Opinion on the third Annual Report on the European Observatory for SMEs

(96/C 82/02)

On 8 May 1995 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the third 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 29 November 1995. The Rapporteur was Mr Pasotti.

At its 331st Plenary Session (meeting of 20 December 1995), the Economic and Social Committee adopted the following Opinion by a large majority (with one abstention).

1. Background

1.1. In 1991 the European Commission issued a three-year call for bids for the compilation of an Annual Report on the situation and prospects for SMEs in the single market.

1.2. The specifications in the call for bids are based on the observation that analysis and research on SMEs are not always carried out in the same way, in terms of quality or quantity, in the Member States of the Union.

1.3. The aim is to provide a coordinated scientific backup for political and institutional operators, giving detailed analysis at country and Community level, through a network of national institutes. This backup must maintain a capacity for cultural accumulation over time, by monitoring trends in certain factors which are critical for the success or failure of SMEs.

1.4. The third Report marks the completion of the first mandate given by the Commission to the European Network for SME Research, and this is a good opportunity for an overall assessment of the work carried out so far.

1.5. Thus, in assessing the results of the Report as a whole, it is necessary to assess both the structure and the working methods of the Network and the structure of the Report itself.

2. Structure of the Network

2.1. The organization of the Network is important because it has an influence in particular on the quality of the work done.

2.2. Over the three years of work the formula has evolved: initially sharply focussed on the main contractor, the management approach has moved on to greater cooperation among the members.

2.3. The main contractor retains a coordination task. A steering committee has been set up, on which three national institutes are represented. Each chapter of the Report is coordinated by one of the institutes, which collects data on national situations from the other members.

2.4. The institutes are either public or private. Coordination difficulties represent one of the critical factors in the Report.

3. Structure of the Report

3.1. Over the period in question the Observatory took account of certain suggestions by the Commission and the Economic and Social Committee, which made many specific comments in its last Opinion on the subject.

3.1.1. The third edition of the Report covers the then Member States plus the four countries whose accession to the Union was being prepared in 1994.

3.1.2. While the first Report appeared only in English, the latest one is available in French, German and English versions. In this third Report the executive summary - previously separate from the Report - is included with it and distinguished by pages of a different colour. The Report, with its summary, is important to all those in the Member States who are involved with the work of the SMEs and must therefore be published in all the official languages of the European Union.

3.2. By virtue of the approach followed so far, and hence by its very nature, the Report retains an 'encyclopaedic' structure, the flexibility of which also needs to be assessed.

3.3. The coordinator correctly identifies at the outset the difficulty in processing the data because of the absence of a common standard in the countries of the Union. Another caveat (which saves us a comment) is that the data are not those of the year of the Report.

3.4. The Report is divided into 4 sections and 18 chapters. The sections are:

1) Business performance;

2) Business environment;

3) Theme studies;

4) Conclusions.

4. General comments

The Committee's aim is to make assessments, on the basis of the Observatory's third Report, of factors critical to the success or failure of SMEs, to be pointed out to the Commission as important considerations in implementing a programme for developing and strengthening SMEs in the single market and international trade.

Three comments on methodology are called for at the outset.

4.1. The first concerns the definition of SMEs (). The Committee regards the definition in current use, which national laws tend to follow, as inadequate. The definition of SMEs is an important issue and if a classification is too broad, it may result in firms facing quite different problems being grouped together for analysis. The use of more precise classification of SMEs will inevitably be accompanied by less reliable and less comparable data on such detailed categories of enterprises, at least in the early stages. Firm size by number of employees is a criterion which requires thorough definition, because it involves various problems of interpretation. It is clearly misleading for a single analysis to cover micro-enterprises with fewer than five employees (now a majority of SMEs) and enterprises with more than 100 employees. And it is fair to say that the organizational restructuring of a firm below the 30-employee threshold is of a different nature from that faced by a 100-employee firm. Different sizes involve different problems, to which differing instruments and solutions must be applied. It is necessary to divide up the world of SMEs more precisely, by finding less generic definitions weighted also by the sizes of the reference markets and the nature of the business environment characteristic of each Member State of the Union. The Committee recommends that the Commission consider the matter rapidly and thoroughly, as this is a precondition for implementing proper economic policy choices.

