Why European SMEs need the digital single market

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

This article is part of our special report Innovation and the Digital Economy.

The fragmented nature of the EU's digital single market is preventing many small businesses from reaping the benefits of the Internet and ICTs, write Ann Mettler and Sylwia St?pie?.

Ann Mettler and Sylwia St?pie? are respectively executive director and senior project manager at the Lisbon Council, a Brussels-based knowledge economy think tank. They contributed this commentary exclusivity to EURACTIV.

"The European Union’s Digital Agenda – one of the flagship initiatives of the Europe 2020 Strategy – firmly recognises the revolutionary potential that information and communication technology (ICT) offers to boost growth, increase productivity and improve the welfare of citizens and consumers.

The evidence that supports greater use of ICT and advances in the Digital Single Market are convincing: even in times of recession and sluggish growth prospects, the Internet contributed on average 3.8% to the EU’s gross domestic product in 2010 and it is forecasted to grow exponentially in coming years. In the leading Internet economies, including the United Kingdom, Sweden, Denmark and the Netherlands, the Internet accounted for as much as 7.2%, 6.6%, 5.8% and 4.3% of GDP in 2009, respectively.

It is also evident that the impact of ICT goes well beyond GDP. Small- and medium-sized enterprises (SMEs) that are intensive technology users not only grow and export twice as much as their peers, but also create twice the number of jobs. Technology is therefore not only – or even foremost – about technology start-ups. Greater use of technology is needed in all companies across all sectors. According to the McKinsey Global Institute, 75% of the economic value created by the Internet arises from traditional companies that are using Web-based technologies to lower the costs of running their business.

To give two illustrative examples, German and French SMEs which engaged actively with consumers on the Web have experienced three-year sales growth rates up to 22 percentage points higher than those companies with low or no Internet presence. And not surprisingly, investment in ICT promises to generate much higher returns on productivity growth (up to 25%) than any other forms of capital investment (15% on average).

Despite this well documented and very convincing evidence, many SMEs are held back in utilising the transformative potential that ICT and the Internet hold because of numerous stumbling blocks. These are mostly related to the fragmented nature of the EU’s Digital Single Market, which in turn is a drag on individual companies but also an impediment to growth, job creation and innovation at member state level.

Digital single market's potential is under-utilised

Key statistics speak for themselves and should send alarm bells ringing among policymakers:

  • The EU is still very weak in high-speed broadband as only 0.9% connections operate at 100 Megabits per second – far from the Digital Agenda’s target of 50% penetration of super-fast Internet by 2020;
  • Europe doesn’t train enough ICT professionals and the digital skills shortage is forecast to be as high as 700,000 professionals by 2015 – and this is in times when unemployment hits a historic rate of 10.2% and the alarming 22.4% for young people. Europe cannot afford this dangerous skills shortage in one of the fastest growing areas of the economy and face the risk of a lost, digitally savvy generation;
  • Nearly one in two European consumers is not interested in making a cross-border transaction because of worries about speed, cost and safety of delivery which is on average twice as high as domestic shipments;
  • 35% of Internet users avoid shopping online because of concerns about the security of payments;
  • And last but not least, European firms that operate cross-border must be familiar with and fully respect a patchwork of 27 different contract laws and unharmonised tax systems which is a huge detriment to expanding businesses beyond local markets.

These are just a few of the formidable obstacles that stand in the way of creating the Digital Single Market that our policymakers purportedly want to unleash.

By not tackling these stumbling blocks, policymakers not only compromise the economic recovery but also impose a straightjacket on the 99% of companies that are classified as SMEs. Despite assurances that we want 'gazelle' enterprises that experience rapid expansion and success, the sad reality is of course that in this environment only about 4.3% of companies manage to be classified as 'high-growth'.

Unleashing the Digital Single Market

Against the backdrop of the fragmented nature of Europe’s digital innovation and regulatory eco-system – and in view of the fact that growth and jobs are more urgently needed than ever – the EU needs to embrace the following “to-do” list to unleash the full potential of the Digital Single Market to the benefit of European SMEs:

  • Accelerate the spread and adoption of ultra high-speed broadband;
  • Create reliable, safe and efficient online payment systems;
  • Establish a single Europe-wide sales contract law;
  • Streamline and simplify complex and overlapping VAT systems;
  • Lower cross-border shipping costs and increase certainty of delivery;
  • Develop a Europe-wide framework for cloud computing;
  • Boost digital skills in the labour market;

Delivering on this digital 'to-do' list is a condition sine qua non if Europe hopes to reap the potential of the digital single market in a sector of the economy where future competitiveness, job creation and productivity performance will be decided.

Falling behind on ICT and the Internet, which by all accounts are the new engine of economic growth in the 21st century – much like electricity was in the 19th century or steam power in the 18th century – would have devastating, long-term consequences.

That is why, as an urgent priority, the digital economy needs to become about the mainstream economy. Instead of handling it like a niche issue which pertains to one narrow strand of policy making (the digital agenda) and not the wider economy (such as financial and economic affairs) and making it about technology start-ups rather than all companies across all sectors, we risk undermining the transformative innovation and growth potential of the Internet in general and ICT in particular.

Kick-starting growth and jobs

One way of tackling this shortcoming would be to make the Digital Agenda part and parcel of the EU’s Annual Growth Survey (AGS), which would help to highlight its growth potential to policymakers who may not be aware of it but who are desperately trying to kick-start their respective economies and job engines.

The precedent for adding urgent and new items that economic policymakers may be unfamiliar with to the AGS has already been set this year, when for the first time 'quality of public administrations' was made a cornerstone of the European Commission’s evaluations of member states. This happened of course against the backdrop of catastrophic developments in countries where the public sector was prohibitively inefficient and expensive, such as Greece.

Let us hope that this time around policy makers can proof more foresight and add Digital Agenda and Internet economy to the AGS before Europe has fallen even further behind in what is the key driver of competitiveness, growth and jobs in the 21st century."

Note: This editorial is based on a new Lisbon Council interactive policy brief: "Wired for Growth and Innovation: How Digital Technologies are Reshaping Small- and Medium-Sized Businesses and Empowering Entrepreneurs."

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