Opinion on the Second Annual Report of the European Observatory for SMEs

(95/C 102/09)

On 16 June 1994, the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the Second Annual Report of the European Observatory for SMEs.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 4 January 1995. The Rapporteur was Mr Andrade.

At its 322nd Plenary Session (meeting of 25 January 1995), the Economic and Social Committee adopted the following Opinion by a majority vote with four abstentions.

1. Introduction

1.1. The European Observatory for SMEs was set up in December 1992. It forms one of a number of initiatives finally taken by the Community in the SME sector.

The Commission Communication of 18 December 1990 (COM(90) 528 final), entitled Enterprise Policy: A New Dimension for Small- and Medium-Sized Enterprises, included an undertaking to launch a feasibility study on a European monitoring centre for SMEs.

The intended purpose of the new body was quite clear: to monitor annual developments in the small business sector in order to meet the need for 'analysis and strategic reflection'.

One of the tasks of the centre would be to help 'evolve the broad lines of European enterprise policy on the basis of the coordinated development of a statistical information system'.

1.2. A European Network for SME Research (ENSR) was set up to implement the project. The network comprises twelve bodies, one from each Member State.

1.3. The Observatory has so far limited itself to the publication of an annual report coordinated by the Dutch ENSR member, the EIM (Small Business Research and Consultancy).

2. The experience gained over two years of operation prompts a number of questions concerning the Observatory's approach.

2.1. Point 1.1 underlines the weight which the Council and Commission accord the Observatory. Given the lack of systematic data on company activity, the Council and Commission will draw heavily on the information provided in the annual report when they map out future measures in support of SMEs.

The Committee hopes that the organizations which form the ENSR network realize the importance of the report and hence make a clear commitment to the project.

The financial resources allocated to the network should be increased so that each of the twelve members can assign one or more of their specialists to the work on a full-time basis.

2.2. It is apparent from the second report that certain shortcomings concerning both the organization of the work and the contributions from network members need to be remedied.

One might ask whether data and research could be better coordinated in order to draw full benefit from the knowledge, critical mass and experience built up over the years by the twelve organizations.

If a chapter of general recommendations is included, it should always be the joint responsibility of all the members.

2.3. The Committee considers that the choice of subjects to be examined each year should take account of the opinion of SME representatives, who should be consulted on the matter in good time.

2.4. On the question of working methods, the Committee feels that the more detailed specific studies carried out each year should not have to await the publication of the report before they can be issued.

They should be issued as they are completed.

3. The Committee also questions three basic features of the report.

3.1. The studies concern the private non-primary sector.

In the Committee's view, the Commission should give DG XXIII the weight it deserves, in order to provide a full response to the many problems faced by SMEs.

3.2. The criterion used to define a SME has the great advantage of being extremely practical ().

However, it is difficult to understand why the cut-off point is 500 employees, and not 200 or 250.

All the information in the rest of the report suggests that the latter figure would be more proper: only 0,2 % of businesses have more than 250 workers. Furthermore, these firms have the same organizational problems, the same influence on job creation, the same type of credit facilities, and so on.

The Commission itself has on several occasions used the threshold of 250 workers as a criterion for defining a SME (and did so as recently as 1 July 1994 in the Notice to the Member States laying down guidelines for operational programmes or global grants which they are invited to propose in the framework of a Community initiative concerning the adaptation of small- and medium-sized enterprises to the internal market - 94/C 180/03).

The Committee draws the Commission's attention to the urgent need to define the term SME, first and foremost for statistical purposes; it therefore supports the Commission's presentation of a communication on the subject.

3.3. The concept of 'craft dominated sector' has been devised with a view to assembling data on the craft sector on an empirical basis. The criterion applied may give rise to criticism and is far from universally accepted, since the sector is not precisely defined in many Member States.

The conclusions drawn with regard to the sector should take account of this fact (see the table in point 5.9.2 below).

Another solution might have been to divide the Member States into two groups, one for countries where the craft sector is not deemed significant and one for countries where it makes a significant contribution to the economy and to employment.

4. Statistics on SMEs are directly to blame for some of the problems met by the report's authors.

Often data simply do not exist, while in other cases they are inadequate, and in others they are not comparable.

It is obviously difficult to work in such conditions, and the results of such work could even be scientifically unsound.

The Commission will have to make a determined effort to rectify this major shortcoming at EU level.

5. The various chapters of the report are examined below.

5.1.

