other types of documentation Servicing of technological 27.8 57.3 39.9 2.1 equipment (except warranty servicing) Development of new lines of 30.4 41.6 47.8 2.5 products Managerial consulting, 26.5 35.7 45.7 6.2 analytical and information support HR services, personnel 28.5 49.7 35.6 7.9 selection and training Other (specify) 24.0 40.0 36.0 24.0 * Sum is more than 100% due to possibility for providing more than one answer. Source: Business Services Survey, 2009. 26 Table A1.3: Factors of provision of BS in-house (frequencies of answers for every type of BS*) always It is less Our Risk of Risk of LimitationsDo not Other done it in- expensi specialists informatlosing imposed by know reasons house ve to do are better ion leaks control; the who (please it in- and/or are unreliablemanagemen could do specify) house better aware partners t system it for us of the and/or specificities legislation of our work Legal services 67.4 40.5 39.6 15.1 2.7 1.5 0.3 0.6 Marketing, 38.6 46.8 40.9 7.6 6.4 1.2 2.9 1.8 advertisement Accounting services 73.8 32.0 45.8 18.0 4.8 1.5 1.0 0.3 Logistics, 40.6 61.9 23.8 1.3 2.5 5.6 2.5 3.1 transportation and freight storage Aftersales servicing of 29.1 62.9 45.7 17.9 6.0 2.6 2.6 3.3 the information system (software, hardware, networks, etc.) Development and 34.7 49.1 55.1 15.0 0.6 3.0 2.4 4.8 follow-up of design, technical and other types of documentation Servicing of 47.9 59.2 46.5 1.1 0.7 0.0 3.9 1.8 technological equipment (except warranty servicing) Development of new 52.0 43.1 56.9 19.0 2.4 0.6 5.5 1.2 lines of products Managerial consulting, 42.4 37.6 38.2 10.6 4.1 2.4 6.5 2.9 analytical and information support HR services, personnel 54.1 45.4 42.8 3.1 1.3 1.3 1.3 2.2 selection and training Other (specify) 0.0 100 0.0 0.0 0.0 0.0 0.0 0.0 *Sum is more than 100% due to possibility for providing more than one answer. Source: Business Services Survey, 2009. 27 Table A1.4: Unsatisfied demand for business services Services % of answers Development of new types of competitive products 37.8 Development of new and efficient technological solutions (use of international best 49.4 practices) Setting up a new and modern information system at the company (or modernizing the 41.8 current system) Setting up a modern management system 27.0 New high-skilled personnel training (personnel re-training) for your company 42.0 Delegation of auxiliary production functions to a reliable contractor (production of 10.8 components, assembly of modules, etc.) Delegation of sales functions to a reliable and high-skilled contractor (marketing, 24.7 advertisement, logistics, after sales servicing of products, etc.) Delegation of auxiliary managerial functions to a reliable and high-skilled contractor 3.4 (accounting, legal services, etc.) Delegation of the work on servicing the company to a reliable and high-skilled contractor 8.0 (equipment servicing, cleaning the premises, etc.) Other (please specify) 1.7 Source: Business Services Survey, 2009. 28 ANNEX A2. Services Survey Regression Results (A) Determinants of Changes in the extent of use (changes in demand) for Services (internally or externally) (question 5). Model: Each if the 10 service is regressed on the following independent dummy variables: Small (takes value of 1 if firm has 0 ­ 100 employees, or zero otherwise), SOEs (takes value of 1 if the state owns any shares in the firm, or zero otherwise), GDPf (takes value 1 if firm is one of those adjudged officially as a significant contributor to GDP/economy, or zero otherwise), and industrial sector dummy variables for each of fuel, ferrous metals, chemical & petrochemicals, machine-building & metal works, wood pulp & paper, construction, light, and food. Methodology: Two techniques are used alternatively: (i) logit regression with robust standard errors, and (ii) robust multinomial logit regression with. For logit regression, dependent variables are recorded in binary format i.e. 1 or 0 i.e. whether firms use the service or not. Where firms have started using the service or have increased the use of the service, the respective service is given a value of 1. If the firm has reduced usage or where no change in the extent of usage has occurred, the service is given a value of 0. (ii) for multinomial regressions, the dependent variables are recorded 0 if no change has occurred, - 1 if usage has reduced, and 1 if firm has started using service or usage has increased. The base category for comparison is category 0 i.e. where no change has occurred. 