ENTERPRISE SURVEYS COUNTRY NOTE SERIES ARMENIA 52111 Running a Business in Armenia 2009 N ew data from Enterprise Surveys indicate that in Armenia, financing of investment by owners' contributions or by is- suing equity increased to 28 percent, making Armenia the country with the highest equity financing of investment in all of Eastern Europe and Central Asia (ECA) (figure 1). The value of collateral as a percentage of the loan amount is only 96 percent on average, which is the third lowest percentage in ECA. The value of required collateral has decreased sub- stantially from 2005, when it was 179 percent of the loan amount. Regarding gender and the workforce, although female labor force participation is lower in Armenia compared to most ECA countries, nearly 36 percent of all firms have a majority female workforce. The Enterprise Surveys1 use standard survey instruments to What Is the Average Firm in Armenia? COUNTRY NOTE NO. 7 capture data on the business environment and its effect on While the average firm3 in Armenia has 41 full-time per- competitiveness and firm performance, the relative impor- manent workers, 38 percent of firms have 10 permanent tance of various constraints to employment and productiv- employees or fewer and 60 percent have 20 permanent em- ity, and the business perceptions of the biggest obstacles to ployees or fewer. The vast majority of firms in Armenia are enterprise growth. The survey is designed to be representa- closed shareholding companies, with 90 percent of all firms tive of a country's private nonagricultural economy, and adopting this legal form. Firms in the southwest region of firms sampled are stratified by size, location, and sector (fig- the country are less likely to be closed shareholding com- ure 2)2 to ensure that most major types of firms are covered. panies, with only 69 percent of firms registered as this type Only firms with five employees or more are included in the of legal entity in that region. sample. In Armenia, 374 firms were surveyed from October Female participation in the labor force, in firm owner- 2008 to February 2009. The information collected refers to ship, and in management is lower in Armenia than in most the characteristics of the firm at the moment of the survey other ECA countries (table 2). Firms with female top man- or to fiscal year 2007. agers are three times as likely to have female participation in Figure 1 Armenia Has the Highest Level of Equity Financing in the Region Percent of investment financed through equity or owners' contributions 30 25 WORLD BANK GROUP 20 Percent 15 ECA Regional average 10 5 0 n ia p. ia Es . a vo ey s an ia y ia d. a nd ia ia n va ne ia na a o n Ar p. ia C a p ru ni ni ni ar i ta ija gr Ky ista at en tv on rb rg an en r Re Re Fe Re do rk so st vi ai la ga to ba ua ng is la ne ro La ba eo Se kh m go ov kr m Tu ed Po n Ko ek jik ol Be ak ch yz l Al th Bu FY Hu te ia er Ro G U Sl ze za M ac zb Ta rg ov ze Li ss on Az Ka er M U Ru C Sl M H R d an ia sn Bo Source: Enterprise Surveys. Figure 2 Characteristics of the Firms Interviewed Sector Size Location Large Southeast (100 employees) 15% 15% Medium Other Manufacturing (20­99 services 30% employees) 37% 32% Southwest 15% Yerevan 70% Small Retail (5­19 employees) 33% 53% Source: Enterprise Surveys. ownership than firms with male managers (73 percent ver- other sectors, including manufacturing. Small firms are also sus 25 percent of firms with male managers). Manufactur- significantly more likely to have female employees than ing firms are much less likely to have female top managers, medium firms. with only 4 percent versus 14 percent of other services and The vast majority of firms in Armenia are fully domesti- 22 percent of retail firms (figure 3). Also, 21 percent of small cally owned. Only around 11 percent of firms have any for- firms have female top managers in contrast to 4 and 7 per- eign participation in ownership, while 4 percent of firms are cent for medium and large firms, respectively. No firms with fully foreign-owned. Government participation in the own- government ownership have female top managers. ership of private sector firms is relatively low in Armenia Nearly 36 percent of all firms have a majority female (table 2), with nearly 99 percent of firms having no gov- workforce. There is significant clustering in female labor ernment participation in ownership. force participation in the formal sector by type of firm and Within Armenia, firm age and years of experience of the firm location. Just over