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Relying on SMEs for jobs growth

The EU is home to 20 million SMEs - one for every 19 of us - and they are its main dynamo for growth. Yet we know too little about how they operate. Research is beginning to put that right, and rightly so, because SMEs account for two-thirds of European jobs, half of turnover and almost all of its enterprises. They are if anything even more important for the successful integration of 13 more countries into the EU.

SMEs are more important to Europe than they are to its major competitor nations. While they generate 66% of private sector employment in Europe, the figures are just 46% in the United States and 33% in Japan.

Given how significant SMEs are to Europe's economic performance, it is essential to have relevant information on the sector to influence EU policy and European business practices. Which is why the European Commission set up the Observatory of European SMEs in 1992.

The Observatory is making substantial progress in its publication this year of a series of reports on SME-related issues. The research was carried out by the European Network for SME Research (ENSR), co-ordinated by EIM Business & Policy Research and KPMG Special Services, based on a survey of over 7,600 SMEs in Europe-19 - the 15 member states plus Iceland, Liechtenstein, Norway and Switzerland.

The first four of this year's Observatory reports have been published. Another nine are to come, including studies on business demography in Europe, high-tech SMEs, recruitment of employees and the influence of taxation on SME growth. Differing impacts, differing factors

The significance and impact of SMEs varies enormously across the EU. Micro businesses - the self-employed and firms with less than 10 employees - are most common in Italy, Spain and the UK. SMEs have more weight in the economies of Italy, Spain and France than in Northern Europe. In Scandinavia, they are mostly concentrated in the capital cities.

Conversely, the largest employers are found more in Northern Europe - Germany, France, the UK, Scandinavia - than in the South.

The factors explaining this are diverse. There is a culture in Italy and Spain of micro firms and small businesses. The industrial base of Southern Europe fits with small enterprise forms - small farms, tourism, retailing, construction and local services. Meanwhile, the UK's micro and small enterprises are focused on a different range of suitable occupations - professional and financial services and the media - which are likely to yield higher incomes.

Areas such as France and Northern Britain, which have traditionally relied on heavy manufacturing, have lower levels of micro and small enterprises. It is speculated that the locational flexibility of self-employment plus the obvious wealth of the major cities may cause micro and small businesses to gravitate towards the often more pleasant environments of the capitals. A rapidly changing picture

But SMEs are changing fast. They are increasingly likely to have international business contacts. Just over half have felt greater domestic competition over the last five years. Larger SMEs are more likely to have faced international competition.

Most noticeably, SMEs have quickly adapted to the internet. Access to the internet amongst the smallest SMEs grew from less than 40% in 1999 to 70% by 2001. Where initially the likelihood of internet access varied greatly according to trading sector, this has levelled out except that SMEs providing business services remain the most likely to use the internet.

SMEs' internet access still varies substantially across countries. It is much more common in Austria, Norway, Sweden and other Northern European countries than in Portugal and France. There has been massive growth in internet take-up in Greece (from just over 20% to almost 80% in two years) and in Austria (from less than 50% to over 85%).

There are other ways in which the picture changed rapidly. Where there were 18.4 million SMEs containing 74 million jobs in 1996, this had quickly grown to over 20 million SMEs with 80 million employees by 2001.

It is important to recognise that SMEs are different types of businesses from large scale enterprises (LSEs), and are affected by policies and practices in different ways. Over the last decade, LSEs have out-performed SMEs as regards real turnover and production growth. This is because the generator for the greater turnover and growth has been export markets. SMEs are less likely to export than are LSEs.

Similarly, labour productivity has grown much faster in LSEs than in SMEs. However, SMEs have been able to pass higher costs on to customers, raising their own profit margins slightly as a result.

This does not diminish the significance of SMEs to the European economy. Since 1995, most of Europe's employment recovery has taken place in SMEs. Conversely, most employment growth in that time in the US has been in LSEs.

