SMEs: Challenges and Importance in Employment, Innovation, and Regulation, Study Guides, Projects, Research of Business

Download SMEs: Challenges and Importance in Employment, Innovation, and Regulation and more Study Guides, Projects, Research Business in PDF only on Docsity! 1 SMALL BUSINESSES, JOB CREATION AND GROWTH: FACTS, OBSTACLES AND BEST PRACTICES 2 Table of contents Executive Summary.................................................................................................................................. 3 Section 1. Job Creation, Output and Productivity Growth......................................................................... 7 Section 2. Financing Small and Medium Enterprises.............................................................................. 17 Section 3. SMEs and Regulatory Reform............................................................................................... 21 Section 4. Public Support to SMEs........................................................................................................ 25 Section 5. Innovative SMEs................................................................................................................... 28 Section 6. High Growth SMEs............................................................................................................... 34 Section 7. Women-owned SMEs............................................................................................................ 38 Section 8. The Regional Dimension to Entrepreneurship........................................................................ 41 Section 9. Best Practice Policies for SMEs............................................................................................. 44 5 industries. The primary policy tools for attracting firms to disadvantaged regions are investment in infrastructure, social assistance, training and other forms of public assistance. The regional dimension of entrepreneurship is not limited to clusters of enterprises but also includes micro enterprises. Programmes to assist the creation and development of micro enterprises in inner cities and remote rural areas have become widespread policy tools. Governments wishing to adopt policies used successfully in other regions or countries should take the regional context into account. Best practice policies The report ends with lessons from policies undertaken in five areas: -- Financing The primary role of the public sector in supporting venture capital is to reduce the risk and cost of private equity finance, complementing and encouraging the development of the private capital industry. There is major variation across OECD countries in the use of funding methods for SMEs, but the provision of equity financing to start-up companies is more advanced in the United States and Canada than elsewhere. Taxation should not impose a disproportionately heavy burden on SMEs. -- The business environment This can be improved by systematic and careful scrutiny of new regulations and by implementation of a business impact system to ensure the audit and monitoring of new legislation. Canada, the United Kingdom and the Netherlands have successfully introduced procedures to that end. The use of information technologies provides opportunities for reducing bureaucratic burdens on all companies, including SMEs. -- Technology Technology diffusion programmes should: ensure quality control; promote customer- orientation; upgrade the innovative capacity of firms -- including the promotion of general awareness of the value of innovation among management -- and stimulate demand for technical and organisational change; build on existing inter-relationships in national innovation systems and provide greater coherence between programme design (e.g. targets, objectives, modes of support) and service delivery; build on evaluation and assessment. Technology diffusion programmes should in particular have mechanisms for assessment which can guide and improve their operation and management on a continuing basis. The United States has programmes effectively stimulating quality in diffusion processes, while Germany has sophisticated institutional set-up catalysing interactions between existing actors in the national innovation system. -- Management capabilities Several G7 governments have sought to enhance the “quality” of owner/managers of SMEs either by encouraging training and/or by providing access to advisory and consultancy services. The most extensive assistance is provided by Japan which has both a highly developed system of advisory services and SME colleges. The United Kingdom and Italy have also implemented interesting schemes. Subsidy-schemes aimed at enhancing the skill base of SMEs should take 6 the following into consideration: specification of objectives; situation after the removal of the subsidy; collecting information from SMEs themselves. Measures to encourage information networks must seek to customise databases and avoid information overload. Four approaches have been developed to address these issues: know your customer; access; explicitly avoid interference with market mechanisms; and subsidisation of information. -- Access to markets Measures to ease access to markets have focused on international markets, on the one hand, and public procurement, on the other. Japan has the most developed policy and institutional set-up for the former, based upon the use of non-discriminatory measures which seek to support efforts made by SMEs themselves. Policy in this area seeks to tackle the disadvantages experienced by SMEs due to their lack of access to human resources, to external markets and to technology. Regarding public procurement, the United States, and other OECD countries such as Australia, have made comprehensive efforts to increase the “share” which small firms obtain of government contracts. 7 SECTION 1 JOB CREATION, OUTPUT AND PRODUCTIVITY GROWTH The term “SME” -- small and medium-sized enterprises -- covers a variety of definitions and measures. In OECD Member countries, employment is the most widely used criterion for determining firm size. SMEs are usually defined as firms with fewer than 500 employees, although a number of countries -- including those in the European Union -- use a lower cut-off point of 250. Employment and job creation It is apparent that SMEs play an important role in all OECD economies: they make up over 95 per cent of enterprises and account for 60 to 70 per cent of jobs in most OECD countries. The share tends to be somewhat lower in manufacturing, although it varies between 40 to 80 per cent of employment in manufacturing (Table 1.1). The overall share of small firms in employment and output may be even higher given that establishments or firms in the service sector are normally of smaller average size than in manufacturing. Table 1.2 illustrates the variability across sectors: for example, wholesale and retail trade and hotels and restaurants are dominated by SMEs. In construction SMEs account for 80 to 90 per cent of all employment. The fact that these industries loom large in overall employment underscores the importance of SMEs as sources of employment. Furthermore, the share of large firms in employment and output has tended to show a certain decline. The average establishment size in manufacturing has fallen since the early 1980s in Canada, the United Kingdom and the United States, has remained constant in Germany, and has risen in Japan (Table 1.3a and 1.3b). The importance of smaller establishments in job dynamics is often assessed on the basis of net employment changes. From the mid-1980s to the early 1990s, in all countries, small establishments (fewer than 100 employees) displayed more rapid net employment growth than larger ones (OECD Employment Outlook 1994, Chapter 3). However, there are at least four ways in which this should be put into perspective: First, it is not surprising that small enterprises/establishments play an important role in the job creation process since they account for between 40 and 80 per cent of total manufacturing employment. To see whether their role is disproportionately high, net job creation has to be expressed in relation to the initial employment in small and large establishments. As shown in Table 1.4, net job creation rates are in fact often higher for smaller size classes. However, for a number of countries it was found that the highest net job creation rates were among very small firms whereas small to medium-sized firms (between 20 and 50 employees) did not perform better than large firms. Second, methodology matters. An important technical issue in studies on net job creation rates is how firms are allocated to size classes: for example, a firm can be considered “small” if it corresponds to the criterion “small” in some base year. Any subsequent job creation is then attributed to the size class “small”, irrespective of whether the firm has moved to a different size class by the end of the observation period. Alternatively, a firm can be considered “small” if it corresponds to the criterion “small” on average, over the entire period. It has been shown that net job creation rates of small and large firms are highly sensitive to such changes in the size class allocation of firms. 