SMEs in the European Union (Chapter 2)

5.1.1. This chapter is important for the wealth of information which it contains. The way in which the indicators are presented and the care taken to show trends over the last few years offer valuable insights into the situation of SMEs.

This interesting chapter was coordinated by the EIM. The main source used was the Eurostat database 'Enterprises in Europe'.

5.1.2.

SME employment

5.1.2.1. The EU workforce stood at 133 million in 1990, 95 million of whom worked in the private non-primary sector; 68 million of these worked in SMEs (these figures do not include former East Germany).

Micro and small enterprises employed 53,7 million people, 17 million of whom (32 %) were the enterprises' owners.

5.1.2.2. The average number of employees per SME was 4,3. In large firms, the average was 2 119.

The overall average was six employees per firm.

5.1.2.3. In percentage terms, SMEs accounted for 71,9 % of total employment in the private non-primary sector in 1990. 31,8 % of this was in micro enterprises and 24,9 % in small enterprises.

5.1.2.4. Between 1988 and 1993, micro and small enterprises registered a net increase of 2,6 million jobs.

Between 1988 and 1990, micro enterprises' share of total employment rose by 1,6 % and small enterprises' share by 0,1 %. In contrast, over the same period the shares of medium-sized enterprises and large enterprises fell by 0,6 % and 1 % respectively.

5.1.2.5. The trend was not uniform throughout the Member States.

Micro enterprises' share of total employment fell in Ireland (6,7 %), Luxembourg (4,4 %) and the UK (1,1 %).

In contrast to the general trend, there were increases in the employment share of large enterprises in Ireland (4,8 %), Spain (1,7 %) and the UK (0,4 %), and in the share of medium-sized enterprises in Ireland (4,2 %), Luxembourg (3,2 %) and France (0,6 %).

5.1.2.6. The sectors with the highest net job creation between 1988 and 1993 were retail distribution and personal services.

Manufacturing industry, in contrast, registered a sharp fall.

5.1.2.7. Two criticisms of this part of the chapter: firstly, one should not use the same term for completely different areas. Table 2.4 gives a figure of 4 210 000 enterprises under the heading of 'personal services', while table 2.5 arrives at a figure of 571 000 under the same heading.

Secondly, since this sector was a net job creator, it would have been well worth attempting to ascertain which 'personal services' made the greatest contribution.

5.1.2.8. In 1988, micro and small enterprises employed 43 % of the total workforce in the EFTA nations, compared to 55 % in the EU.

In the United States, large enterprises also have a larger share of total employment than in the EU.

5.1.3.

Scale of SMEs

5.1.3.1. In 1990 there were 15,8 million enterprises in the EU (excluding former East Germany), of which 99,9 % were SMEs.

Micro enterprises, at 14,8 million, formed 93,3 % of the total.

In the same year there were just 13 000 firms with more than 500 employees, and 14 000 with between 250 and 499. Each of these groups accounted for 0,1 % of the total.

5.1.3.2. Large enterprises dominate the extractive industries, transport, communications and producer services.

Micro enterprises are predominant in the retail sector and personal services.

5.1.3.3. Between 1988 and 1993, the number of SMEs rose by 9 %. Over the same period, the population rose by just 2,5 %. Hence there seems to be a growing attraction for entrepreneurship.

The 9 % rise was concentrated in micro and small enterprises, while the figure for large firms fell.

5.1.3.4. In the Mediterranean nations, there was an average of 65 enterprises per 1 000 inhabitants, while elsewhere the average was below 40. In the EFTA nations, in contrast, the average was below 25.

5.1.4.

SME turnover

5.1.4.1. In 1990, SMEs accounted for 69,4 % of total turnover.

Although micro enterprises account for 93,3 % of businesses, their turnover represented just 23,4 % of the total, compared with 30,6 % for large enterprises, 25,8 % for small enterprises, and 20,1 % for medium-sized enterprises.

5.1.4.2. Between 1988 and 1993, the relative position of SMEs improved (and particularly that of micro enterprises).

The exceptions were Spain and Ireland, where large enterprises assumed a more important role.

5.2.

Macroeconomic environment (Chapter 3)

5.2.1. This chapter, which was coordinated by the EIM, could undoubtedly be deemed one of the weakest. This is inevitable as it attempts an ambitious analysis in just a few pages.

5.2.1.1. The first question to consider is whether a separate chapter on the macroeconomy is justified.

It would appear more logical to make macroeconomic analyses throughout the report as necessary, in order to explain why SMEs face certain types of problem.

