Land of entrepreneurs, IT and beauty. New businesses analysis

Business climate in Ukraine has been growing in recent years. Doing Business rating by the World Bank and the results of NBU expert survey prove it. International rating dynamics shows that starting business in Ukraine since 2011 is gradually becoming easier. We were at 118th place out of 183 in 2011, and managed to get to the 56th out of 190 in 2019. What do these numbers mean? How many new businesses appeared in Ukraine over the last three years and how many private entrepreneurs? 

VoxUkraine studied the new businesses in the country based on Opendatabot data for the last two years, from August 2017 to August 2019.

Main outtakes:

1. For two years, from August 2017 to September 2019 the number of new businesses grew 20-30 thousands a month, meaning that each day, around 900 businesses are registered in Ukraine. In total, 686,379 new business were registered in Ukraine during the study period. 
2. PEs are more popular than LLCs. For instance, in 2019 there were 5,7 times more new PEs than there were new LLCs. They make up 77% of all the new businesses.
3. Most of new businesses — both individuals and legal entities — meddle in trade. Individuals prefer retail (30% of new PEs ), legal entities — wholesale (42% of new LLCs). Second most popular sphere is IT for PEs (12%) and real estate for LLCs (6%). 
4. On average we have 1,558 new business per 100,000 people. 40% of new businesses were registered in Kyiv, Kharkiv, Odessa, Mykolayiv, Lviv and Chernivtsi regions. Kyiv, though, is an undisputed leader (20% of all the businesses registered during the study period are located there). 
5. Govermental authorities start checking new businesses 10 months after the registration (on average). The State Service of Ukraine for Food Safety and Consumer Protection (after 9 months on average). It is mostly interested in businesses connected with healthcare. The Pension Fund starts its checks on average 10 months after the registration, though the terms is two times shorter  (around 5 months).

Swift dynamics

Entrepreneurial activity in Ukraine is developing rapidly. During the study period, 686,379 businesses were opened in Ukraine, more than 900 new businesses per day.

An average of 26,632 businesses are registered in Ukraine every month. The dynamics is stable, and the number of new businesses has always been maintained at the level of 20-30 thousand per month.

There is a notable exception, though. The biggest number of new businesses were registered in fall 2018. At that time, the average had increased by more than 7,000 businesses, with a peak in October 2018 — 57 168 new businesses, nearly double the average for the year (29 443 businesses). This can be explained by the governmental measures on unofficial employment prevention undertaken at this time.

What kind of businesses were actively registered in October 2018? Most of the businesses registered during the period are PEs, and their fields of activity are retail of various types (20 577), hairdressing services (6 891) and IT (3 360). It should be noted that these spheres are in the top by popularity regardless of the period.

There is a year-to-year positive dynamics of new businesses emergence rate. The most popular spheres are retail, IT and personal services (especially beauty and hair salons). See below the detailed analysis of the situation by region, registration type, timeline of the inspections and investments. 

PE or LLC?

Out of all forms of registration PEs win by the numbers. In two years 531,019 new PEs appeared in Ukraine (77% of all new businesses). The second type by popularity is LLC (155,359 businesses), 75% out of all new legal entities. Third place goes to the NGOs (10,404). We’ll analyze business only, i.e. PEs and LLCs. NGOs will be the focus of our next research.

Each year, there are more new PEs than new LLCs emerging, and the difference continues to grow. For instance, there were 3,6 times more new PEs in 2017 (86,171 to 31,444). In August 2019 there were 5,7 times more new PEs (172 068 to 43 371). 

This can be explained by the simplicity of the registration process, much lower requirements and taxes. The latter factor is one of the main reasons why entrepreneurs try to retain the PEstatus. LLC registration requires more bureaucratic procedures, and the services of a professional accountant to prepare reports and pay taxes. In addition, businesses sometimes use PEs as a way to pay lower taxes.

In both spheres, the biggest amount of enterprises registered in the sphere are traders (Table 1). During the period under review, there were almost twice as much new PEs in the field of retail trade as in the next most popular sector — IT. As for legal entities, their most popular sphere, wholesale, is seven times ahead of the second most popular branch, real estate.

According to the State Statistics Service, wholesale and retail trade ranked first by the share of GDP (14%). Among other leaders are manufacturing (12%) and agriculture (11%). These three areas together account for about 40% of GDP. At the same time, construction, financial and insurance activities are in the lead in terms of growth in value added.

According to the NBU data. On banks of Ukraine, wholesale and retail also consistently attract a lot of foreign direct investments: $24 million in the first half of 2017, $67 million in the first half of 2018, $36 million in the first half of 2019. In terms of the absolute volume of investments, in the first three months of the years studied trade took the third place, after food and mining industries.

Businesses by region

The regional distribution of emergence of new businesses was to be expected. New businesses appeared most actively in 5 largest regions and Kyiv. At the same time, the number of new businesses in Kyiv is three times higher than the average number in the top 5 regions. Over the past 2,5 years, 139,646 new businesses have been registered in the capital, which is 20% of total number of new businesses registered. 

