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How legislation affects SME’s & the economy

Updated: Apr 3

It might be a truism to note that everything in our lives is subjected to laws: the property we live in, the vehicles we use to get around, the education we receive, the salaries we earn, the clothes we wear, and even the food we eat. Needless to say, the legislation affects all actors in society: from individuals to large multinational corporations, from labor unions to NGOs, and many more.


As an entrepreneur who has experienced the crucial relationship between government (especially the legislative branch) and business throughout the years, I’d like to share some impressive and inspiring cases from world practice, that demonstrate how the economy can flourish when business, especially small to mid-size enterprises (SMEs) are backed by proper government support and legislation.

The reason I’ve chosen to focus on SMEs is the fact that they are the backbone of national economies worldwide. Before presenting infographics and information on the role of SMEs in economies, it’s necessary to provide a definition. So what is an SME and what defines it?


According to Investopedia – A small to mid-size enterprise (SME) is a business that maintains revenues, assets, or several employees below a certain level. The criteria for determining an SME varies among countries and industries. For example, in the European Union (EU) a business with fewer than 250 employees is considered an SME, while in the United States, an SME has fewer than 500 employees.

According to the World Bank, SMEs play a major role in most economies, particularly in developing countries. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included.  According to estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs. However, access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.


Now I’d like to present some cases on how economies and SMEs benefited from government support and share my view on the importance of legislation updates for the needs of the modern business ecosystem.

According to BBC, in 2010 Rustam Minnikhanov shared his take on e-government – “I felt that to be able to take the right managerial decisions, you need to have full information – and this information needs to come to you fast and leave you fast as well”.


Needless to say, Tatarstan is one of the best cases of transitions to e-government in a short period. However, the mindset shift and clear-cut decisions on transition are not enough. The backbone of it all is legislation that it’s being supported by. Such shifts are very crucial in terms of the development of the private sector & public services.


There was a time in history when business and government were viewed as two disparate entities that operated parallel to each other and had very different characteristics and functions. The overarching theme was that business and politics exist in two separate Venn Diagrams, the overlap is minimal. Business and government today are more intertwined than ever. The relation between the two is no longer analogized as separate Venn Diagrams, but instead, the relation is best likened to a common intersection between the two Venn Diagrams.

In this modern day, according to Nikolai Starikov, geopolitics has shifted to become geoeconomics, therefore two major characteristics align businesses with governments – generation of value (profitability) & efficiency.


So how can the subtle art of governance & legislation help businesses?

The changes in legal infrastructure not only have to be analyzed correctly but also dispatched at the right time of necessity. As Emiratis have done throughout recent history.


Through a significant strategy designed to lure multinational companies, Sheikh Mohammed successfully turned Dubai into the global business hub of the Middle East. In the early 1980s, Mohammed had breathed new life into the languishing Jebel Ali port by declaring it Dubai’s first “free zone.”


Just by looking at Dubai, we can see that the creation of the Jebel Ali Free Zone caused the development of clusters of new free zones. These free zones included Internet City, an internet technology area with ownership and tax-related benefits, Dubai Media City, a tax-free zone to increase Dubai’s presence in the worldwide media, Dubai Maritime which will have many facilities including waterfronts & harbors and finally the Dubai international financial center (DIFC) free zone opened in 2002, which attracted international giants.


Free zones in many countries were simply areas where companies were exempt from taxation. But in Dubai, there were no corporate or income taxes, to begin with; the government was funded largely with the profits of state-owned enterprises, oil revenues, and sin taxes on alcohol. However, inside the new free zone, business could be done as much as it was done in the West, according to a specially crafted civil legal code geared specifically toward port businesses. Jebel Ali thrived under the new regime, becoming one of the busiest ports on the planet. Today, it processes over 10 million shipping containers annually.


Finally, in 2002 Mohammed issued a land reform decree allowing any foreigner to own real estate in Dubai, which was a first in any Gulf state.


The success of all the above-mentioned changes & adaptations in Dubai is subject to interpretation, however, the result is mesmerizing from any standpoint. Nonetheless, each of those changes required radical and fast-operating legislation changes for those actions to become successful.

 However, Dubai was literally and figuratively a sandbox for its ruling family to play with, evidently, it turned out to become a huge success. Nonetheless, most countries rely on the development of small and medium-sized enterprises to prosper so that it can have a domino effect on the bigger picture.


The infographic below illustrates my point to some extent.


Legislation's Impact on SMEs & Economy


Any governing state should ask the following crucial questions to evaluate the current status of an SME-friendly ecosystem.


  • How easy is it for a citizen/foreigner to launch & operate a business?

  • How transparent & adequate (big word I know) are the legislation and taxation system, that facilitates the first question?

  • How is the legislation system more favorable than any neighboring country or regional competitors?

Yes exactly, it is not rocket science. Although my background is not in legislation, taxation, or in public sector, as an entrepreneur over the years I have come across various “flaws” that need to be fixed.

After all, there are dozens of cases that can examined such as Singapore, Estonia, Dubai & some newly emerging European countries. However, the pinnacle in all of those cases is radical changes in legislation that derive from a long-term vision & objectives of the state.


Creation of free zones- Dubai

Adoption of cryptocurrency law- Belarus

Creation of e-citizenship-Estonia

The full switch to e-government-Tatarstan


Noted above are just examples and all those radical changes from the past 20 years have heavily relied on legislation and tech. Therefore, we should not only understand but also embrace it. Legislation on business and economy cannot be subject to interpretation, it has to be clear-cut and on point for two primary purposes – justice & prosperity.


Finally, let me state this:
Quick win aspiration & short-term thinking will not deliver long lasting results.

Pura Vida

Rashad


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