A dynamic and vibrant private sector is crucial to economic growth, with firms making new investments, creating jobs, improving productivity, and promoting growth. Entrepreneurial activity is pivotal to the continued dynamism of the private sector, with the generation of new businesses fostering competition and economic growth. This study uses data from the new 2012 World Bank entrepreneurship survey conducted to gauge new firm growth in the formal sector in Armenia and data from World Bank enterprise surveys to analyze innovative activity in existing firms. Armenia has by far the highest level of entrepreneurial activity among the three South Caucuses countries that were studied. Armenia's entrepreneurial culture is built largely on the very strong math and science foundation established during the Soviet era. However, several factors hinder business growth and entrepreneurship. The government could remove bottlenecks from the general business environment that impede able entrepreneurs with good ideas from starting a new venture and creating jobs. This would include strengthening the business environment to allow failure and company exit as a necessary part of entrepreneurial learning, company incentives that favor entrepreneurs with good ideas, instruments that enable entrepreneurs to access capital for startups, and flexible labor market policies that enable firms to expand by attracting the best talent from outside the firm or the country. The ease of paying taxes index and other business surveys continue to cite weaknesses in the country's tax administration, and arbitrary, corrupt behavior by tax officials is a major impediment to the formation and success of Small and Medium Enterprises (SMEs). The Armenian law on bankruptcy prohibits a bankrupt natural person from starting or partnering in a new business for five years, thus hampering the fresh start that should be the goal of a personal insolvency regime. Further, it requires the bankrupt debtor and 'affiliated persons' to submit property and income statements for three years, according to a regulation to be issued, which can serve as a disincentive to follow through with an insolvency proceeding.