To assess the intensity of the new businesses emergence for each region regardless of its population we took the number of businesses per 100,000 people as an indicator. The growth was the steepest in Kyiv (2,140 per 100,000 people), Kharkiv (1,923), Odessa (1,890), Mykolayiv (1,765), Chernivtsi (1,745) and Lviv (1,747) regions. In total, they represent 41% of the total number of new businesses. The most popular areas are retail and wholesale, as well as IT. 

The first place by the number of new enterprises per 100,000 people in all regions of the country in is the sphere of retail trade. Wholesale is also in the top three, but usually ranks second or third.

Programming is among the three most popular areas in each of the top regions by the number of new businesses. However, it is absent from the top three in 12 regions with an average 1,272 new businesses per 100,000 population.

Hair styling services are in the top three in 10 regions with an average population of just over 1.5 million. 

Inspecting the new businesses

Governmental regulators inspecting a business if a vital part of its life cycle. 

Which businesses are inspected and how long does it take for a new business to get its first inspection?

Out of 686,379 new businesses 2,099 have attracted the attention of the regulators (0,3% of total), and only 1,203 LLCs were inspected and received the appropriate conclusion. 

We chose the spheres where 100+ businesses were registered during August 207-August 2019, and counted how many of them were inspected. 

The average ratio of inspections to the total number of registered businesses in a particular area is 5.1%. Most often, one check (mode) is carried out at the enterprise, but there are exceptions.

Most often the inspections were carried out for the new enterprises with NACE “retail fuel trade” (38% of the total number of new enterprises in this field) and medical services (27%) — Fig. 5.

Source: Opendatabot

Instead, there are hardly any audits in the areas where most businesses are registered. In all top 3 spheres by number of registrations, the frequency of inspections is less than 1%: in the sphere of construction of residential and non-residential buildings 67 inspections were carried out for 4,702 new businesses (1.4%), in the leasing and operation of own or leased real estate property — 55 for 5,376 (1%), in the sphere of non-specialized wholesale trade 48 inspections were carried out for 28 379 businesses. 

However the relatively low number of inspections resulted in quite a number of violations discovered. The most were in the living space lease — 650 violations, almost 12 per company. Most of them were discovered by the Main office of the State Emergency Service (435 violations), and the Main office of the State Service of Ukraine on Labor (91 violation). 

For construction companies, there were three violations per company on average, and for the non-specialized wholesale trade — 1:1. 

Retail fuel trade is the first by the number of violations. Regulators have discovered 1400 violations (12 per company on average) with the average 3 per company among all the spheres in general. 

Who conducts the inspections?

1st place by the number of inspections goes to State Architectural and Construction Inspectorate of Ukraine (545 inspections), State Labor Service of Ukraine (274 inspections), State Emergency Service of Ukraine (235 inspections). 

Among the regional bodies the most strict ones is the State Consumer Service in Zhytomyr region — 187 inspections in 2,5 years. Second place went to Kyiv State Consumer Service (137 inspections) and Kyiv office of the State Pension Fund (52 inspections).

Inspection time

After finding out which governmental bodies conduct more inspections, we decided to check when do they start inspecting new businesses, and which spheres get more inspections. In order to do that, we defined an average period between the registration of a new business and the first inspection day for each of the regulators, and found three most rigorous ones. We took into account only cases with 3+ inspections in order to exclude standalone cases.  

On average, inspections of  LLCs start in a little less than a year — 326 days from the registration date. The median onset of inspections coincides with the average, meaning that the same number of enterprises were audited before the average term and later.

Almost a quarter of so-called early inspections (which start in less than 326 days) are for healthcare companies (145 out of 608). At the same time, the sphere of medical services also leads in the number of inspections in the first month after registration: 52 enterprises out of 86 (62%) were inspected in the first month by the State Consumer Service.

On average, the most early inspections are conducted by the State Consumer Service. It was excluded from the moratorium on inspections in the first 2 months after the registration of the company. Therefore, his regulator comes to the enterprises first, after an average of 9 months from the beginning of their activity. The regulator pays the most attention to the healthcare institutions, whose average first inspection period is less than six months (150 days). They are followed by wholesale (8 months on average) and retail (11 months).

The Pension Fund of Ukraine is usually the second to inspect the new businesses. On average, its inspections start 10 months after the beginning of operations. The Pension Fund is the most likely to come to retailers (an average of 5 months after the start of operations), wholesale of motor vehicles (7 months) and real estate (8 months).

The visit of the Ministry of Internal Affairs can be expected in a little more than a year — 13 months after the registration on average. The Ministry of Internal Affairs had inspected all new businesses in the field of security services and investigations.

The State Labor Service is in no hurry to carry out its inspections. It starts the inspections on average in 15 months from the registration date.