COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 08.11.199' 
COM(95) 526 final " 
COMMUNICATION FROM THE COMMISSION 
THE EUROPEAN OBSERVATORY FOR SMEs 
Comments by the Commission on the third annual report (1995) 

THE EUROPEAN OBSERVATORY FOR SMEs 
Comments by the Commission on the Third Annual Report (1995) 
INTRODUCTION 
In the context of Community initiatives aimed at promoting better observation of the 
economic development of enterprises as part of the dynamics of effective implementation of 
the Internal Market 1, and namely in the framework of the European Observatory for SMEs 
set up by the Commission on December 1992, the "Economisch Instituut voor het Midden-
en Kleinbedrijf ' (EIM), coordinator of the network made up by the "KMO Studiecentrum", 
the Danish Technological Institute (DTI), the "Institut fur Mittelstandforschung" (IFM), the 
Hellenic Organisation of Small and Medium-Sized Industries and Handicrafts (EOMMEX), 
the "Instituto Vasco de Estudios e Investigation" (DŒI), the "Association pour la 
Promotion et le Développement Industriel" (APRODI), the Economie and Social Research 
Institute (ESRI), the "Université Commerciale Luigi Bocconi", the "Chambre des Métiers 
du Grand Duché de Luxembourg", the "Economisch Instituut voor het Midden-en 
Kleinbedrijf (EIM), the AGDER Research Foundation, the "Institut fur Gewerbe-und 
Handwerksforschung", the "Instituto de Apoio as Pequenas e Médias Empresas e ao 
Investimento" (IAPMEI), the Turku School of Economies and Business Administration, the 
"Nàrings-och teknikutvecklingsverket" (NUTEK) and the University of Warwick School of 
Industrial and Business Studies, has submitted to the Commission a third independent 
Report on the situation of, and the prospects for SMEs 2. 
Like its predecessors, this Report is mainly in the nature of a review which presents the 
latest enterprise developments and prospects in the European economy, quite often in areas 
where data is scarce but vital for an effective analysis. It provides specific coverage and 
detailed consideration of the impact of the Internal Market on SMEs and discusses a series 
of current issues which are relevant to understanding present and future SME trends. It 
considers recent developments in Community and national policies which affect the business 
environment and SME performance. And, by doing so, it aims at stimulating, and providing 
a basis for, substantive debate and greater understanding of horizontal issues relating to 
SMEs. 
1 Council Decision 93/379/EEC of 14 June 1993, O.J. L 161 of 2 July 1993. 
^ Following the coming into force of the European Economic Area on the 1st January 1994, participation 
in the Observatory network was extended to research institutes originating from EFTA/EEA Member 
States, on an informal and voluntary basis. Austria, Finland, Norway and Sweden have thus joined this 
project, with valuable support from the competent national authorities. Accordingly, this annual Report 
actually covers the 15 EU Member States and Norway and its future editions should refer also to 
Iceland and Liechtenstein. 
The Commission is pleased to note that previous reports have been well received, and 
widely discussed in all quarters 3 and trusts that this new Report will be as important a 
source of ideas, information and experience. The contribution of SMEs to employment 
generation and sustainable growth is quite significant. Given the high levels of 
unemployment throughout Europe, SMEs will undoubtedly continue to play a vital role in 
stimulating economic recovery, and enterprise policy is becoming increasingly important for 
the creation of new employment opportunities. But successful problem-solving and policy­
making in favour of SMEs require access to information which has not traditionally been 
readily available in all Member States. The Commission therefore considers that the 
Observatory can surely continue to act as one of the most important analytical sources on 
which are to be based practical proposals to stimulate, innovate and supplement the range of 
existing actions, in the new form of partnership proposed under the Integrated Programme 
in favour of SMEs and the craft sector 4, and hopes that this Report will help towards 
meeting the information needs of all those concerned with the future of SMEs and involved 
in policy debates at both national and European levels. 
This document, which closely follows the Report's structure, sets out a summary of the 
Commission's comments on the Report, referring mainly to new data and results provided 
by the Observatory, and focuses primarily on its most controversial findings or aspects that 
are particularly open for outside criticism. It thus presents the Commission's comments on 
the business performance (Chapters 1-5) and the business environment (Chapters 6-13) 
parts of the Report, whilst also covering its theme studies (Chapters 14-16) and conclusions 
(Chapters 17-18). As it has been the case with regard to its comments on the first and 
second reports 5, the Commission did not appraise systematically the data for each Member 
State or the annexes to the Report although incidental use has been made of them in order 
to illustrate or highlight some of the ideas and concepts used. 