10 Table 1.1 Size distributions in manufacturing industry Number of enterprises/establishments Employment of which in employment size class of which in employment size class Year 1-19 20-99 100-499 500+ 1-19 20-99 100-499 500+ Percentages Percentages United States 1993 73.7 19.8 5.1 1.4 7.4 14.6 16.5 61.5 Canada 1994 50.6 37.8 10.2 1.4 7.6 27.8 39.4 25.2 Mexico 1994 80.3 15.1 2.7 2.0 12.2 21.2 15.6 51 Japan 1994 74.3 21.6 3.6 0.5 22.4 30.9 25.0 21.6 Korea 1994 69.5 26.1 3.0 1.3 20.5 32.0 14.2 33.3 Australia 1994 82.0 14.1 3.4 0.4 22.3 27.5 32.7 17.5 New Zealand 1994 90.6 7.7 1.5 0.3 27.3 24.7 24.0 24.0 Austria 1993 43.2 41.5 10.0 5.2 4.3 26.9 23.4 45.5 Belgium 1993 80.4 15.3 3.7 0.6 .. .. .. .. Denmark 1993 82.0 14.6 3.1 0.3 .. .. .. .. Finland 1992 50.8 36.1 11.6 1.5 .. .. .. .. Germany 1993 71.5 19.4 4.1 5.0 19.9 22.1 10.8 47.2 Greece 1992 59.0 34.3 6.0 0.7 20.4 35.0 27.5 17.2 Hungary 1994 76.8 18.3 3.9 1.1 .. .. .. .. Iceland 1992 90.8 6.7 2.5 35.1 26.6 38.2 Italy 1992 89.7 9.0 1.2 0.2 38.7 25.0 17.3 19.0 Luxembourg 1992 79.4 15.0 4.7 0.9 13.0 22.1 35.0 29.9 Netherlands 1993 78.0 17.2 4.3 0.6 15.7 24.8 27.8 31.7 Norway 1994 40.2 47.4 7.5 4.9 9.3 34.9 18.2 37.6 Portugal 1994 85.8 11.8 2.2 0.2 23.5 32.3 27.8 16.5 Sweden 1993 44.4 40.8 12.4 2.4 6.9 23.1 35.3 34.7 Switzerland 1991 84.2 12.3 3.1 0.4 20.2 26.9 31.3 21.5 Czech Republic 1995 94.9 2.9 1.6 0.5 18.0 10.3 24.6 47.1 Turkey 1992 36.6 47.1 13.3 3.0 5.5 22.2 32.2 40.1 United Kingdom 1994 82.7 12.9 3.7 0.8 13.2 21.6 28.9 36.3 Note: Statistical unit: establishment except for the United States, New Zealand, Czech Republic, Hungary, Italy, Luxembourg, Portugal (enterprises). Size classes differ: Canada, New Zealand: 0-19; Mexico: 1-15; 16-100; 101- 250; 251+; Japan, Korea: 4-19; Finland: 10-19; Hungary: 0-9; 10-99; Iceland: 0-19; 20-60; 60+; Norway: 1-19 ; 20-99 ; 100-199 ; 200+; Czech Republic: 0-24; 25-99. Source: OECD, Database on SME statistics; Eurostat (1996), Enterprises in Europe. 11 Table 1.2 Distribution of employment by firm size and sector Year Employment size class 1-9 10-19 20-99 100-499 500+ Total Percentages United States Manufacturing 1993 3.5 3.9 14.6 16.5 61.5 100.0 1988 3.1 3.7 14.5 16.1 62.6 100.0 Construction 1993 28.6 17.0 30.7 12.5 11.1 100.0 1988 25.5 16.5 31.7 14.8 11.5 100.0 Wholesale and retail trade, 1993 13.1 9.9 22.2 11.8 43.0 100.0 hotels and restaurants 1988 13.6 10.4 23.2 11.9 40.8 100.0 Finance, insurance and real estate 1993 12.5 5.5 13.8 12.2 56.1 100.0 1988 12.3 5.7 14.3 12.4 55.3 100.0 Total non-farm business sector 1993 10.7 7.7 18.8 13.1 49.6 100.0 1988 10.5 7.8 19.3 13.3 49.0 100.0 Canada Manufacturing 1992 .. 11.4 20.3 22.0 46.3 100.0 1989 .. 9.9 21.3 22.8 46.0 100.0 Construction 1992 .. 56.0 26.7 12.3 5.0 100.0 1989 .. 51.0 29.4 14.5 5.1 100.0 Wholesale and retail trade, 1992 .. 33.6 25.7 13.2 27.5 100.0 hotels and restaurants 1989 .. 28.9 24.5 12.9 33.7 100.0 Finance, insurance and real estate 1992 .. 17.8 12.1 9.7 60.4 100.0 1989 .. 17.2 14.4 10.8 57.6 100.0 Total non-farm business sector 1992 .. 25.5 20.8 15.1 38.6 100.0 1989 .. 23.5 22.0 16.3 38.2 100.0 Japan Manufacturing 1993 12.5 10.4 30.8 24.6 21.7 100.0 1986 13.7 11.0 30.6 23.5 21.3 100.0 France Manufacturing 1992 8.1 5.0 22.4 23.6 40.9 100.0 1990 10.1 5.1 22.0 23.1 39.7 100.0 Construction 1992 29.0 11.5 27.5 14.0 18.0 100.0 1990 33.9 10.8 26.7 12.8 15.8 100.0 Wholesale and retail trade, 1992 32.9 10.3 25.8 12.4 18.5 100.0 hotels and restaurants 1990 38.6 9.8 23.7 11.2 16.8 100.0 Finance, insurance and real estate 1992 15.9 7.2 19.6 17.9 39.4 100.0 1990 19.7 7.4 18.9 17.4 36.6 100.0 Total non-farm business sector 1992 18.2 7.1 21.7 17.1 35.9 100.0 1990 22.0 7.0 21.0 16.2 33.7 100.0 12 Table 1.2 Distribution of employment by firm size and sector (cont’d) Year Employment size class 1-9 10-19 20-99 100-499 500+ Total Percentages Germany Manufacturing 1992 7.8 6.2 16.3 21.6 48.2 100.0 1988 6.1 6.1 16.1 21.5 50.1 100.0 Construction 1992 27.1 21.6 28.0 13.7 9.6 100.0 1988 22.8 20.4 31.9 15.3 9.6 100.0 Wholesale and retail trade, 1992 37.8 12.6 19.2 11.9 18.5 100.0 hotels and restaurants 1988 29.0 14.6 22.2 13.5 20.7 100.0 Finance, insurance and real estate 1992 28.3 10.8 16.0 16.7 28.2 100.0 1988 21.3 10.3 16.9 17.9 33.6 100.0 Total non-farm business sector 1992 21.1 10.2 18.2 17.0 33.5 100.0 1988 15.3 10.2 19.2 18.0 37.2 100.0 Italy Manufacturing 1991 24.2 14.8 24.4 16.9 19.7 100.0 Construction 1991 52.3 16.0 19.5 7.9 4.3 100.0 Wholesale and retail trade, 1991 74.6 9.7 8.8 3.1 3.8 100.0 hotels and restaurants Finance, insurance and real estate 1991 49.5 7.0 9.4 9.0 25.2 100.0 Total non-farm business sector 1991 44.2 11.4 15.9 10.1 18.4 100.0 United Kingdom Manufacturing 1991 13.3 4.7 14.4 17.0 50.7 100.0 1988 10.9 4.0 17.0 17.8 50.3 100.0 Construction 1991 58.3 6.1 12.3 10.2 13.1 100.0 1988 58.2 7.4 12.9 9.6 11.9 100.0 Wholesale and retail trade, 1991 31.3 8.8 19.6 26.9 13.5 100.0 hotels and restaurants 1988 33.8 9.0 19.4 24.2 13.6 100.0 Finance, insurance and real estate 1991 25.6 5.0 13.5 12.3 43.5 100.0 1988 17.8 4.2 11.7 20.3 46.1 100.0 Total non-farm business sector 1991 25.2 6.0 15.0 17.8 36.0 100.0 1988 24.0 5.9 15.7 19.3 35.2 100.0 Note: Statistical unit: enterprise, except for Canada (average labour unit) and Japan (establishment). Size classes vary: Canada: 0-19;. Japan: 4-9. European countries: manufacturing = class 2+3+4 of NACE 70; construction = class 5; wholesale etc. = class 6; finance etc. = class 8; business sector = class 2-8 Source: OECD, Database on SME statistics; Eurostat (1996), Enterprises in Europe. 15 Table 1.5 Distribution of gross job flows and employment by establishment size Gross flows Employment Establishment size Openings Expansions Job gains Closures Contractions Job losses (last year) Canada 1983-1991 Total 100 100 100 100 100 100 100 1-19 employees 53.6 41 43.7 48 32 36.1 27.2 20-99 23 22.4 22.5 21.5 23.7 23.1 22.3 100-499 13.7 15.3 15 15.6 17.3 16.9 15.9 500+ 9.7 21.3 18.8 14.9 27 23.9 34.6 Denmark 1983-1989 Total 100 100 100 100 100 100 100 1-19 employees 55.8 56 55.9 59.5 41.7 48.1 39.8 20-99 22.6 26.5 25 21.5 30.3 27.2 31.8 100+ 21.6 17.5 19.1 19 28 24.7 28.4 Finland 1987-1992 Total 100 100 100 100 100 100 100 1-19 employees 54.9 51.5 52.7 46 35.5 38.4 34 20-99 25.2 24.4 24.7 29.5 25.8 26.9 29.3 100-499 16.1 18 17.3 19.4 25.6 23.9 25.5 500+ 3.8 6.1 5.3 5.1 13.1 10.8 11.2 France 1987-1992 Total 100 100 100 1-19 employees 54.8 53.4 35.7 20-99 24.1 25.6 29.7 100-499 15 15 22.5 500+ 6.1 6 12.1 Italy 1984-1992 Total 100 100 100 100 100 100 100 1-19 employees 71.2 63 65.7 63.9 52.3 56.2 39.2 20-99 15.5 18.4 17.5 17.6 21.1 20 22.2 100-499 7.2 10 9 9.1 12.1 11 15.6 500+ 6.1 8.6 7.8 9.4 14.5 12.8 23 New Zealand 1987-1992 Total 100 100 100 100 100 100 100 1-19 employees 53.7 57.3 55.6 53.2 33.4 41.8 45.2 20-99 25.1 27.2 26.2 28.7 31.6 30.4 30.9 100-499 16.3 11.6 13.8 12.7 22.8 18.5 18.3 500+ 4.9 3.9 4.4 5.4 12.2 9.3 5.6 Sweden 1985-1991 Total 100 100 100 100 100 100 100 1-19 employees 54.1 56.1 55.2 52.8 35.2 41.8 35.2 20-99 20.4 24.9 22.9 21.4 28.9 26.1 28.3 100-499 14.2 13.8 14 13.5 22.4 19.1 22.5 500+ 11.2 5.2 7.9 12.3 13.5 13 14 United Kingdom 1987-1991 Total 100 100 100 100 100 100 100 1-19 employees 84 37.4 50 63.6 21.1 45.6 30.5 20-99 11 18.6 16.6 19.1 15.5 17.6 16.7 100-499 4.2 15.1 12.2 10.3 16.4 12.9 12.9 500+ 0.8 28.9 21.2 7 47 23.9 39.9 United States 1984-1988 (manufacturing) Total 100 100 100 100 100 100 100 1-19 employees 14.5 5 6.7 20.1 6 9.6 3.6 20-99 43.5 24.9 28.2 37.7 23.5 27.2 19 100-499 30.7 38.6 37.2 30.9 36.7 35.2 37.3 500+ 11.2 31.4 27.8 11.4 33.8 28 40.1 Source: OECD Employment Outlook 1994. 16 Table 1.6 Size distribution of value added in manufacturing Employment size class Year 1-19 20-99 100-499 500+ Percentages United States 1993 4.6 10.0 13.6 71.9 Canada 1994 4.5 20.1 39.0 36.3 Japan 1994 12.1 23.2 29.3 35.4 Korea 1994 10.3 21.9 14.2 53.5 Australia 1994 15.3 25.0 36.2 23.5 Austria 1993 4.1 23.8 23.0 49.1 Finland 1992 7.9 14.7 45.3 32.0 Germany 1993 15.4 19.4 10.0 55.1 Greece 1992 12.0 29.9 35.4 22.6 Hungary 1994 5.4 15.3 25.2 54.1 Italy 1992 27.2 25.7 22.2 24.9 Netherlands 1993 6.9 24.8 27.9 40.4 Portugal 1994 12.6 23.9 26.4 37.1 Sweden 1993 - - - - Czech Republic 1995 12.3 9.4 22.9 55.5 Turkey 1992 1.7 11.0 32.1 55.2 United Kingdom 1994 9.5 16.6 28.0 45.9 Note: see note to Table 1.1. Source: OECD, Database on SME statistics; Eurostat (1996), Enterprises in Europe. 