half of employees in other services top manager vary considerably depending on the firm's size firms are female, in contrast to just under a third of firms in and sector, though firms are on average fairly young. Over Table 1 How Does Armenia 2009 Compare within Eastern Europe and Central Asia? Descending ranking Ranking 1 assigned to the largest value (out of 29 countries) % of Firms Formally Registered when Started Operations in the Country 19 Private Domestic Ownership (%)* 21 Private Foreign Ownership (%)* 8 Government/State Ownership (%)* 16 % of Firms with Female Participation in Ownership 22 Bank Finance for Investment (%) 16 % of Exporter Firms 13 Domestic Sales (% of Sales) 18 % of Firms with Internationally Recognized Quality Certification 7 % of Firms with Annual Financial Statement Reviewed by External Auditor 29 Capacity Utilization (%) 23 % of Firms Using Their Own Web Site 10 % of Firms Using Email to Communicate with Clients/Suppliers 13 Ascending ranking Ranking 1 assigned to the smallest value (out of 29 countries) Value of Collateral Needed for a Loan (% of the Loan Amount) 3 Number of Power Outages in a Typical Month 10 Senior Management Time Spent in Dealing with Requirements of Government Regulation (%) 14 Average Number of Visits or Required Meetings with Tax Officials 21 Incidence of Graft Index ** 20 Losses Due to Theft, Robbery, Vandalism, and Arson against the Firm (% of Sales) 21 Source: Enterprise Surveys. 2 Table 2 The "Average Firm" in Armenia 2009 Armenia ECA EU-10 Age (years) 9.9 14.0 14.1 % of Firms Formally Registered When Started Operations in the Country 96.2 96.8 98.7 Most Common Legal Form Closed Closed Closed Shareholding Co. Shareholding Co. Shareholding Co. Private Domestic Ownership (%)* 89.9 91.3 90.2 Private Foreign Ownership (%)* 7.7 6.2 7.5 Government/State Ownership (%)* 0.7 1.2 0.5 % of Firms with Female Participation in Ownership 31.8 36.7 39.1 % of Firms with Female in Top Management Position 13.5 19.1 22.7 Experience of the Top Manager (Years) 13.5 16.1 17.1 Average Number of Temporary Workers 5.2 5.7 3.4 Average Number of Permanent, Full-Time Workers 40.9 44.0 37.3 % of Full-Time Female Workers 36.9 38.7 40.5 Source: Enterprise Surveys. 60 percent of all firms are 10 years old or less and 96 per- nance all of their investment from internal funds. Firms cent of firms are less than 20 years old. Manufacturing firms with female participation in ownership finance higher per- are also significantly older than firms in other sectors and centages of their investment from internal funds (61 per- have more experienced managers. Top managers at manu- cent) than do firms without female participation in facturing firms have an average of 18 years of experience, 6 ownership (42 percent), which suggests that firms with fe- more years than top managers of firms in other sectors. Fe- male participation in ownership may be more credit male top managers have an average of 4 constrained. years less experience than their male Sales on credit are well below the counterparts. Eighty-five percent of ECA averages, while prepaid sales are substantially higher than the regional How Do Businesses Operate in firms sell all of their averages. Forty-three percent of firms Armenia? output in the domestic sell nothing on credit and 9 percent of Armenia stands out in ECA for its high firms sell everything on credit. Forty- use of equity, owners' contributions, or market. one percent of sales in Yerevan are pre- stock sales to finance investment. paid, while only 29 percent of sales in Twenty-eight percent of investment in the southwest region and 21 percent of Armenia is financed through equity or owners' contribu- sales in the southeast region are prepaid. tions, which is the highest value in all of ECA. Turning to Armenian firms usually need collateral to secure their other ways to finance investment, an average firm finances loans. Eighty-six percent of firms with loans were required 23 percent of its investment through banks and 47 percent to pledge collateral. The value of collateral as a percentage through internal funds. Thirty-seven percent of firms fi- of the loan amount, however, is only 96 percent on average, which is the third lowest percentage in ECA (table 1). Only Turkey and Kazakhstan require a lower value of collateral on Figure 3 Female Participation in Ownership and Labor Force Varies across Sector average: 90 and 91 percent, respectively. In terms of general access to financial products, 90 percent of Armenian firms 60 have a checking or savings account. 