4.2. The second comment on methodology is that the data currently available are lacking in quality and homogeneity. The Committee appreciates the effort made by the Commission in directing the Observatory's work also towards the creation of a historical archive which will be more reliable and systematic than the one now available. However, the patchiness and lack of statistical homogeneity still found in the Report make the work of analysis difficult. It is essential that Eurostat are consulted about the data used in the Observatory Report to ensure that, where possible, comparable data are used and that changes due to improvement in methodology are correctly identified. The Committee recommends a greater commitment by the Commission to achieving a reliable statistical framework in a short time.

4.3. The third comment concerns the updating of the Report. At a time when the Community economy is particularly dynamic, and the money markets highly unstable, the recovery not yet consolidated and with a strong international trade component, rapid growth or equally rapid decline of certain commodity sectors, it is absolutely essential to have extremely rapid updatings of business trends analysis.

Such updatings are impossible if the Report retains its present 'encyclopaedic' structure, while it would become more manageable if the updatings were made more concise. The present ESC Opinion also seeks to analyze the trends which, in a Report compiled on 1994 data, appear less short-term and more structural.

The Committee recommends that the Report be restructured in this sense.

5. Specific comments

5.1. The Committee regards as particularly important the analysis of the impact on SMEs of completion of the single market. It therefore appreciates the Report's approach of seeking to analyze the environment in which entrepreneurial activity as a whole develops, and the critical environmental factors which affect the success or failure of a firm.

5.2. Attention is then drawn to a summary of some of the Report's conclusions on convergence among the European Union's areas follows.

5.2.1. Between 1988 and 1994 the general business environment improved. The convergence of certain economic variables in the twelve EU countries also had a positive effect on the SME environment, although this varied from one country to another. To take just one example, added value rose on average by 2,7 % per annum, mainly thanks to the increase in SMEs' exports, either direct or through subcontracted supplies to more internationalized, larger firms. British and Italian firms constitute an exception, and are together sufficient to make these statistics negative as a whole.

5.2.2. The gain in productivity registered by many firms has limited the effect of SMEs on employment. The modest increase in the number of jobs is also attributable to the inadequacy of a labour market structured around rules defined for large firms and incapable of making the most of the SMEs' potential.

5.2.3. Comparison of the performance of SMEs in the Europe of the Twelve with that of SMEs in former EFTA countries reveals that the former had better results in terms of added value, turnover and employment. On the other hand, the growth rate has fallen in both areas. Despite the convergence of general economic conditions and certain specific ones relating to SMEs, the gap between the two areas remains significant, above all because of the divergent behaviour of certain variables in the southern countries of the Union.

5.3. Analysis of certain critical factors

The following assessments derive from the analysis of the results in Part IV of the Report, and particularly from the analysis of the theoretical model included in it.

5.3.1. Markets and competition

The Committee stresses the need to step up efforts to build a highly competitive market devoid of monopolistic positions whether on the demand or the supply side. If there is a business environment for which competitive markets are essential to growth, it is precisely that of SMEs. They live and die in a highly competitive market, and have no chance of survival when suppliers of goods and services operate in less competitive markets. It is not a problem of choice between public or private monopolies, but rather that in competitive markets no firm, and certainly no SME, can meet the bill for the inefficiencies caused by monopolies or cartels.

5.3.1.1. The same question arises for SMEs' outlet markets: there is a gradual increase in concentrations through agreements and mergers involving medium and large firms which are natural purchasers from the SMEs; the risk is that a highly competitive international market for SMEs will develop at the same time as a market for large firms which gradually take on non-competitive cartel positions. It would obviously be difficult for SMEs to survive in such circumstances.

5.3.2. Capital and financing

Once again the Committee must stress how the Report's conclusions bring out the great difficulties encountered by the SMEs in the process of capital supply. The terms of the problem are well known; they are constantly debated, in both academic and political circles, and have been covered in many ESC Opinions, but without reaching any quantitatively or qualitatively significant conclusions. Access to the capital market implies a close link between the SMEs and the entrepreneurial environment which interacts with them, either through national choices (primarily fiscal ones) or through European choices, involving subsidiarity and the Commission's capacity for guidance. The Committee regards access to risk capital as a decisive variable in assessing the quality of the entrepreneurial environment. Alongside a compatible level of competition in the banking sector, all the instruments such as participatory loans and local stock exchanges, not yet uniformly found in the Member States, must be developed in a homogeneous framework in the European Union. The aim must be to establish a credit market with many actors of different types competing on the basis of differentiated products. In this context the Committee calls for a strong interpretation of Treaty Article 130, extending to the world of small and medium-sized enterprises.