17 SECTION 2 FINANCING SMALL AND MEDIUM-SIZED ENTERPRISES Key differences in financing smaller and larger enterprises The variance of both profitability and growth decreases with firm size. The second key source of divergence is that smaller enterprises have a lower probability of survival than larger enterprises. In a normally functioning financial market, some of these differences should be reflected in higher interest rates or less favourable terms of debt financing. This general observation, as well as the following points, should be taken into account in the design of policy responses to the needs of SMEs: − Financial institutions assess smaller and medium enterprises as being inherently more risky. − Larger firms usually comply with higher disclosure requirements to a greater extent than SMEs because of their access to a broad range of external funds (including bonds, equity and loans). Financial institutions charge higher interest rates to SMEs than to bigger companies in order to compensate for the higher costs of information collection, the smaller volume of external financing and the greater risk of failure. − For many existing SMEs “insiders” (the entrepreneur, management) have better information about the expected profits of activities than external financial institutions. This lack of information leads to higher market rates to compensate for risk which may crowd out low- risk, low-return borrowers, leaving a relatively higher number of high risk/return borrowers in the market. Charging higher interest rates may therefore not be in the interest of banks as low-risk borrowers -- those most likely to repay loans -- are driven from the market. − In the case of new enterprises or activities, outsiders (experienced bankers or other specialised financial intermediaries) can, in many cases, better assess the risks involved than relatively inexperienced “insiders”. A specific disadvantage of young firms is that they cannot point to credit histories which provide important signals and help facilitate access to debt financing. − Lending to SMEs is more likely to be based on collateral than is the case for loans to larger firms. This may lead to situations in which lending is not based on expected return but rather upon access to collateral. On the other hand, collateral reduces or eliminates contract problems such as “moral hazard” and “adverse selection”. Many SMEs lacking access to “good collateral” suffer from credit rationing. 20 The special case for financing new technology-based firms Investments of US and Canadian venture capital funds have a high concentration in technology. Although the emphasis in other OECD countries is less pronounced, new technology-based firms may be considered a special case for the financing of smaller businesses more generally. The financing of new technology-based firms may be more problematic because of their complexity and riskiness. In particular, outside the United States, the funding of new technology-based firms seems to pose problems -- there are indications that venture capitalists are investing significantly less in the technology sector. Reasons include risk aversion by investors and lack of expertise to operate complex ventures. 21 SECTION 3 SMES AND REGULATORY REFORM The regulatory burden A review of the regulations that govern the establishment of an enterprise is of particular relevance for creating a favourable regulatory environment and should be at the forefront of the overall economic policy agenda. One of the effects of such regulations is that they appear to discourage the creation of new technology-based firms and innovative start-ups which are important for employment growth, technological change and innovation.1 Establishing a relationship between regulation and a firm’s competitive capacity is particularly arduous in the case of SMEs. Regulatory regimes will have very different impacts from one firm to another. While empirical studies may shed light on the problems of a particular category of SMEs, it will be hard to draw general lessons. Analysis suggests that, while some regulations may deliberately favour SMEs (many regulations exclude the smallest firms), in general the adverse impact of regulations on SMEs can be particularly harmful. This is because SMEs are less equipped to deal with problems arising from regulations since they have less capacity than larger firms to navigate through the complexities of regulatory and bureaucratic networks. SMEs are more likely to be hampered by regulations because their strength stems from their flexibility. Some regulations designed to prevent entry into the market by dynamic SMEs are particularly detrimental. Furthermore, due to its “fixed-cost” nature, the cost burden of regulation is larger for small firms than for larger firms: i.e. administrative costs entailed in compliance have a disproportionate effect on small firms. In many cases compliance is based on an initial fixed, standard cost for all firms, irrespective of size, followed by a sliding scale, related to increasing size. This means that average compliance costs per employee are much higher for small firms. For instance, in the case of the Netherlands, of the Gld 7 billion spent annually on meeting administrative obligations, companies employing between 0-4 workers were required to pay annual administrative costs of around Gld 4 000 per employee, whereas for companies employing over 500 staff, the equivalent cost per employee was only Gld 200.2 Table 3.1, using a different study, confirms the progressive increase of costs for smaller firms. A major consequence of the asymmetric rise in fixed costs is not only the diversion of scarce financial resources away from productive investment, but also, and equally important, the absorption of management time. Both are critical for SMEs. Investment ability may be compromised if the cost of 1. OECD (1996), SMEs: Employment, Innovation and Growth -- The Washington Workshop, Paris. 2. OECD (1995), “Reducing the Regulatory Burden on Business in the Netherlands: How Can This be Achieved?”, Best Practice Policies for Small and Medium-sized Enterprises, Paris. 22 compliance to regulation deflects an excessive amount of resources, including capital as well as current expenditure. Absorption of management time implies that scarce managerial resources cannot be used for directing the strategy and managing the operations of the enterprise. Table 3.1 The average costs of administrative burdens per size class, enterprise and employee in the Netherlands, 1993 (in ECU) Number of employees Costs per enterprise Costs per employee 0 2 800 -- 1-9 12 100 3 500 10-19 20 500 1 500 20-29 47 100 1 400 50-99 62 000 900 100 or more 171 000 600 All size classes 9 800 Source: “Administratieve lasten bedrijven 1993” (Administrative Burdens in Enterprises 1993), EIM Small Business Research and Consultancy, 1994, cited in The European Observatory for SMEs (1995), Third Annual Report, p. 287. Finally, the impact of regulation on operational flexibility is likely to have a particularly negative impact on smaller firms. In one survey of the industrial cleaning sector, which is dominated by SMEs and in which “success” is strongly influenced by flexibility, 83 per cent of the companies surveyed linked regulations to the inability to expand their business operations. Required policy measures Improving the information available to SMEs Reducing administrative and regulatory burdens would constitute a major improvement in the business environment for SMEs. The majority of OECD Member countries have implemented measures to achieve this goal by reducing red tape, simplifying administrative procedures, streamlining and/or eliminating regulations, improving the information available to enterprises about administrative obligations, drawing up special rules for those enterprises (usually smaller enterprises) that are most affected by administrative burdens, improving the quality of regulations, etc. Nevertheless, and despite the fact that the cost and complexity of regulations are recognised as having a particularly adverse impact on SMEs, little data is available regarding regulatory burdens on business categorised by firm size. 25 SECTION 4 PUBLIC SUPPORT TO SMES Public support to industry in the OECD area According to OECD data, public support grew by 25 per cent in nominal terms from 1989 to 1993. Table 4.1 shows that nominal net expenditure rose from US$37 billion in 1989 to US$47 billion in 1993. This upward trend should be even more significant when 1992 and 1993 data for certain large support programmes becomes available. These figures underscore that the persisting importance of subsidies as an instrument of structural policy in OECD Member countries was largely outweighed by stronger support in all other areas. The overall trend masks considerable diversity in spending, however. Support declined in only one-third of participating countries, while it grew in the remaining two-thirds. Regarding policy objectives, regional development almost doubled in the period under