In Russia the practice of subcontracting is being held back by the lack of coordination in the measures to support it

26 july 2018

There are two basic subcontracting models: in the Japanese model the focus is on building long term relationships while in the American model jobs get subcontracted for one specific order, experts note in the new bullet on the development of competition titled Subcontracting as a Small Business Development Mechanism.

According to the experts, the difference between these two basic models results in differences in state policy on subcontracting. While in Japan measures to promote subcontracting are regarded as one of the essential elements in state policy, in the state policy of the US subcontracting is viewed only as a mechanism for giving small businesses access to state contracts.

Having analyzed subcontracting in other countries, the analysts have identified key barriers that hold back the development of subcontracting in Russia: small subcontractors generally tend to have to negotiate with big companies from a position of weakness and find it hard to find customers and to build this type of relationships.

The experts believe that a key barrier in Russia is lack of coordination in the measures aimed at supporting subcontracting. "The Ministry of Industry and Trade, the Ministry of Economic Development and the Corporation for the Development of Small and Medium-Sized Businesses are developing and implementing a number of measures to promote subcontracting. In addition, regional organizations are also implementing a number of initiatives. Recently, there has been some cooperation in this area, however, experts say a centralized approach to supporting subcontracting is needed," the bulletin says.

The authors of the report also note that the current requirements for the purchasing of goods and services by state companies from small and medium-sized businesses can hinder the establishment of long term relationships through subcontracting. A long term relationship between a big state company and a subcontractor can be interpreted as a violation of the principle of competition in state procurement. Thus, in order to develop this mechanism properly it would make sense to consider amending the current laws governing the purchasing function of state-owned companies in order to allow them to establish long term relationships with subcontractors, the experts believe.

A key problem getting in the way of the efforts to expand the practice of long term subcontractor relationships is the high degree to which contractors depend on getting goods or services from a single subcontractor, which may in the worst case result in the risk of the entire production process griding to a halt or losing an entire distribution channel, the analysts note. In their view, solving this problem requires that a system of risk management be set up by both contractors and subcontractors that have long term business relationships with each other. In Japan, where long term relationships with subcontractors are the norm, there are various measures in place to help subcontractors that have lost their sole distribution channel, the analysts explain.

For details see the bulletin Subcontracting as a Small Business Development Mechanism.

For other bulletins on the development of competition see Publications.