5.3.3. The theoretical model

5.3.3.1. The Committee is interested by the construction of the theoretical model of the single market presented in the Report. If its scientific reliability is confirmed, certain useful guidelines for economic policy can be drawn from it.

5.3.3.2. By concentrating attention on tables 17.6,7,8,9 and more particularly on two important indicators (job creation and growth of added value) clear indications can be drawn of the effect of the economic environment on SMEs.

5.3.3.3. The negative factors for growth and employment are: quality of transfers of state funds and allocations for R& D (public expenditure), costs and labour market, average size of firms.

5.3.4. The question of the quality and composition of public expenditure seems significant for SMEs if one bears in mind that, although more of their trade is now international, the national market is still very important to them. This aspect becomes even more decisive in countries where budgetary policies have traditionally been more expansionist. Meeting convergence criteria has involved a sizeable reduction in the shares of state budgets devoted to consumption and investment expenditure, which has had a noticeable effect on the market for SME products. The Committee would suggest that an important aspect of budget policies aimed at consolidating the Community's economic recovery would be a redistribution of budgetary resources (also through more pragmatic fiscal and monetary policies) to put a strong emphasis on investment initiatives.

5.3.5. Employment policies and the labour market are a crucial component. The model presented gives few grounds for optimism on the usefulness of active and passive policies in the labour market. Neither the active policies used in the countries of northern Europe nor the more interventionist ones applied in the southern area have led to the desired results. On the contrary, by making a decisive contribution to a public expenditure structure which does not favour the SME environment, these policies have had negative effects. The debate on current levels of social security and their operation is far from reconciling the divergent positions, but this in itself suggests an approach more closely linked to the aims and instruments indicated in the White Paper.

5.3.5.1. The SMEs have not yet fully exploited their own capacity to produce jobs. LSEs (Large Size Enterprises) have had a greater capacity for managing the labour force, and in times of crisis have made workers redundant, scaled down their operations or relocated. The SMEs, with less elasticity, have essentially maintained employment levels. A recovery centred on export has been of interest mainly to the LSEs, which are naturally more internationalized. The SMEs have tended to aim for increases in productivity rather than job creation. Consolidation of the recovery, if accompanied by suitable budgetary policies and labour market rules more suited to the way SMEs are organized, could reopen considerable employment opportunities.

5.3.5.2. The present structure of the economic recovery itself shows that without an effort by the SMEs it is impossible to lower unemployment rates. The Committee recommends that the Commission make a careful assessment of this phenomenon and draw up a programme to benefit those entrepreneurs who set their firms on the path to growth, abandoning where the market allows the option of keeping them small. It can remain an individual choice, and must not be an external constraint dictated by technical and cultural difficulties in tackling expansion policies.

5.3.6. Equally careful consideration must be given to the capacity for technological innovation. Budget shares devoted to research and development (R& D) have generally siphoned off funds from public expenditure on investment and consumption, thus reducing the share of total wealth available for the SMEs. This reduction would seem justified if research expenditure had succeeded in stimulating the technological development of the industrial system as a whole. Unfortunately, the allocation of these funds has helped only LSEs, thereby contributing to the imbalance between them and SMEs.

5.3.7. Research and Development which is an important ingredient in promoting competitiveness, cannot be just an expenditure heading confined to industry, but must be a basic philosophy guiding entrepreneurial development in all its practical applications.

The Committee therefore urges the Commission to seek a new balance in the distribution of funds, through greater efficiency in existing programmes and more binding cooperation with the Member States and the institutes responsible for technological dissemination, or rather for giving greater impetus to technological innovation in the SMEs. This factor is extremely important, particularly in the context of internationalization.

Done at Brussels, 20 December 1995.

The President

of the Economic and Social Committee

Carlos FERRER

() Firms employing 0-9 people (micro-firms); 10-99 people (small firms); 100-499 people (medium-sized firms) - Page 72 of the Report.