review and was the predominant cause of the observed increase in public support. Table 4.1 shows reductions in the areas of sectoral aid, investment incentives and SMEs. Support programmes for SMEs One-quarter of all support programmes in OECD countries primarily target SMEs. More than one-third of all programmes included in the database have been designed to at least partly assist SMEs. Of the programmes primarily targeting SMEs, slightly less than 10 per cent were designed exclusively to finance the provision or acquisition of advisory and consultancy services. Other programmes addressed SME financing, offering soft loans and guarantees for start-ups, equipment modernisation and/or R&D and technological innovation. Job creation and training, as well as export promotion, are specified in relatively few programmes. However, several countries dedicated more than 50 per cent of their support programmes to SMEs. In terms of expenditure, support to SMEs ranked fourth at both the beginning and the end of the period. In terms of Net Cost to Government (NCG), SME support accounted for US$5.4 billion in 1989 and US$6.0 billion in 1990, before steadily dropping back to US$3.7 billion in 1993 (Table 4.2). This sharp decline is mainly the result of the reduction of one important SME programme. Ten programmes accounted for approximately 50 per cent of the total Net Cost to Government recorded under this policy objective. The average support of the remainder was close to US$ 6 million in 1993. Only under the policy objective of environmental protection was the average funding by programme at an equally low level. This implies that there is potential for integrating these programmes into a smaller number with a wider scope, facilitating their understanding and implementation by SMEs, and reducing administrative costs for governments. 26 Table 4.1 Reported expenditures and programmes by policy objective Programmes NCG3 in current prices; million US dollars Policy objective 1989 1990 1991 1992 1993 Sectoral 147 4 449 4 923 5 813 5 194 3 388 % share 10.2 12.1 11.7 12.1 11.1 7.4 Crisis aid 53 1 625 668 875 585 3 188 % share 3.7 4.4 1.6 1.8 1.3 6.9 R&D & tech. innovation 269 6 369 7 864 9 102 9 976 8 677 % share 18.7 17.3 18.7 19.0 21.4 18.9 Regional development 213 8 510 9 803 1 4049 14 863 15 386 % share 14.8 23.1 23.3 29.3 31.8 33.4 Investment 148 2 953 2 805 2 767 2 396 2 594 % share 10.3 8.0 6.7 5.8 5.1 5.6 SMEs 359 5 432 6 031 4 340 4 693 3 750 % share 25.0 14.7 14.4 9.0 10.0 8.1 Export & foreign trade 118 6 883 8 973 9 920.2 7 813.4 7 267.8 % share 8.2 18.7 21.4 20.7 16.7 15.8 Energy efficiency 64 436 620 840 866 1 443 % share 4.5 1.2 1.5 1.8 1.9 3.1 Environment 66 249 338 276 329 333 % share 4.6 0.7 0.8 0.6 0.7 0.7 Total 1 437 36 906 42 025 47 983 46 717 46 028 Note: All programmes are categorised according to their primary objectives. Compared to the large numbers of SMEs in the OECD area, evidence shows that few SMEs benefited from SME support programmes, and that the expenditure per benefiting company represented only very small amounts. In addition, the profile of support to SMEs has the following characteristics: − sub-central levels of government (sub-central, regional and local) administer 52 per cent of SME support programmes, while a further 10 per cent are managed jointly by central and sub-central authorities; − loans, tax concessions and grants are the principal financing instruments for delivering support to SMEs; and − concerning the specific economic activities supported by SME programmes, investment costs initially attracted a large share of overall support. The high number of programmes, and the low level of average funding per programme raises questions regarding administrative costs4. Almost 70 per cent of the programmes reported had a duration of five years or more. In fact, the turnover in the stock of SME support programmes was the least 3. NCG measures the Net Cost to Government generated by a support programme. 4. Total cost of public support programmes are composed of the Net Cost to Government plus the administrative costs. The latter have not been taken into account in the tables. 27 dynamic among all policy areas. The relative high stability in the stock of programmes appears problematic with respect to the responsiveness of programmes to changing policy priorities. Table 4.2 Support patterns of small and medium-sized enterprises programmes Programmes (% Share) NCG current million $ (% Share) 1989 1990 1991 1992 1993 Total 359 5 426.0 6 019.2 4 325.2 4 674.6 3 734.9 Financing instrument 1989 1990 1991 1992 1993 Grant 99 397.7 449.8 496.6 1 045.9 529.5 (27.6%) (7.3%) (7.5%) (11.5%) (22.4%) (14.2%) Interest rate subsidy 22 646.3 475.5 513.0 720.9 423.7 (6.1%) (11.9%) (7.9%) (11.9%) (15.4%) (11.3%) Loan 155 665.2 1 450.8 1 096.4 1 061.3 952.8 (43.2%) (12.3%) (24.1%) (25.3%) (22.7%) (25.5%) Guarantee 28 220.4 244.6 156.4 118.3 161.6 (7.8%) (4.1%) (4.1%) (3.6%) (2.5%) (4.3%) Equity capital 5 0.9 0.8 1.1 1.5 1.2 (1.4%) (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) Tax concession 20 3 316.9 3 172.5 1 836.0 1 453.5 1 317.7 (5.6%) (61.1%) (52.7%) (42.4%) (31.1%) (35.3%) Mixed 29 174.0 220.1 220.5 268.3 344.4 (8.1%) (3.2%) (3.7%) (5.1%) (5.7%) (9.2%) Unclassified 1 4.6 5.1 5.2 4.9 4.0 (0.3%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) Economic activities supported 1989 1990 1991 1992 1993 Production 56 364.5 574.7 359.6 316.3 359.8 (15.6%) (6.7%) (9.5%) (8.3%) (6.8%) (9.6%) Investment 124 1 870.8 2 194.2 1 941.9 1 817.3 1 239.5 (34.5%) (34.5%) (36.5%) (44.9%) (38.9%) (33.2%) Specialised investment 120 471.3 557.1 495.2 499.3 558.3 (33.4%) (8.7%) (9.3%) (11.4%) (10.7%) (14.9%) R&D 15 20.7 32.3 34.3 552.0 57.0 (4.2%) (0.4%) (0.5%) (0.8%) (11.8%) (1.5%) Transportation 0 0.0 0.0 0.0 0.0 0.0 (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) (0.0%) Non-profit institution 20 115.8 118.1 129.1 157.9 154.9 (5.6%) (2.1%) (2.0%) (3.0%) (3.4%) (4.1%) Unclassified 24 2 583.0 2 542.9 1 365.2 1 331.8 1 365.4 (6.7%) (47.6%) (42.2%) (31.6%) (28.5%) (36.6%) SME programmes by national treatment SME programmes by programme duration 84% 4% 4% 8% All Domestic Worldwide National Only Unclassified 68% 18% 3% 5% 6% Ongoing New New/Sunsetting Sunsetting Unclassified Source: OECD Industrial Support Database, April 1996. 30 Building the innovation capacity of SMEs: policy rationale and new approaches The weak technology receptiveness and innovation capacity of firms often constitutes one of the most important bottlenecks in the diffusion process and results from barriers to firms’ rational behaviour, and associated market imperfections, namely: 31 Figure 5.1 Company types Source: Arnold, E. and Thuriaux, B. (1997), Supporting Companies' Technological Capabilities", Technopolis report to the OECD. Low-technology SMEs No meaningful technological capability No perceived need for this May be no actual need Minimum- capability SMEs One engineer Able to adopt/adapt packaged solutions May need help to implement Technological competents Multiple engineers Some budgetary discretion Able to participate in technology networks Research performers Research department or equivalent Able to take long run view of technological capabilities 0 25 50 75 100 Total stock of firms of which SMEs: 90-98% of which new: 10-30% of which innovative: 30-60% of which technology-based: 5-15% 100% 90-98% 9-29% 3-18% 1-3% Percentage of the total stock of firms Figure 5.2 Share of new technology-based firms1 1. All figures are orders of magnitude which may vary considerably between countries and years. They roughly correspond to a definition of SMEs as establishments/enterprises with less than 500 employees. Source: OECD, Eurostat, Enterprises in Europe. of which innovative: 30-60% 32 − The “low capability trap”, which means that until a firm has learnt something it cannot properly specify what it needs to learn. More generally, despite market pressures SMEs tend to overestimate their capability relative to competitors’ best practices . − Organisational inadequacies which prevent the rational exploitation and matching of new technological and market opportunities; and/or deficiencies in business skills preventing a sound self-diagnosis of needs and reducing the perceived value of organisational change and external (e.g. consulting) market services. − Inadequate availability of information on technological and market opportunities, the business infrastructure, and/or business services. Table 5.1 Typology of technology diffusion programmes Goal Programme types Objectives Technology, institution, or sector-specific To diffuse a specific technology to a wide number of firms and sectors, to promote technology transfer from specific institutions, or to diffuse technology to a particular industrial sector Demonstration Technical assistance To assist firms in diagnosing technology needs and in problem solving Information networks