Is it possible for a country to have too many entrepreneurs? Probably not. But according to a World Bank study of developing countries in Europe and Central Asia (ECA), having too many small businesses is not necessarily a good thing.

The bank’s survey, titled Accelerating Growth through Entrepreneurship, Technology Adoption, and Innovation, identifies Caucasus and Central Asian states as having problematic business environments, in terms of a country’s ability to move upward from middle-income to high-income status.

“Business dynamism has slowed down, and resource reallocation has shown signs of weakness … because of slower progress on structural reforms and a more challenging global environment,” the report states. “If the middle-income countries in the [ECA] region are to achieve high-income status, their economies must become more dynamic.”

The report notes that Caucasus and Central Asian states, which are all in the ECA middle-income category, tend to have lots of businesses per capita, but they “generate fewer jobs than they do in countries elsewhere at the same income level.” 

Georgia, for example, has about the same number of businesses per capita as does Finland, but the number of employees at firms in Georgia is about two-thirds as those in Finland. Both Georgia and Kyrgyzstan are cited as countries in the ECA area where “firms produce far fewer jobs per capita than expected.”

“Employment density [for middle-income ECA states] falls below what might be expected for economies with many enterprises,” the report states. “The shortfall stems from insufficient expansion among firms …  which prevents them from achieving the scale observed in higher-income countries.”

Medium and large enterprises (classified as those firms with 50-plus employees) are the main drivers of growth, the report states, and more are needed to provide mass employment for growing populations, especially in Central Asia. “Medium and large firms provide 40–50 percent of total employment [the middle-income ECA states] —far less than in Denmark, France, Germany, the Netherlands, the United Kingdom, and the United States—economies in which about three out of four jobs are with medium or large enterprises,” the report notes.

Productivity is a major issue for firms in the Caucasus and Central Asia. The World Bank estimates that employees at small firms in the ECA area (classified as those with 10–49 workers) add only 30–80 percent of the value to finished goods as that generated by workers in Germany. A firm in Kyrgyzstan, according to bank’s report, “generates only about 10–40 percent of the value added by a worker at the average large firm in Germany.”

The bank identifies numerous obstacles hindering efforts by enterprises in the Caucasus and Central Asia to implement structural reforms needed to foster innovation and greater productivity, including a lack of access to credit markets and venture capital, stricter product regulation and inefficient management. 

“Middle-income countries in ECA invest less than middle-income countries elsewhere in the world,” the report states. “Gross fixed capital formation as a share of GDP is consistently lower than in countries of similar income.”

The bank report recommends that the comparatively more dynamic economies in the Caucasus and Central Asia – Armenia, Georgia and Kazakhstan – place greater “emphasis on integrating global technology, expertise, and capital … while establishing the basis for promoting innovation by increasing private investments in R&D and more closely connecting public research investments with the needs of private firms.”

More broadly, the report calls for far-reaching reforms by middle-income ECA governments, including promoting competition and innovation via regulatory changes, lowering trade barriers to “deepen ties with the global economy,” expand access to financing, improve human capital and management capacity and facilitate the adopting of new technologies by businesses.

“Beyond confirming concerns about the excessive number of small businesses in the region, this report highlights two important findings,” the report concludes. “First, ECA lacks large, superstar firms—exceptionally large and innovative companies operating at the global productivity frontier. Second, even the leading businesses in the region generate relatively few jobs and lag their counterparts in richer countries in terms of productivity and innovation.”