50 Armenia does not stand out from the rest of ECA in 40 terms of international trade (table 3). Domestic sales are Percent 30 90 percent of total sales on average. Eighty-five percent of 20 firms sell all of their output in the domestic market. On av- erage, 8 percent of sales are exported directly and 2 percent 10 of sales are exported indirectly. Firms in Yeravan use their 0 own Web site and use email to communicate with their All Manufacturing Retail Other services % of firms with female in top management position clients significantly more than firms in the other regions % of firms with female participation in ownership within the country. Twenty-seven percent of Armenian % of full-time female workers firms have an internationally recognized certification of quality (like ISO). Larger firms tend to be more innovative Source: Enterprise Surveys. 3 Figure 4 Innovation Gap between Large and number of visits or required meetings with tax officials per Smaller Firms year is two (table 4). These results are consistent with other indicators of Armenia's regulatory burden. The Doing Busi- 95 60 ness 2009 report, for example, ranks Armenia 9 out of 28 90 50 countries in ECA. The Global Competitiveness Report 40 2008-2009 ranks Armenia 9 out of the 17 ECA countries Percent Percent 85 30 included. 80 Firms' experiences with corruption vary by firm charac- 20 75 10 teristics. The percentage of firms expected to make infor- 70 0 mal payments to public officials to "get things done" is 12, Total Small Medium Large firms firms firms which is lower than the ECA average but above the EU-10 Percent of firms that use email to communicate with clients average of 7 (table 4). Nonexporting firms, firms with male Percent of firms with international certification of quality top managers, and firms without female participation in Source: Enterprise Surveys. their ownership are more likely to be expected to pay bribes to get things done. The incidence of graft index, which is an by relying on these technologies and international certifi- indicator of the importance of bribery in dealing with gov- cations (figure 4). ernment officials, is almost identical to Only 19 percent of Armenian firms the ECA average, but again substantially have their financial statements reviewed Male top managers have worse than the EU-10 average of 4.7 by an external auditor, which is the low- (table 4). However, Armenia's rank on est percentage in ECA (table 1). This per- almost twice as many this index of 20 out of 29 presents an centage is much higher for large firms even less favorable view. Similarly, Ar- visits or required meet- (45 percent) than for medium-size firms menia is ranked 19 out of the 28 ECA (25 percent) or small firms (10 percent). ings with tax inspectors countries in the 2008 Corruption Per- Capacity utilization is also somewhat ceptions Index produced by Trans- than firms with female parency International. low--the average capacity utilization in Armenia is 66 percent, so Armenia ranks top managers. Excessive regulatory requirements 23 out of 29 in this measure. may lead to corruption. Each interaction with a government official may present What Constrains Firms in that official with the opportunity to extract a bribe. Male Armenia? top managers have almost twice as many visits or required Armenia is comparable with the rest of ECA in terms of the meetings with tax inspectors than firms with female top regulatory burden placed on firms. For example, senior managers (figure 5). In parallel, a much higher percentage managers spend 10 percent of their time dealing with the of firms with male top managers are expected to give infor- requirements of government regulation, and the average mal payments to public officials than firms with female top Table 3 Choices by the "Average Firm" in Armenia 2009 Armenia ECA EU-10 Internal Finance for Investment (%) 46.6 62.2 62.3 Bank Finance for Investment (%) 22.6 23.8 26.7 Value of Collateral Needed for a Loan (% of the Loan Amount) 95.6 132.8 124.6 Loans Requiring Collateral (%) 85.9 81.1 74.3 % of Firms with a Checking or Savings Account 89.5 88.9 85.2 % of Exporter Firms 22.1 21.8 28.3 Domestic Sales (% of Sales) 89.6 91.0 88.6 Sales Exported Directly (% Sales) 8.4 7.0 9.2 Sales Exported Indirectly (% Sales) 2.0 2.0 2.2 Sales That Are Prepaid (%) 38.0 22.9 10.9 Sales Sold on Credit (%) 30.0 49.4 66.5 % of Firms with Internationally Recognized Quality Certification 26.9 19.9 25.6 % of Firms with Annual Financial Statement Reviewed by External Auditor 19.1 37.9 38.7 Capacity Utilization (%) 66.3 73.7 81.3 % of Firms Using Their Own Web Site 62.8 48.5 63.4 % of Firms Using Email to Communicate with Clients/Suppliers 81.1 73.2 88.5 Source: Enterprise Surveys. 