Assistance for small-scale R&D projects Diagnostic tools Assist firms to develop innovation-oriented management (includes organisational change) Benchmarking Transmit best practice from elsewhere Sector-wide technology road map Systematic planning for future strategic technology investments University-industry collaboration Upgrade the knowledge base of the firm Level 1: Improve the adoption and adaptation of specific technologies Level 2: Improve the general technology receptor capacity of firms Level 3: Build the innovation capacity of firms Source: OECD/GD(97)60. Promoting new technology-based firms Realising the potential contribution of new technology-based firms to economic growth and job creation depends on the existence of business opportunities, an entrepreneurial culture, a supportive business and technical infrastructure, and availability of and access to key resources. In addition to facilitating access to technology and know how and ensuring appropriate conditions for business start-ups in general (e.g. simplification of administrative and legal procedures), governments need to address the combined impact of a number of factors on opportunities for the 35 − The third study, “Failing Concerns: Business Bankruptcy in Canada” (Baldwin et al., 1997), investigates the characteristics associated with failure. The major findings of this study are that internal and external factors are equally responsible for firm failure. Internal factors are more important among firms that are less than five years old. Major internal deficiencies, particularly in these younger firms, fall into the area of management capabilities. United States − For the 1991-95 period, it was found that 3 per cent of new firms i) start with at least US$100 000 in first year sales; and ii) generate at least 20 per cent annual sales growth. Gross job creation tends to be concentrated among such high-growth firms or “gazelles” (Birch, et al., 1996) that are found in all economic sectors, accounting for 6 per cent of start- ups in manufacturing, 3.4 per cent in trade (wholesale and retail), 2.4 per cent in finance, insurance and real estate (FIRE); 2.1 per cent in services; and 3.5 per cent in other (agriculture, mining, construction, and transportation, communications and utilities). Smaller firms, including high-growth firms, are a major source of job growth in all of the nine major regions of the United States. − In an analysis of all sectors of the US economy before 1976-88, it was found that 31 000, or 4 per cent, of the 814 000 firms created in 1977-78 were responsible for 74 per cent of the gross employment growth of the entire cohort by 1984 (Kirchhoff, 1994, p. 187). After eliminating those firms that recorded “unbelievable growth”, firms with growth rates in excess of 300 per cent (an average of 50 per cent per year over six years) were considered high-growth (Kirchhoff, 1994, p. 178-179). − Analysis was carried out using data provided by representative samples of new firms 1-6 years old in all economic sectors from Minnesota (1985 sample), Pennsylvania (1994 sample), and Wisconsin (1993 sample). About 8 per cent of these firms had both growth and initial annual sales above the median (high-growth, high-start). They were responsible for 15 per cent of the jobs, 27 per cent of the sales and 40 per cent of the out-of state exports of the cohort (Reynolds and White, in press). The top 2 per cent of the firms from the Minnesota and Pennsylvania samples with at least two years of sales accounted for 10 per cent of the jobs created in the cohort (Reynolds, 1993). Given this diverse and incomplete assessment of firm growth, its relationship to age, and its contribution to overall economic growth, there is clearly a strong justification for a more careful assessment. France This case study uses the database of the Ministry of Industry and examines the complete set of 23 000 manufacturing firms with more than 20 employees in 1994. − The first analysis shows that half the enterprises were permanent throughout the period between 1985 and 1994. These permanent enterprises lost jobs equivalent to 10 per cent of their aggregate workforce, but these job losses stemmed solely from very large firms with over 2 000 employees. This confirms the observation of concentration of job losses in a 36 small number of firms. No analysis has yet been conducted concerning job creation but a similar pattern of concentration is likely. Europe’s 500 Comparisons across European countries have been carried out in an extensive analysis sponsored by the European Commission. The study shows that during 1989 and 1984, a period of recession, 500 of Europe’s most dynamic entrepreneurs increased employment levels in their companies by almost 160 per cent. The report focuses on these entrepreneurs and explains how they managed to create jobs during a period of rising unemployment across Europe: − These dynamic entrepreneurs are typically male, aged 40-50, generally have a university degree, consider themselves to be “trained professionals”, and rate themselves most highly on skills typically associated with general management. They are typically “team starters”, but at the same time they own a majority of the company’s shares and seek to maintain its independence. − Dynamic entrepreneurs are found in all the European countries and in all major sectors, but there is an above-average representation in the service sector. The majority of the entrepreneurs selected for Europe’s 500 have pursued well-defined strategies to achieve rapid rates of growth. Their strategies are proactive and outward-looking, based on product differentiation rather than low cost. Quality is their watchword throughout their organisations and in the products and services they offer. They like to be financially self- reliant to the greatest possible extent, but say that people are the key to their success. They devote enormous energy to creating and then maintaining a highly motivated and well- qualified staff. A tentative summary of the characteristics and strategies of high-growth firms From the above-mentioned US and Canadian studies and Europe’s 500, a number of features emerge which appear to characterise HGSMEs: − Innovation and attention to human resources are most strongly related to growth. Regardless of sectors, innovators grow faster than no-innovators. At the earlier stages management capabilities are crucial to survival. As the firm matures, human resource and innovation strategies increase in importance. By the time the firm has reached an established stage, its management and human resource capabilities are typically quite developed, and growth is more closely associated with innovation. − Faster-growing successful entrants are almost twice as likely to innovate as slow-growing firms. Similarly, fast-growth firms place more emphasis on strategies relating to enhancing, updating or expanding their product line, and improving production. Successful fast growing entrants are those that translate their strategic emphases into action by undertaking R&D, innovation and training. − Successful fast-growing firms place greater emphasis on hiring skilled employees and motivating their employees. 37 − Balance -- an emphasis on striving to enhance their capabilities in all areas -- is a consistent theme among faster-growing firms. Nevertheless, balance appears to be more important to growth in the high-knowledge sectors than in the low-knowledge sectors. Main barriers to HGSMEs and policy implications − Market failures in capital markets can make it more difficult to obtain financing than is justified by the potential of start-up and small firms. As mentioned above, faster-growing successful entrants tend to be more innovative than slower ones. However, given the risk of knowledge investments, firms will undertake sub-optimal amounts of this type of investment, both because they cannot be guaranteed to reap the rewards and because they cannot get financing for it. − Government regulations and policies are seen by the entrepreneurs of the fastest growing firms as the main obstacles to the development of their businesses. Entrepreneurs rate bureaucracy, social security contributions, company taxes, personal income taxes, fiscal policy and labour law, in that order, as representing the governmental interference with the most negative impact. In general, entrepreneurs indicate that indirect labour costs are a barrier to growth. − Access to foreign markets is also considered to be difficult for small businesses. Exchange rate fluctuations, identifying and prospecting markets, different technical standards, discriminatory public contract award procedures and bureaucracy all represent barriers to international trade and globalisation. − Access to existing technologies should not be hampered by lack of information, insufficient bargaining power of SMEs or abuse of dominant positions by large firms. − Difficulties in recruiting qualified staff and skilled workers are also considered a major barrier to the fast growth of small business. On a preliminary basis what can be said about the role of government? The broad findings of these studies tend to indicate that the role of government should be oriented towards ensuring a supportive business environment for SME growth. The results also show that, although new and small hi-tech firms have a potential to grow fast, they are far from being the only group of successful high-growth entrants. Therefore, governments should have a broad scope for action and should look for ways to promote knowledge investments in order to overcome the underinvestment problems faced by SMEs in general. Governments can help by focusing on the timely provision of vitally needed information, knowledge and expertise, in particular with regard to access to foreign markets, access to technology, skill building and in encouraging the creation and support of business networks. 