5.2.1.2. We could cite a number of examples of the incomplete coverage of this topic. For instance, no account is taken of the economic effects of inflation (the word 'inflation' appears only once, in the penultimate line). And, even more astounding, there is no reference to interest rates.

5.2.2. Since the chapter mentions the importance of exchange rate fluctuations, the Committee asks the Commission, Council and EIB to find a way of providing an advance guarantee (at the time of the transaction) of the ECU exchange rate for the date of payment of the good or service. Alternatively, measures should be devised so that SMEs can have a simpler and less expensive method of engaging in forward currency transactions through existing financial institutions.

This would help to familiarize businesses with the idea of a single currency more rapidly and remove some of the uncertainties from international transactions, which everyone agrees should be encouraged and developed.

5.3.

Impact of the internal market on SMEs

(Chapter 4)

5.3.1. This chapter was coordinated by the Centre for Planning and Economic Research (KEPE) and the Greek SMEs and Crafts Organization (Eommex).

5.3.2. Three fundamental points emerge from it:

A.

There is still a long way to go towards liberalization of trade and free movement of goods, services and capital.

B.

Small businessmen are dissatisfied and wary of the internal market's impact on them.

C.

Experts from countries with a high proportion of SMEs feel that the internal market has had generally adverse effects on SMEs.

5.3.3. Intra-Community trade has risen steadily over the years and its share of Member States' overall trade has increased.

5.3.3.1. However, there are a number of reasons why progress has not been more rapid. These include delays in the transposition of Community legislation into national law, the unsatisfactory progress on the convergence criteria, the existence of red tape, the lack of information, differing regulations in the Member States, and the public procurement difficulties faced by non-national firms.

5.3.3.2. At the same time, the opening of national borders has offered firms access to new markets and economies of scale, obliging the less well equipped to restructure and encouraging technological advances and vocational training. In the longer term, all this can be highly beneficial for the business world in general and SMEs in particular.

5.3.4. The short-term impact on SMEs is often negative.

This is evident from the survey by Eurochambres. It could be argued that the number of businesses polled is not significant.

However, the Committee considers that the gravity of the problem and the serious misgivings of the main parties concerned are grounds for carrying out an urgent survey in all Member States.

5.3.4.1. The misgivings felt by small businessmen are largely due to increasing competition, rising costs and their lack of information and technical expertise.

These businessmen feel that the internal market has favoured large firms which are better prepared technically, have easier access to capital, and are better structured to exploit new business opportunities.

5.3.5. The Committee recently adopted a major Opinion () on the Commission's 1993 report on the internal market (). This contains a detailed analysis of developments.

5.4.

Employment creation and human capital

(Chapter 5)

5.4.1. This chapter was coordinated by the University of Warwick's SME centre.

The attempt to go a little further than most research in this field is noteworthy.

However, the lack of statistics in the various Member States unfortunately made it impossible to obtain the desired results.

5.4.1.1. This is blatantly clear from the last section, which considers the link between training and labour productivity but is obliged to base its conclusions on comparative studies of groups of business in just two countries.

It is obvious that any attempt to extrapolate these findings EU-wide is scientifically unsound.

5.4.2. Mention is again made of the important role of micro and small enterprises in job creation (also considered in the first chapter of the report).

However, here it is considered in much greater detail. The chapter highlights research into self-employment, job creation, training in SMEs, and the differences between education systems.

5.4.2.1. The figures for self-employment indicate wide disparities between Member States, from 30 % of total employment in Greece and Italy to 10 % in Denmark, France and the Netherlands.

The likelihood of such businesses taking on paid staff also varies greatly: from 4 % in Italy to 60 % in Germany, with an EU average of 30 %.

5.4.2.2. The study of the job-generation process is extremely interesting.

It concludes that company expansion generates twice as many jobs as the start-up of new businesses.

Similarly, in many countries, more jobs are lost as a result of lay-offs than of company closures.

5.4.2.3. SMEs are wary of investing resources in staff training, partly because of their high staff turnover.

5.4.2.3.1. While the Committee realizes that it is generally difficult for a business with just three or four employees to do without some of them during working hours, it points out how important it is that such employees should also receive training.

5.4.2.3.2. It should be stressed that the author of this chapter does not suggest public intervention in this field, but simply cites specific examples of such intervention.