19In both cases, the constant is excluded to permit the inclusion of all sectoral dummies. Results (reporting only significant variables, +/- denoting positive/negative coefficient); ***, **, *, denoting significance at 1%, 5%, and 10% levels). Negative coefficient will denote reduction/no change in use, and positive coefficient will denote commencement of use/increase in use. (1) Logistic Regression: Legal services: SOEs (-*), Chemical (-***), machine (-***), wood (-*), light (-**), and food (-*). Marketing: Small (-**), wood (+***), construction (+***), light (+***), and food (+***). Accounting: Small (-*), chemical (-***), machine (-***), wood (-***), construction (-*), light (-***), food (-***). Logistic services: small (-***), gdpf (+*), machine (-*), food (+**). Aftersales services: Small (-**). Development of documentation: chemical (-***), machine (-***), wood (-***),light (-***), Servicing technical equipment: fuel (-**), ferrous (-**), chemical (-***), machine (-***), wood (-***), construction, light, food (all -***) Development of new products: chemical (-***), machine (-***), wood (-**) Managerial Consulting: chemical (-***), machine (-***), light (-*), food ( -***) HR services small (-*), fuel (-*), chemical (-***), machine (-***), wood (-**), light (-**), food (-**). 19 Syntax in stata are as follow: (i) logistic regression - logit legal5 small soe gdpf fuel ferrous chemical machine wood construct light food, no constant vce(robust); (ii) multinomial regression: mlogit legal5 small soe gdpf fuel ferrous chemical machine wood construct light food, noconstant baseoutcome(0) vce(robust). 29 (ii) Multinomial logistic regression: Legal services: Only sector dummies significant (with negative coefficient), hence sectors are highly unlikely to have started using, increase usage of service. Marketing: fuel, ferrous, chemical, and machine industries are highly unlikely to have started using service; whereas naturally competitive sectors like wood, construction, light, and food sectors have increased their usage of service (all significant at 1%). Small firms are unlikely to have increased usage. Accounting: Small firms are highly unlikely to have started using service. All sectors have not seen any change in usage (neither increase nor reduction). Logistic service: gdpf firms have started using service. Small firms are highly unlikely to have increased usage, whereas food sector firms have significantly increased their usage of service. Firms in chemical, machine, wood, and light sectors are unlikely to have reduced usage. Aftersales IT service: SOEs have started using the service. GDPf firms are highly unlikely to have started using the service. Small firms are less likely to have increased usage. Sectoral dummies suggest most have not changed. Development of documentation: SOEs have started using the service. Servicing technical equipment: SOEs have reduced usage. Development of new products: SOEs have started usage of the service, relative to firms with no change. Managerial consultancy: gdpf firms highly unlikely to have started usage of service. HR services: small firms are highly unlikely to have increased the use of service. (B) Determinants of Changes in the use ("doing within organization or outsourcing") of the Services (question 6). The same model and methodology as (A) above. However, for the binary logit regression, the dependent variables with a value of zero or one are synonymous to no outsourcing or outsourcing, respectively. For the multinomial regressions, the 1, 2, 3, or 4 values of the dependent variables correspond to have completely delegated to outside organizations, have increased outsourcing, and have reduced out outsourcing, no changes. The last category is the base outcome. Results (reporting only significant variables, +/- denoting positive/negative coefficient); ***, **, *, denoting significance at 1%, 5%, and 10% levels). Negative coefficient will denote reduction/no change in outsourcing, and positive coefficient will denote commencement /increase in outsourcing. (1) Logistic regression results Legal services: SOEs (-**), ferrous (-**), Chemical (-***), machine (-***), wood (-***), light (- ***), and food (-***). Marketing: fuel (-*), ferrous (-*), chemical (-**), machine (-**) Accounting: All sectors (-***). Logistic services: SOEs (-*),fuel (-*), ferrous (-**), machine (-***). Aftersales services: gdpf (-***), machine (-***), food (-***). Development of documentation: SOEs (+**), fuel (-**), chemical (-***), machine (-***), wood (-***), construction (-***), light (-***), Servicing technical equipment: all sectors (-***) Development of new products: SOEs (+**), other sectors excluding fuel and ferrous (-***). Managerial Consulting: gdpf (+**), all sectors (-***). HR services: small (-**), other sectors excluding ferrous (-**). 