40 level. National programmes tend to be more motivated by concern for equal opportunity than in encouraging female entrepreneurship. Policy implications and recommendations A broad set of recommendations emerged from the “OECD Conference on Women Entrepreneurs in SMEs” for actions to be taken by government, business and financial institutions. Among these are: − The knowledge of women's entrepreneurship should be deepened with a view to increasing the overall effectiveness of SME policy. In this context, the OECD should play a leadership role, and in particular encourage and facilitate the collection and standardisation of statistics and data on SMEs, including women-owned SMEs, on a worldwide basis. − Best practices in the financing of women entrepreneurs should be identified, with particular attention to the role played by “business angels”, equity or quasi-equity formation (including tax-driven mechanisms), guarantee programmes, women’s loan funds, micro-business financing programmes, and training and counselling programmes linked to financing. − OECD Member countries should be encouraged to define the mix of private and government actions required to improve access to capital for women entrepreneurs. Research should analyse the nature and value of “intellectual capital” so as to provide financial institutions with new elements to consider in evaluating credit risk. − International networks of existing national women entrepreneurs’ associations should be encouraged and strengthened in partnership with government and corporations. − Technology use should be promoted to improve competitiveness and networking. Education and training in technology and business skills should be provided to women business owners in centres, educational institutions and, through technology, in the home. 41 SECTION 8 THE REGIONAL DIMENSION OF ENTREPRENEURSHIP Entrepreneurship has several regional or territorial dimensions that are relevant for policy analysis and development. Entrepreneurship is often dependent on its territorial context: entrepreneurial activity often varies markedly across sub-national regions with some regions having much higher rates of entrepreneurial activity than others (see Table 8.1), and with certain types of activity often being clustered together. For example, the so-called “third Italy” has firm creation rates which are much higher than in the southern Italian regions. Table 8.1 Firm birth rates and variations within countries at the regional level1 Annual firm births at the regional level (per 10 000 persons) Regional variations National Min Max Min/Max average All sectors France (1981-91) 118 67 264 3.9 Germany (1986-89) 55 41 90 2.2 Italy 144 74 202 2.7 Sweden2 (1985-89) 88 56 149 2.7 United Kingdom (1980-90) 72 42 107 2.5 United States (1986-88) 33 18 74 4.1 Manufacturing only Germany (1986-89) 6.8 4.5 12.0 2.7 Ireland3 (1980-90) 22.3 10.7 42.7 4.0 Italy 26.8 12.7 51.0 4.0 Japan (1985) 6.7 4.1 12.7 3.1 Sweden (1985-89) 10.3 4.4 28.7 6.5 United Kingdom3 (1980-90) 27.5 10.0 59.5 6.0 United States3 (1986-88) 16.8 2.4 114.0 47.5 1. There is definitional variation across the countries due to differences in the methods used to measure firm births. As a result, cross-national comparisons of the average values are not appropriate. 2. Population 16-64 used as denominator, rather than size of workforce. 3. Manufacturing workers used as denominators. Source: OECD (1993), “Regional Characteristics Affecting Small Business Formation”, ILE Notebooks No. 18, Paris. Clusters Silicon Valley in California is currently the most prominent cluster of computer-related entrepreneurial firms. Clustering produces several types of benefits: firm concentration creates a larger 42 market for specialised labour and for intermediate inputs; and there can be “informational spill-overs” owing to the increased intensity of communication facilitated by the geographical concentration of producers. Clustering can be of particular benefit to smaller firms who, because of their size, often cannot provide specialised training or maintain in-house services such as R&D or marketing. According to one view, clusters develop naturally, based on the intrinsic advantages such as natural resources (e.g. mines, port facilities) found in a particular region. For example, firms in the steel industry are often established close to energy supplies and good transportation networks. Others argue that the process of clustering is marked by historical “accidents”. An invention or technological development is exploited by an enterprising individual and leads to persistent centres of production,7 particularly in industries which are “rootless”, that is, industries which are not dependent on fixed natural resources (e.g. light manufacturing). For example, Silicon Valley owes its start to the Vice-President of Stanford University who established the famous research park on university land, leading later to the creation of many dynamic new firms. These two views are not mutually exclusive and a combination of both a priori regional advantages provided by the presence of natural resources and historical accident are responsible for the creation of many clusters. Both views agree that clusters generate cumulative benefits that can progressively increase the cluster’s competitive edge. A number of intangible factors at the regional level such as culture, social capital and local networking influence enterprise development. Much of the literature on clusters cites the importance of the social environment and of social cohesion within the network of firms, enabling the maintenance of a high level of wages even in sectors dominated by developing countries which benefit from cheap labour. This is the case, for example, in the textiles sector in Denmark and the shoe industry in Italy. While clusters of enterprises can be stable over long periods of time, it would appear that these cumulative advantages are not altogether decisive, and the position of an entrenched cluster can be successfully challenged. Examples of this abound: steel in Europe and the United States, certain types of computer chip-making in the United States and Japan, automakers in the United States, cameras in Germany, textiles in many industrial countries. Therefore, as production becomes standardised over time, localisation of an industry can fade away. There appears to be a kind of product cycle in which emergent new industries initially flourish in localised industrial districts, then disperse as they mature. As clusters of enterprises mature and disperse, the regions in which they are situated may suffer an economic shock as firms down-size or close, causing high social costs from which it is difficult to recover. Regional policies Traditional regional development policies introduced to assist regions suffering from a declining industry have often been guided by a development model which promoted large investments in infrastructure or in social assistance. Another relatively common regional development policy has been to attract firms from other regions or countries to establish themselves in the disadvantaged region by offering subsidies of various kinds. More recently, entrepreneurial policies have been introduced which concentrate on improving the labour pool and intermediate inputs. For example, training policies have been introduced in several countries to encourage employee training, many of them targeted at small firms. Recognising that much of the training undertaken is informal, the Australian government has sought to encourage more training by creating an accreditation scheme for skills obtained on-the-job8. 