4 Figure 5 Female Top Managers Have Fewer How Has the Business Meetings with Tax Inspectors and Face Environment Changed over Less Corruption the Past Three Years? Number of visits or meetings 2.5 16 The Enterprise Surveys data provide the tools to monitor 14 changes in the business environment across different rounds 2.0 12 of surveys. In Armenia, of 374 firms interviewed in 2009, 99 1.5 10 were also previously surveyed in 2005.4 Since the same Percent 8 firms are interviewed over time, this subset of data is more 1.0 6 appropriate to evaluate the evolution of the business envi- 4 0.5 ronment and the impact of business environment reforms 2 than the full datasets for both years. Considering the full 0 0 All firms Top manager Top manager datasets would introduce effects that are the result of varia- is male is female tions in the sample composition over the two years.5 There- Average number of visits or required meetings with tax officials Percent of firms expected to give informal payments to public officials fore, the following analysis refers only to these firms that were interviewed in both rounds of surveys. Source: Enterprise Surveys. In general, the firms surveyed in both 2005 and 2009 have grown, increasing the average number of permanent managers. In fact, no firms with female top managers report full-time workers from 50 to 66. These increases were con- that they are expected to give informal payments to public centrated among manufacturing firms and domestically officials. One interpretation of these results is that firms owned firms. Armenian firms have also benefited from sev- with female top managers face less corruption because they eral reforms in trade and in business finance. In 2008, Ar- have less interaction with government of- menia implemented an electronic ficials. Senior management in firms with system that allows import and export top female managers also spend signifi- declarations to be submitted electroni- cantly less time (5 percent) dealing with The value of collateral cally to the customs offices. This reform government regulations than senior man- required to secure a may explain why the percentage of firms agement in firms with male top managers using material inputs or supplies of for- (11 percent). loan plummeted, falling eign origin increased significantly be- Security expenses and losses due to from 173 to 75 percent tween the two rounds of surveys, from crime in Armenia are also comparable 71 percent to 88 percent. with the region's averages. Only 50 per- of the loan value. Business financing in Armenia has cent of small firms pay for security, but improved significantly according to sev- much higher percentages of medium-size eral measures. First, for firms in both firms (65 percent) and large firms (85 percent) pay for se- survey rounds, the value of collateral required to secure a curity. Security costs as a percentage of total sales have a loan plummeted, falling from 173 to 75 percent of the loan similar pattern, with 1.2 percent for small firms, 1.4 per- value (figure 6). Both prepaid sales and sales on credit cent for medium-size firms, and 2.6 percent for large firms. nearly doubled as well, from around 15 to 16 percent in Firms with female management and firms in the southwest 2005 to over 30 percent in the 2009 survey. These im- have significantly lower security costs than their counter- provements may have been helped by several reforms in Ar- parts. menia, including the introduction of a public credit registry Table 4 Constraints on the "Average Firm" in Armenia 2009 Armenia ECA EU-10 Number of Power Outages in a Typical Month 2.3 5.8 2.5 Senior Management Time Spent in Dealing with Requirements of Government Regulation (%) 10.3 10.6 9.5 Average Number of Visits or Required Meetings with Tax Officials 2.1 1.7 1.1 % of Firms Expected to Pay Informal Payment to Public Officials (to Get Things Done) 11.6 16.8 7.4 Incidence of Graft Index** 9.9 9.9 4.7 Losses Due to Theft, Robbery, Vandalism, and Arson against the Firm (% of Sales) 0.6 0.5 0.4 % of Firms Paying for Security 59.0 57.7 62.0 Source: Enterprise Surveys. 