5.4.2.4. The differences in education systems should also be highlighted, as they may affect young people's future prospects.

5.5.

Capital and finance (Chapter 6)

5.5.1. This interesting study was coordinated by the Basque Studies and Research Institute (IKEI).

5.5.2. As mentioned above, the Committee considers that this chapter should have been linked to that on the macroeconomic environment.

It must be remembered that SMEs find it particularly hard to gain access to credit.

5.5.3. In a study of SMEs, it is vital to identify the various interest rates applied to them and, inter alia, the mutual guarantee systems available to them.

5.5.3.1. Table 6.1 shows interbank lending rates and public debt yields which are far removed from the rates applied to SMEs.

In Portugal, for instance, the prime rate (only granted to large firms with a very good credit rating) varied between 19 % and 16,3 % in 1992 and between 16 % and 13,5 % in 1993.

5.5.3.1.1. It is incorrect to state that a small firm pays on average only two percentage points more than a large one.

The difference varies enormously from one Member State to another, depending on interest-rate levels in the country concerned. Since in the Member States with the highest interest rates the figure is above 6 % (e.g. Greece and Portugal), a European average of 2 % is somewhat unlikely.

5.5.3.1.2. Another important factor which has been overlooked is whether a specific tax is charged on interest rates. In countries where such a tax is charged, SMEs' capital costs are increased still further.

5.5.4. Financial structure has a direct effect on both net results and competitiveness.

Since most SMEs are reliant on short-term loans at high rates of interest, how can they compete head-on on an open market with large firms which can secure long-term loans at much lower rates?

5.5.5. As soon as possible, the Observatory must assess the effectiveness of the Commission's pilot schemes for tackling these financial problems.

5.6.

Innovation and diffusion of technology

(Chapter 7)

5.6.1. This chapter was coordinated by the French Association for the Promotion of Industrial Development (Aprodi).

5.6.2. It concludes that in 1991 the four largest EU economies took up 88 % of total R & D expenditure.

This figure might not be accurate. Statistics do not reflect the efforts made by SMEs, which are constantly seeking to innovate and looking out for new products and manufacturing processes. If they were not, they would find it impossible to withstand market competition.

5.6.3. The main obstacles to research and innovation are high risk, cost, lack of financing and skilled staff, and poor knowledge of the market.

5.6.4. In order to encourage research, closer intra-EU links should be promoted not only between businesses but also between businesses and EU universities and research institutes.

5.7.

Regional aspects (Chapter 8)

5.7.1. The EIM coordinated this chapter.

5.7.2. Particular attention was paid to the situation in border regions. Specialists in various types of organization with a direct interest in this issue were interviewed by telephone.

5.7.2.1. They confirmed that cross-border cooperation is still making very slow progress.

5.7.2.2. How can one hope for an effective internal market and sustained, open trade between businesses in the Twelve if favourable results cannot even be achieved in border areas, despite the provision of a programme specifically designed to help them?

5.7.2.3. If the situation is to improve, the local and regional authorities and local business leaders must agree on clear strategies for resolving the problem.

5.8.

Policy for SMEs (Chapter 9)

5.8.1. This chapter was coordinated by the German SME Research Institute (IFM). It provides an interesting insight into Member States' differing attitudes to SME support policy.

5.8.2. All Member States consider that support is justified for both the start-up and development of SMEs.

5.8.3. Aid mainly goes to start-ups and growth, R & D, capital and finance, investment, exports, business cooperation, education and training, and job creation.

5.8.4. The instruments used include subsidies and grants, soft loans, direct participation, tax relief, export guarantees, and the provision of various services.

5.8.5. The study gives an interesting list of the main measures taken by the Member States and regions.

It would be helpful if future reports could include an analysis of the practical implementation of measures to promote free competition (especially those to prevent abuse of a dominant market position or the formation of cartels in certain sectors).

The Committee feels that encouragement should be given to information-swapping on successful projects, in order to see whether they could be repeated elsewhere in the EU.

5.9.

The craft trades (Chapter 10)

5.9.1. This theme study was drawn up by the Luxembourg Chambre des Métiers and the EIM.

5.9.1.1. Its authors state at the start, and again in point 10.4.1, that their aim is to provide policy-makers with data on the craft sector. They are thus fully aware of the potential implications of their findings for both the Council and the Commission.

