The full-scale invasion has become the most exhausting challenge for Ukraine’s economy. Nevertheless, the Ukrainian business sector with strong medium-sized private enterprises has demonstrated outstanding resilience despite economic downfall, missile and drone attacks, and electricity outages. The IER research asserts that in the last two decades, Ukraine has grown a new private sector that secures Ukraine’s resistance.
In 2023, the IER conducted a study of medium-sized enterprises, supported by the Naumann Foundation. The study uncovered tremendous changes in composition of the Ukraine’s business sector since 2003 when a similar business survey was taken by the IER team.
According to the 2023 survey results, most of the medium-sized businesses are private enterprises. Among them, 76% have always been private, and 19% are former state-owned entities. At the same time, there are only 2% of state-owned or municipal enterprises. Only 3% of medium-sized enterprises could not answer the question.
Figure 1. Distribution of Surveyed Companies by Form of Ownership
For comparison, as of 2003, most medium-sized enterprises emerged due to the privatization of former state-owned enterprises, accounting for a significant 88% of the respondents. This phenomenon was typical in transition economies, where medium-sized businesses often formed as part of the workforce optimization process resulting from privatization efforts. At the same time, the share of newly established medium-sized enterprises was insignificant – only 3.5%[1].
Figure 2. Enterprises by ways to achieve average size (% of respondents)
The question of how companies reached the current employee count confirms the recorded positive trend in the business sector since 2003. As of 2023, almost two-thirds (64%) of medium-sized businesses have grown organically from small to larger entities. Most perpetually private enterprises (71%) have small businesses on their history record.
At the same time, only 15% of medium-sized enterprises were large entities in the past, which has reduced the employee count (12.1%) or fragmented into separate enterprises (2.4%). This indicator is a few times higher (43%) for formerly state-owned medium-sized enterprises as they have large businesses in their roots more frequently.
The natural development of the business sector is also confirmed by the recorded pattern: the fewer employees in the enterprise, the more common the answer about growth from small to medium size. Among respondents with 51 to 100 employees, the share of such enterprises is 71%. Besides, almost half (46%) of medium-sized enterprises have from 51 to 100 employees. In contrast, the more employees a company has, the more responses indicate a decrease in the number of employees from large entities to medium ones (for entities with 201 to 250 employees, it is 19%).
The IER research illustrates the transformation of Ukraine’s business sector in the last twenty years. The new private sector emerged based on the development of small businesses born in the independent Ukraine. Many of them managed to scale up their business models to the medium size while upgrading managerial systems, introducing new technologies, and reaching foreign markets.
The new business sector has demonstrated strong resilience to many barriers of the last decades. Ukrainian SMEs have faced numerous historical and economic challenges, including the 2007 – 2008 global financial crisis, the Russian annexation of Crimea and occupation of eastern industrial regions in 2014, the national economic crisis of 2014 – 2015, the COVID-19 pandemic, and finally Russian full-scale invasion of Ukraine in February 2022. At the same time, the government’s economic policy has been unpredictable. The business climate has been under the sign of such impediments as lack of financing, problematic tax administration, and unsecured property rights.
The transformation of the business sector provides insights that a brighter future could be possible for the private sector. The more elaborated economic policy would result in a stronger SME sector (particularly medium-sized enterprises) that would secure Ukraine’s economic victory. The needs of small and medium-sized businesses should be properly taken care of by the to-be-approved SME Strategy (a draft was presented by the government in January 2024).
To sum up, despite economic crises and not always a favorable business climate, a new private business sector has grown in Ukraine in the last two decades. Most medium-sized businesses, representing the heart of the private sector, are private enterprises that have never been state-owned. Two-thirds of medium-sized enterprises have emerged because of growth from small businesses. Thus, the government should pay more attention to impediments that limit the growth of small and medium businesses in the next SME Strategy.
You can learn more about the role and portrait of medium-sized businesses in Ukraine from the report “Medium-sized Business in Ukraine: Terra Incognita of “Hidden” Mittelstand”.
The project is financed by the Friedrich Nauman Foundation Ukraine
[1] For more see http://www.ier.com.ua/files/publications/Special_research/02_SpecialQES_ukr_02_oct03.pdf