5 tal, both human and physical. Female participation in man- Figure 6 Collateral Requirements Have Decreased across All Sectors agement and in the labor force as well as capacity utiliza- tion are below regional averages. Value of collateral needed for a loan (% of the loan amount) Notes 300 1. The Enterprise Surveys, implemented in Eastern Europe and Central 250 Asia countries, are also known as Business Environment and Enterprise Per- 200 formance Surveys (BEEPS) and are jointly conducted by the World Bank Percent 150 and the European Bank for Reconstruction and Development for this geo- graphic region. 100 2. This figure presents the unweighted distributions by size, sector, and lo- 50 cation of the firms interviewed without any inferences to the whole economy. 0 3. The term "Average Firm" is used to convey the average firm charac- Total Manufacturing Retail Other services teristics from the Armenia 2009 Enterprise Survey. The sample of firms in- 2005 2009 terviewed is representative of the manufacturing and services sectors of the economy. For more information on the survey methodology, please consult Source: Enterprise Surveys. http://www.enterprisesurveys.org/ Methodology/. 4. The information collected in 2005 refers to the characteristics of the as well as private credit bureaus (Doing Business 2006, 2007, firm at the moment of the survey or to fiscal year 2004. 2008). However, financing by raising equity or by contri- 5. The firms surveyed in both years may not be representative of the Ar- menia's private nonagricultural economy since these are a subset of the full butions of the owners also increased dramatically, rising sample. Firms with fewer than five employees may be included among the from under 1 percent in 2005 to 28 percent of all invest- firms surveyed in both years. The analysis presented is purely descriptive ment financing in the 2009 survey. Internal financing of in- and does not aim at establishing causality between reforms and their in- vestment has decreased from an average of 67 percent in tended effects. 2005 to 48 percent in the 2009 survey. * The ownership variables represent the average ownership composi- tion within a firm. These variables do not represent the ownership compo- Tax administration also seems to have improved some- sition across firms. what between the two rounds of surveys. The percentage of ** Incidence of Graft Index is the proportion of instances in which firms firms that reported that they were expected to give gifts in were either expected or requested to pay a gift or informal payment over the meetings with tax inspectors fell from 71 percent to 9 per- number of total solicitations for public services, licenses, or permits for that cent. Additionally, the average number of visits or required country. The Graft Index is defined in Gonzalez, Alvaro S., Ernesto Lopez- meetings with tax officials decreased from 2.8 to 2.3, and Cordova, J., and E. Valladares, Elio, The Incidence of Graft on Developing- Country Firms. World Bank Policy Research Working Paper Series, 2007. this decline was significant for small firms, retail firms, and ECA includes Albania 2009, Armenia 2009, Azerbaijan 2009, Belarus domestically owned firms. 2008, Bosnia and Herzegovina 2009, Bulgaria 2009, Croatia 2009, Czech Firms in Armenia have benefited from an improved busi- Republic 2009, Estonia 2009, Georgia 2008, Hungary 2009, Kazakhstan ness environment over time, especially in areas of credit ac- 2009, The Republic of Kosovo 2009, Kyrgyz Republic 2009, Latvia 2009, cess and paying taxes. However, firms in Armenia still face Lithuania 2009, FYR Macedonia 2009, Moldova 2009, Montenegro 2009, Poland 2009, Romania 2009, Russian Federation 2009, Serbia 2009, Slovak difficulties. Corruption remains a problem, and Armenia Republic 2009, Slovenia 2009, Tajikistan 2008, Turkey 2008, Ukraine 2008, ranks at the bottom in firms having their financial state- and Uzbekistan 2008. ments reviewed by an external auditor. Armenian firms also EU-10 includes 2009 data from Bulgaria, Czech Republic, Estonia, face challenges in making use of all of their potential capi- Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, and Slovenia. The Enterprise Surveys measure the business environment in over 100 countries in the world. A standardized questionnaire, universe under study, and implementation methodology is used to make sure information is comparable across countries and time. The full data and documentation explaining the methodology are available at www.enterprisesurveys.org. The Country Notes are a product of the staff of the Enterprise Analysis Unit. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 6