30 (ii) Multinomial logistic regression: Legal services: Except small firms, all firms highly unlikely to have completely outsourced or increased use of service. All sectors unlikely to have reduced, relative to firms with no change. Marketing: excluding small firms, construction sector, and food, firms are highly unlikely to have completely delegated. Firms in light and food sectors have increased outsourcing. Accounting: excluding small firms, all firms are highly unlikely to have completely delegated to outsourcing. Small firms have reduced outsourcing significantly. Logistic service: small firms have reduced usage relative to other firms, whereas food sector has increased outsourcing. Most sectors are unlikely to have completely delegated. Aftersales IT service: gdpf are unlikely to have completely delegated/or increased outsourcing. SOEs have reduced outsourcing. Development of documentation: SOEs have increased outsourcing, whereas gdpf firms have started doing it on their own. Servicing technical equipment: small firms are likely to have completely delegated to outsourcing, unlike other firms/sectors. Gdpf have increased outsourcing, whilst SOEs have reduced. Development of new products: SOEs have increased outsourcing, relative to other firms, whilst gdpf firms are unlikely to have reduced outsourcing. Managerial consultancy: gdpf firms have increased outsourcing, unlike other firms/sectors. Firms unlikely to have completely delegated. HR services: small firms are highly unlikely to have increased outsourcing. (C) Impact of Extent of Use of Services on Performance (question 5) Model: each of the four performance measures (sales before and after crisis, exports before and after crisis, takes the value -1 if performance has reduced, 0 if no change in performance, 1 if performance has increased, and is regressed on the following independent dummy variables: Small (takes value of 1 if firm has 0 ­ 100 employees, or zero otherwise), SOEs (takes value of 1 if the state owns any shares in the firm, or zero otherwise), GDPf (takes value 1 if firm is one of those adjudged officially as a significant contributor to GDP/economy, or zero otherwise), and the services (i.e. legal, accounting, marketing, etc) which take value 1 if firm uses/increases usage of service,0 if no change in extent of usage, and -1 if firm has reduced usage. Multinomial logistic regression with robust errors is employed. No change in performance is the base category. Results (reporting only significant variables, +/- denoting positive/negative coefficient); ***, **, *, denoting significance at 1%, 5%, and 10% levels). Negative coefficient will denote reduction in performance, and positive coefficient will denote increases performance. Sales Before the crisis, sales of SOEs and GDPf firms are unlikely to have reduced. Also, firms that use accounting services, service technical equipment, and managerial consultancy, are unlikely to have performed poorly. On the other hand, the performance of SOEs and firms that use marketing services are likely to have increased. Sales of small firms are unlikely to have reduced or increased during the crisis, whereas performances of SOEs are highly likely to have declined. Exports Before the crisis, sales of firms that use marketing services are unlikely to have declined. While exports of small firms are unlikely to have increased, exports of SOEs and GDPf firms increased significantly. During the crisis, exports of SOEs and gdpf firms are likely to have declined significantly, as did the performance of firms that use logistic services. Exports of small firms and firms using documentation development services are highly unlikely to have declined/increased. Exports of firms that develop new products are likely to have increased. 31 Impact of outsourcing of services on performance (question 6) The same model and methodology as (C) above. However, for the multinomial regressions, the service variables take the value -1, 0, and 1, if firms have reduced out outsourcing, no changes, and have completely delegated to outside organizations. The category no change is the base outcome. Sales Before the crisis, sales of SOEs and small firms are unlikely to have reduced, whereas firms that outsource accounting services performed relatively poorly. On the other hand, the performance of SOEs, small firms, gdpf firms are likely to have increased, and there is a positive correlation between sales and the outsourcing of marketing services. Sales of small firms are unlikely to have reduced or increased during the crisis, whereas performances of SOEs and gdpf firms are highly likely to have declined. Sales of firms outsourcing marketing services have also declined, unlike those that outsource technical servicing of equipment. Exports Before the crisis, exports of small firms and firms that outsource marketing services are unlikely to have declined, unlike firms that outsource development of new products. While exports of small firms are unlikely to have increased, exports of SOEs and GDPf firms increased significantly, as did exports of firms outsourcing after sales services, documentation development, and HR services. During the crisis, exports of SOEs and gdpf firms are likely to have declined significantly, as did the performance of firms that outsource logistic services. Exports of small firms are highly unlikely to have declined/increased, and firms that outsource documentation development services are likely to have increased exports. Exports of firms that develop new products are likely to have increased. 32