7. Krugman, P. (1991), Geography and Trade, MIT Press, MA. 8. Colardyn, D. (1996), La gestion des compétences, PUF. 45 assessments are based on track record, projections of future cash flows and collateral. Consequently, banks are in a better position to provide loans to existing SMEs than to new SMEs. Smaller potential borrowers have a handicap in obtaining loans from banks because credit assessment costs are fixed. In response, banks have been seeking ways to improve their SME credit assessment skills so as to be in a better position to price the credit risks of SMEs as well as to better assess their credits. Information on the spread of interest rates paid by SMEs seems to suggest that financial intermediaries outside the United States tend to have greater difficulties in assessing and pricing credit risks than US financial institutions. Loan guarantee schemes To overcome these problems with borrowing, G7 countries such as Canada, France and the United Kingdom, have introduced loan guarantee schemes. A percentage of the loan is guaranteed by the state so that, in the event of default, the loss to the financial institution is only a proportion of the sum at risk. In return, the charge paid by the borrower on such loans is higher than under normal arrangements since an additional premium is paid to the state to cover expected losses. Even so, the SME is able to access funds from a financial institution without access to collateral. The table below shows the financing terms for Canada, France and the United Kingdom. Table 9.1 Loan guarantee conditions France Canada United Kingdom % of loan guaranteed 65 90 70-85 Interest rate premium 0.6 1.75 1.5 The general lessons for loan guarantee schemes are that the criteria for success should be clearly specified. These include: − Minimisation of dead-weight: the state will wish to ensure that its funds are not used by banks as a substitute for their own loans. − Job creation: the state may wish to be satisfied that there are wider economic benefits, for example additional job creations, associated with the scheme. − Developing banking expertise: the guarantee scheme may encourage banks to lend more on the basis of the quality of the project and less on the basis of available collateral. If private- sector banks can develop more expertise and become better at distinguishing good projects from bad ones, this will lead to increased lending to small firms by banks from their own resources. − Speed of decisions: in implementing any guarantee scheme it is vital that, since SMEs require speedy decisions, access to the guarantee does not add significantly to the time taken to make decisions about loans. 46 Financing the seed and start-up stages of investment In Canada and the United States, it is relatively easy to obtain early-stage venture capital. Outside North America raising early-stage funds is more problematic, thereby shifting the emphasis onto later-stage investments. In a number of countries, commercial banks have set up subsidiaries to provide venture capital but they seem to be more active in the later stages of investment. Involvement of institutional investors in venture financing Institutional investors generally prefer larger and later-stage investments over relatively small and early-stage investments. The evolution of the limited partnership model in combination with favourable regulatory changes (in particular allowing pension funds to invest in private equity) and changes in the tax code spurred the flow of capital to the private equity market in the United States (more than 75 per cent of venture capital is provided through limited partnerships, with pension funds providing the bulk of total financial commitments). Raising private equity via limited partnerships seems to becoming more popular outside the United States. However, in many OECD countries, pension funds are barred from investing in the private equity market. The importance of exit mechanisms Efficient exit mechanisms (trade sales, initial public offerings and repurchases) are crucial for a healthy venture-capital industry. In Canada and the United States, sales to portfolio investors are the most common exit route, while in Europe trade sales and buy-ins/buy-outs are most widely used. The limited possibility of exiting through sales to portfolio investors is a serious obstacle to the full development of the European venture-capital industry. Second-tier markets Second-tier and private equity markets for unlisted securities are important for SMEs. Second-tier markets for initial public offerings constitute efficient exit vehicles in the United States and, to a lesser extent, in Japan. Problems with existing exit vehicles in countries outside Japan and the United States have stimulated the development of new parallel markets, notably in Western Europe. Thus far, these new markets have been more successful than the earlier European experiments. Informal venture capital While the formal venture-capital sector is of considerable interest to policy makers, the conditions for informal venture capital, provided by private individuals or “business angels”, are also of primary importance. Such individuals are thought to provide significantly more equity to private business than the formal sector. 47 Experience from Canada and the United States suggests that the informal venture-capital sector can be stimulated through: − improved networking services to enhance the flow of information between investors and investees; − use of the taxation system to encourage wealthy individuals to invest in private business. The role of taxation Taxation may impose a relatively heavier burden on small than on large businesses, and it is appropriate to consider steps to reduce this distortion. If assistance to small businesses is considered desirable, then there is a need to consider whether such help is best delivered through the tax system. The economic arguments for aiding small businesses suggest helping certain types: firms in dynamic sectors of the economy; firms having difficulties in raising funds, etc. It is rarely the case that any tax paid by small businesses will coincide closely with a target group, be it personal income tax, corporation tax, general consumption taxes or taxes on the owners of small businesses. The disadvantages of this lack in precise targeting of tax-based measures must, of course, be measured against the attractions of using existing administrative machinery. A fundamental question is to what extent the tax system is an appropriate vehicle for removing obstacles to SMEs in a cost-effective manner. The following is a list of areas where the tax system has a potential role to achieve various policy aims: limiting the cost disadvantages faced by small businesses in complying with tax legislation; encouraging the creation of new small businesses; ensuring the continuation of small businesses when control passes from the founder of the firm to another person. Business environment From the viewpoint of SMEs, legislation is perceived to be drafted to satisfy the interests of law- makers, administrators and enforcers, rather than seeking the most cost-effective means of satisfying legal requirements. Five initiatives can help to strike a balance between the need for regulation and the interests of those -- particularly SMEs -- complying with the regulations: − New regulations should be scrutinised in a systematic manner. Those proposing legislative change should have to clearly justify any new procedures. Economic side effects, such as differential compliance costs according to firms size, showing be estimated and quantified. − A Business Impact System could be implemented to ensure the audit and monitoring of new legislation along the lines of an Environmental Impact Assessment. − Countries such as Canada seek to trawl existing regulations with a view to eliminating those where compliance costs exceed the benefits. The Enterprise and Deregulation Unit in the 50 counsellors advise firms and refer them to public research institutions, commercial suppliers of knowledge and private consultants. As a way to build on existing local, state and national resources, the Manufacturing Extension Partnership (MEP) programme in the United States provides links and referrals to other public institutions such as federal laboratories (for technology), the Environmental Protection Agency (for environmental technology) or the Small Business Administration (for financing and business planning). Building in evaluation and assessment -- technology diffusion programmes should have mechanisms for assessment which can guide and improve their operation and management on a continuing basis. Evaluation is currently the Achilles heal of technology diffusion policy in OECD countries, especially when relating its specific objectives to broader policy goals. There are a variety of methodological, operational and programme impact issues related to evaluating technology diffusion that could benefit from cross-national comparison. The OECD work on best practices in technology and innovation policy and the European Commission’s European Innovation Monitoring System (EIMS) respond to this need in documenting and comparing the efficiency of similar programmes across different countries. Management capabilities Subsidised consultancy and training services There is a general consensus that the competitiveness of an individual SME is strongly related to the “quality” of its owner/manager. “Quality” is, in this context, strongly related to the human capital of the individual, in turn influenced by a combination of formal education, training and experiential learning. In most OECD countries, it is also the case that: − the formal educational qualifications of individuals managing smaller enterprises are inferior to those managing larger enterprises; and − the probability that a worker or manager is in receipt of formal training is significantly less in small, than in large, enterprises. Several G7 governments have sought to enhance the “quality” of owner/managers of SMEs either by encouraging (subsidising) training and/or by providing access to (subsidised) advisory and consultancy services. The precise nature of these services varies widely from one G7 country to another. Probably the most extensive assistance is provided by Japan, which has both a highly developed system of advisory services and also SME colleges. Established initially in 1962, there are now eight colleges educating SME employees, consultants and managers. Formal training is provided in courses, of up to 12 months’ duration, which are certified by the Ministry of International Trade and Industry (MITI). In 1993 alone, short- and long-term training programmes were provided for more than 11 000 people. Until 1994 the United Kingdom had a consultancy initiative in which SMEs employing external consultants in marketing, quality, design, etc., for up to 15 days were subsidised at up to 50 per cent. The role of the consultant was to produce a development plan, in conjunction with the SME, which the SME would then implement after the consultant’s departure. 51 Perhaps one of the most interesting initiatives is implemented under Italian Law 44. Introduced in 1986, the scheme seeks to develop managerial expertise among young entrepreneurs up to 30 years of age in Southern Italy. Law 44 requires that training and technical assistance be provided simultaneously, together with financial incentives, to such enterprises. Each young entrepreneur is required to have a mentor (generally a manufacturing or consulting firm) whose function is to develop the young partner’s entrepreneurial capabilities, whilst helping the enterprise achieve its objectives. Although the scheme is clearly expensive to implement, survival rates for these businesses are significantly higher than would be expected of businesses established by young individuals in the less prosperous areas of Southern Italy. The following factors should be considered by subsidy schemes aimed at enhancing the skill base of SMEs: − Specification of objectives. In some instances government criteria for the success of such schemes is their take up and overall “penetration rate”. Both are highly sensitive to the level of subsidy provided by government. Penetration rates cannot be used as a perfect indicator of the satisfaction and value of the scheme as far as SMEs are concerned. − Situation after the removal of the subsidy. In the case of both the French and UK schemes, external consultants are employed at a (generally) 50 per cent subsidy for up to about 15 days. One criterion of whether the SME is satisfied with the services received could be whether the consultant continues to be employed once the subsidy is removed. Unfortunately, however, there is no “benchmark” on which such success could be calibrated, e.g. success is defined as whether the consultant is employed for a further ten days in 50 per cent of cases. − Asking the SMEs themselves. Almost all such initiatives seek the views of SME owners/trainees. These fairly consistently report high levels of satisfaction with the training provided, but it is more difficult to link training provision to enhanced firm performance in terms of business survival and/or growth. Information networks for SMEs The OECD globalisation study emphasized that, while SMEs were less likely to export than large firms, they were strongly influenced by globalisation and were starting to play a more powerful role. To fulfil a leading role it was necessary that SMEs had access to information not simply about their own country but elsewhere in the world. The G7 study of global market-places emphasized that SMEs needed information about other parts of the world; it also stressed the need to develop electronic commerce. Electronic commerce constitutes a fundamental change in trading activities and is not limited to simply extending trading on the World Wide Web. Information is a key to the competitive advantage of SMEs, and it is likely to increase substantially in the future. Several major policy issues have emerged from discussions on governments’ efforts to extend the scale of electronic commerce, with a particular focus on SMEs: − Customising databases. The central problem encountered by those seeking to provide information services is the huge diversity of needs of the SME community. In many respects, governments face “tensions” between the ability to provide information and 52 customer requirements. Hence the central challenge is to seek to produce a database which is “user friendly” but which does not assume a specific enquiry structure. − Information overload. The ability of time-constrained entrepreneurs to scan databases to absorb the relevant information, even where this information can be found, is limited. Furthermore, computer literacy is likely to be lower, the smaller the enterprise. To address these issues, four approaches have been developed: − Know your customer. This involves monitoring usage of databases, with a view to focusing more closely on those services which are extensively used and dropping those which are not; it also involves the regular use of surveys which can be quickly and efficiently conducted on the Internet. However this does not overcome the problem of the substantial proportion of SMEs managed by individuals who are not computer literate. One response is to focus the information system, not on SMEs themselves, but instead on groups of intermediaries, most notably accountants, consultants, etc., whose role is to interpret the information on behalf of their customers -- SMEs. The problem here is that SMEs are rarely prepared to pay for such “interpretation” services where the benefits are not immediately apparent. − Access. It is clear that there has been close dialogue between Canada and the United States and that, while their databases are not necessarily wholly compatible, the approaches adopted are broadly similar. A key question which emerges, however, is the extent to which databases and information systems are usable by non-nationals. The argument in favour of restricting database access to firms located in a particular country are that there may be national security issues. Even more important, if the information is regarded as commercially valuable and the databases have been established by national taxpayers, then there is a powerful incentive for the prime beneficiaries of these databases to be the taxpaying firms. − Avoid interference with the market mechanism. While the provision of public databases, funded by public funds, clearly benefits the economy as a whole, there is a risk that their provision ultimately competes with the commercial information industry. Both in Canada and the United States it is recognised that, in principle, the state should not seek to directly compete with the provision of services by the private sector. For this reason the Canadian strategy has been to include “hard-to-get information”. − Subsidisation. The target groups using the Canadian databases were growing businesses and it was decreed that pricing should be based on at least full cost recovery. The state should not subsidise provision of the information, since the firms were able to pay for it themselves, and to do so would undermine the commercial information industry. However, it is also the case that these rapidly growing businesses provide positive national “externalities”, such as raising the competitiveness of the economy, creating jobs, etc. On these grounds there is a case for some public subsidisation. There remain fundamental problems with the principles for pricing policy in this area. Markets work best when the consumer has considerable information about the merits of a particular product/service accumulated on his or her behalf by regular purchases and repurchases. It works least well when the purchaser has little idea of the qualities of the product/service under consideration. In short, the “needs” of SMEs are normally reflected in their willingness to pay. However, since they are