The reasons for these differences and the greater importance of SMEs to the European economy apparently relate to cultural and social factors rather than the trade sectors in which SMEs compete. It seems likely that the greater cultural and linguistic variations across Europe compared with the US and Japan make it more likely that business organisations will be smaller. Further, European capital markets are less integrated, making expansion more difficult. There are more barriers in Europe to mergers and acquisitions, which may discourage the formation of LSEs.

Main indicators of non-primary private enterprise,
Europe-19, 2000

Main indicators of non-primary private enterprise, Europe-19, 2000 - Source: SMEs in Europe, including a first glance at EU candidate countries, page 11

Click to enlarge

And then there were 28 ...

Providing effective policy-making to support SMEs will become more difficult when enlargement takes place. The candidate countries bring with them even more diversity in terms of economic history, enterprise culture and SME health.

The Observatory report analyses the performance and state of SMEs in the 13 candidate countries, and find an extremely complex picture. Culturally, the candidate countries can be broken up into two groups, the 10 former Soviet-bloc states and the three Mediterranean countries. But there are obvious economic differences between those Mediterranean countries, Turkey, Cyprus and Malta. Likewise, the economic and political changes that have taken place in Central and Eastern Europe have varied immensely.

In general terms, the candidate countries are more reliant for employment on micro enterprises. The three Mediterranean proposed entrants are economically similar to existing Mediterranean member states Greece, Italy, Spain and Portugal, with a major role played by SMEs.

However, the economies of the Central and Eastern European countries - particularly the Baltic states - remain heavily dependent on LSEs, despite the years of transition from planned to market economies. Yet this picture is uneven. Where the average number of employees per enterprise has fallen in Hungary from nine to four between 1995 and 1999, it actually rose in Romania from three to six. The average in Latvia in 1999 remained an astonishingly high 15 jobs per business.

The conflicting changes reflect the lack of consensus among the former Soviet countries on how best to liberalise industries and move towards market economies.

"SMEs have supported growth in the more advanced [former Soviet] economies, like Poland, Hungary or the Czech Republic, and now account for significant shares of Gross Domestic Product," reports the Observatory. "Part of this shift - in the countries mentioned, but perhaps even stronger in the other Central and Eastern European countries - however, was just a shift of production from formerly state owned enterprises, which were to a large extent dismantled, and does not itself point to a healthy development of the SME sector."

The Observatory continues that the most worrying concern is that across these countries the most active SMEs are small traders and retailers making thin margins on standard products. The advanced services sector of the EU has no equivalent in these states as yet. The vast majority of their SMEs do not invest in innovative capital equipment, or in new technology. Most SMEs are therefore unable to take advantage of incoming foreign manufacturers by supplying them.

However, there are signs that these countries' SMEs are beginning to adapt to EU markets and have started to export to the EU. They are also beginning to benefit from the structural reform programmes which should make their countries' economies and SMEs' performance more sustainable.

Although SMEs are growing at speed in many of the former Soviet countries, the rate of employment growth is not sufficient to offset the job losses from the old state owned businesses. Consequently unemployment is rising fast in some countries - to 20% in 2000 in Slovakia. It is unclear, says the Observatory, whether the decline in employment in LSEs is because some have closed and had their trade taken over by SMEs, or whether LSEs are cutting staff - or both.

Progress is being made, but it remains slow to integrate the candidate countries into the single market. The Observatory's studies will be an important tool for policy-makers to consider how to hasten change.

Enterprises in Europe, data 1987-97.
ISBN 92 828 3005 5
European Commission, Luxembourg, 2001, English, 200 pp, EUR 30

SMEs in Europe, including a first glance at EU candidate countries
ISBN 92 828 3557 7, European Commission, Luxembourg, 2002, English,
54 pp, free of charge

Highlights from the 2001 Survey, Observatory of European SMEs
ISBN 92 828 2208 7, European Commission, Luxembourg, 2002, English,
32 pp, free of charge

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