5.9.1.2. Research in any sector must be based on the precisest possible definitions of the areas to be covered.

5.9.1.3. The Committee understands and accepts the reasons for attempting to find a definition of the craft sector that can be used to make comparisons between Member States.

However, the Committee feels obliged to sound a note of caution about the data and conclusions formulated in the report on the basis of the term 'craft dominated sector', as these might give a false impression of the real importance of the sector in each Member State.

Similar caution will be needed if these data are to be used as a basis for drawing up policy strategies.

5.9.1.4. The approach adopted may mean that in most Member States it will be very difficult to distinguish between an industrial SME and a craft business.

The report actually identifies the Pedip () programme in Portugal as one of the three cases of specific government support for the craft sector.

5.9.2.

>TABLE>

This table compares the data given in tables 10.7 and 10.8 of the report concerning share of employment. It gives some idea of how the notion of craft dominated sectors distorts the situation.

5.9.3. The information supplied by experts is interesting.

5.9.3.1. 46 % of experts think that craft firms are in favour of the internal market and of the Treaty of Maastricht.

Curiously enough, when the same experts were asked about the internal market's likely effects, a majority (32 %) anticipated an increase in risks (!) while the number who expect it to increase opportunities (22 %) is only slightly higher than those who think it will have no effect (20 %).

The vast majority think that it will increase costs and reduce the number of businesses.

5.9.3.2. 39 % of those polled consider that craft businesses will lose market share if they do not adopt new technologies, while 36 % think that they will not. The remaining 25 % do not put forward figures.

Contrary to what is said in the report, technology centres were set up in Portugal to support industrial SMEs, not the craft sector.

5.9.3.3. Harmonization and the cost of environmental protection measures are seen as a further burden on craft businesses.

5.10.

Monitoring SMEs in the internal market: synthesis (Chapter 11)

5.10.1. The EIM coordinated this chapter, which aims not only to give an overview of the state of SMEs in the EU and in the individual Member States, but also to develop a SME internal market monitor.

5.10.2. Indicators at the Union level, which were examined in earlier chapters of the report, are here presented in summary form and in some cases (e.g. employment) updated.

Hence at one point in this chapter we read that manufacturing industry played an important part in job creation between 1988 and 1990; yet we already know from page 41, figure 2.3 of the report that between 1990 and 1993 it played an important role in increasing unemployment. Most new jobs came from the service sector.

5.10.2.1. It is also regrettable to note once again (this time in a summary), that the actual position of the craft trades in each country is ignored, and replaced by the inaccurate concept of 'craft dominated sectors'.

5.10.3. In the country profiles it is strange, to say the least, that in the diagrams showing the percentage share of SMEs in various economic sectors in 1990 (construction, wholesale trade, personal services, retail distribution and producer services) the percentage of each country (with the exception of Greece) almost always coincides with the European average.

5.11.

General recommendations (Chapter 12)

5.11.1. This chapter too was coordinated by the EIM.

5.11.2. The first question to consider is whether the Observatory is justified in presenting general recommendations.

Committee members are divided on this point.

5.11.3. Point 2.2 of the introduction to the present Opinion put forward the view that general recommendations, if included, should be formulated by all ENSR members, and not simply coordinated by one of them.

5.11.4. However, the approach selected is perfectly acceptable and comprehensible, since unemployment is one of the main challenges facing the EU.

5.11.4.1. The suggested ways of involving SMEs in efforts to overcome this major problem are also interesting.

The Committee congratulates the authors of this chapter on its high quality.

5.11.5. However, the Committee considers that a little more could be expected from a chapter of general recommendations in a report which only appears once a year.

5.11.5.1. The problems facing SMEs vary greatly from country to country and even from region to region. The EIM itself acknowledges this at the start of the chapter.

This implies that different solutions will often be needed, and future proposals must always take this into account.

Done at Brussels, 25 January 1995.

The President

of the Economic and Social Committee

Carlos FERRER

() Throughout the Report, the European SME sector is taken to comprise enterprises (except in agriculture, hunting, forestry and fishing) employing less than 500 persons. Additionally, the following broad size classes are distinguished within the SME sector:

- micro enterprises: 0-9 employees;

- small enterprises: 10-99 employees, sometimes further subdivided into 10-19, 20-49 and 50-99 employees;

- medium enterprises: 100-499 employees, sometimes further subdivided into 100-249 and 250-499 employees.

() OJ No C 393, 31. 12. 1994.

() COM(94) 55 final.

() Pedip: Specific development programme for Portuguese industry.