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SME growth: Key to Europe’s economy

03-06-2007 (updated: 10-10-2011 )

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Small and medium-sized enterprises (SME) are potentially the most dynamic sector of the economy. Their growth is key for the overall economic well-being. The Commission has several programmes and measures in place to promote SME growth. 

Background

According to the Commission's definition, whether a company qualifies as an SME is determined by the factors headcount and turnover or balance sheet total. The Commission counts companies with less than 250 workers and a turnover of less than 50 million euro annually as SME. Companies with a balance sheet total of more than 43 million euro do not qualify as SME. 

SME represent 99% of all companies in the EU. They are the biggest sector of the EU economy, with 23 million enterprises employing around 75 million people. are responsible for the creation of one in every two new jobs. SME produce considerably more than half the EU's GDP. 

Due to their small size and lean structures, SME are potentially more dynamic than big enterprises, which makes them particularly important for job creation. But they are also more vulnerable, lacking often access to capital and to funding sources. 

Issues

EU Enterprise Policies

The promotion of SME growth is part of all sectorial EU policies. Non-sectorial policies are brought together in the multi-annual programme (MAP) for enterprise and entrepreneurship. From 2007 onwards, the MAP will be followed up by the Entrepreneurship and Innovation Programme (EIP), which is part of the "Competitiveness and Innovation framework Programme (CIP)" 2007-2013. 

For more details, see EURACTIV's LinksDossier on the CIP.

Access to capital 

For SME, finding funding means in the vast majority of cases getting a loan from their bank. According to an October 2005 Eurobarometer Flash, in 79% of cases SME turn to a bank to get financing. Banks, however, are reluctant to give loans to SME, which they consider as risky. In order to meet this need, the CIP will add a new risk capital instrument aimed specifically at innovative and high-growth SME.

The MAP already contains an SME Guarantee Facility, which is administered by the European Investment Fund and  covers Loan Guarantees, Micro-credit Guarantees, Equity Guarantees and ICT Loan Guarantees. On 24 November 2005, the Commission presented JEREMIE, a 'joint Regio-EIB group initiative for supporting improved access to finance for SME and micro-enterprise development in the regions'.  

  • Small loans

The Commission actively engages to promote smoother handling applications for small loan, which it defines as as any loan below a 25,000 euro threshold. It stresses that this is were entrepreneurship and anti-discrimination policies touch. The European Investment Fund (EIF) manages, on behalf of the Commission, a microcredit guarantee window, the terms of which are laid down in the MAP. A 2004 Commission Staff Working Document deals with Microcredit for European small businesses. 

  • Basel II and new rules on rating and capital requirement

The SME community is concerned about the new capital adequacy directive, known as Basel 2, citing fears that "benefits for SME will be frustrated by the implementation cost of Basel II in the banking system, especially with regard to smaller loans (loans below 100,000 euro)". The Commission reacted to the concerns with an information campaign , including a guide on how to deal with the new rules. 

For more detail, see EURACTIV's LinksDossier on Basel II and the Capital Requirements Directive.

  • Venture Capital

The early stage venture capital market in Europe represents only about 2 billion euro per annum - about 25% of its US equivalent. Only one in 50 SME turns to a venture capital company to get money. 6% of SME have done so at a point in time. The June 1998 Cardiff European Council adopted the Risk Capital Action Plan, which intends to set up a single market for venture capital. On 30 June 2006, the Commission started a set of measures  to facilitate small companies' access to risk capital. 

  • State Aid

SME can get small amounts of state aid - the so-called de minimis aid, not exceeding 100,000 euro within a three-year period - exempt from competition rules. The 2006 Spring Summit supported the Commission, which wants to raise this threshold to 200,000 euro. UEAPME, the European SME employers' association, also supports the raise, but has spoken out against requests to raise the threshold even higher. 

Better regulation

The 23 - 24 March 2006 Spring Council decided  to take steps to cut down the administrative time needed for setting up business to one week by the end of 2007. They also decided to introduce one-stop-shops for setting up companies and hiring the first employees. The Commission tries to support member states in cutting red tape by providing examples of best practices already implemented. 

For more details, see EURACTIV's LinksDossier on Better Regulation.

Taxation

The EU has 25 different corporate taxation systems. Smaller companies doing cross-border business spend up to 2.5% of their turnover for compliance costs. For many of them, those costs are a main barrier for doing cross-border business. Bigger companies with dedicated taxation units, on the other hand, often benefit from differences in taxation schemes, which they can use for financial engineering. Even in cases where there are common EU rules, as is the case with value-added tax, the implementation differs strongly from one country to another. 

Access to skills

Due to their leaner infrastructure, SME have to make more of an effort to train and educate workers than bigger companies have to. This makes it more important for SME to be able to rely on external training, which may be provided by public institutions, private educational establishments or companies such as software makers training people to work with their products. In order to assess abilities a person has acquired elsewhere, SME need transparent and workable skills certification schemes. 

For more details, see EURACTIV's LinksDossiers on Lifelong Learning and on eSkills. 

Entrepreneurial culture

Entrepreneurial initiative and risk-taking are less developed in Europe than in competing economies such as the US. A 2002 Eurobarometer survey found that EU citizens are less inclined to become entrepreneurs, and more risk-averse than their American counterparts. In its February 2004 action plan 'The European agenda for Entrepreneurship', the Commission proposes actions in five strategic policy areas: entrepreneurial mindsets, incentives for entrepreneurs, competitiveness and growth, access to finance and red tape.

For more details, see EURACTIV's LinksDossier on Entrepreneurship.

Positions

Addressing the SME Conference 'Financing European Enterprise' on 27 April 2006, Enterprise Commissioner Günter Verheugen said: 
 "The Communication will set three policy goals: First, we need more risk capital investment to promote growth. In partnership with the Member States, we have to focus on ways to increase investment in growth firms. Second, we need to develop bank finance for innovation. Many Member States have a strong, bank-oriented financing culture and to leverage this strength, the Commission will promote dialogue between SMEs and banks to increase understanding. And third, we need better governance of financing systems. Member States have an opportunity to substantially improve their financing systems by learning from global best practices. Furthermore, the Commission provides the Member States additional tools to reduce identified market gaps."

The Austrian Council Presidency, in its draft progress report on Better Regulation, dated 8 May 2006, "underlined the crucial role of SMEs in creating growth and better jobs in Europe and the need to develop comprehensive supportive policies for SMEs of all types, as well as a regulatory environment that is simple, transparent and easy to apply. The Presidency notes the Commission will bring forward specific provisions to encourage SME growth and development, such as longer transition periods, reduced fees, simplified reporting requirements and exemptions."

Gerhard Huemer, Director for Economic and Fiscal Policy with UEAPME, the European Association of Craft, Small and Medium-sized Enterprises, said: "There are certainly two things that are true for all small and medium-sized companies: First, the administrative burden must be cut. And the second most important issue is access to finance. In the very near future, we may be facing a third challenge, which is labour market supply - we may not be able to get enough of the right qualification on both the higher and lower end of the labour market. In many regions, we are facing this kind of problems already now. On the lower end of the labour market it is often easier to stay unemployed and live on benefits."

Timeline

  • On 30 June 2006, the Commission unveiled its measures for facilitating SME's access to risk capital.
  • On 4 October 2006, the Competitiveness and Innovation Framework Programme (CIP) was published in the Official Journal
  • On 1 January 2007, the CIP replaced the MAP, providing 1 billion euro through its financial instruments from 2007 to 2013 

Further Reading

EU official documents

Business & Industry

Think tanks & Academia

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