GENERAL COMMENTS ON THE REPORT 
The Commission very much welcomes this third Report considering the state of SMEs, 
particularly as it clearly reaffirms the need to promote mutual consultation and joint 
coordination leading to the exchange of best practices between Member States as a means 
to give full scope to the dynamism and innovative potential of SMEs, along the lines 
presented in the Council Resolution of 10 October 1994 6. 
3 See in particular the Resolution from thti European Parliament (PE 186.411 of 19 January 1995) and 
the Opinion from the Social and Economic Committee (CES 52/95 of 25 January 1995) on the second 
annual report from the European Observatory for SMEs. 
4 COM (94) 207 final of 3 June 1994. 
5 COM (93) 527 final of 5 November 1993 and COM (94) 352 final of 7 September 1994, respectively. 
6 O.J. C 294 of 22 October 1994. 
The third annual Report of the European Observatory for SMEs aims in particular at 
providing both institutions and individuals with some comprehensive information about the 
performance of SMEs in the Internal Market and the factors which influence them. It is 
largely based on comparable data collected by EUROSTAT as well as on the conceptual 
framework set out in its "Enterprises in Europe" reports and, following the Commission's 
suggestion ', its structure has been adapted to explicitly consider the various items to be 
presented and variables to be analysed as elements of either the performance of SMEs or 
their business environment. 
As has been the case with previous reports, 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 
50-99 employees; into 10-19, 20-49 and 
DU-yy employees; 
- medium enterprises: 100-499 employees, sometimes further subdivided into 100-249 and 
250-499 employees 8. 
The Commission acknowledges that the methodology used by the Observatory has already 
proved to secure the use of comparable data throughout the reports, thus providing a 
structured and comprehensive basis to guide their development in subsequent years. It 
nevertheless recalls that the statistical thresholds retained by the Observatory for defining 
SMEs clearly need to be reconsidered to reflect as accurately as possible the socio­
economic reality of this category of enterprises. Moreover, the limited availability of data 
referring to the period 1991-95 invites to the use of some precaution when looking at the 
relevance and accuracy of qualitative assessments made in the Report, particularly whenever 
developments which are estimated to have occurred during this period are compared to 
those identified in previous years. 
7 See COM (94) 352 final of 7 September 1994, p. 19. 
8 The general expression "SME" is the only one used throughout this document as to designate all 
enterprises employing less than 500 persons. Any other reference to micro, small and medium 
enterprises should therefore be read as referring to spécifie size classes. 
1. Economie growth and sectoral development 
As this Report is drawn on the basis of the same core statistical data set used in the context 
of the second Observatory's report and referring mainly to 1990 there are, obviously, no 
significant differences to be noticed with regard to the main characteristics and structure of 
the European non-primary private sector, apart from those resulting from the extension of 
its geographical coverage 9. On the basis of the Observatory own estimates, it could thus be 
assumed that there are at present in Europe more than 17 million enterprises, of which some 
99.9% employ less than 500 employees and some 93% are micro enterprises. Including 
large firms, the average enterprise in the European economy has about 6 persons employed 
(ranging from 3 in Greece to 13 persons employed in Sweden), while the average SME 
employs slightly less than 4 persons. As a result, SMEs would now provide well over 70 
million jobs, accounting for an impressive 71% of total employment 10 in the European 
non-primary private sector. 
Notwithstanding the statistical limitations referred to above there is at least a general, 
relatively new finding in the Report that deserves further consideration. Although labour 
productivity in SMEs, as measured by value added per occupied person, seems to be below 
the national average in almost all countries (the only exceptions being Belgium, Denmark, 
Germany and Norway), its size class pattern appears to follow an inverted V-shape, 
reaching its highest value for medium-sized enterprises. Together with other findings 
relating to sectoral and national variations in SME relative labour productivity, and 
assuming that there is a positive relation between average enterprise size and capital 
intensity, this would suggest that the relative distribution of SMEs and large enterprises 
across the economy is related to the very nature of the production process and partly 
governed by economic efficiency H. When considered from a political point of view, this 
result seems to give a clear indication • as to the need to further consider and develop 
differentiated policy approaches and instruments, tailored to the specific needs of different 
types of enterprises according to their size, category and place in the economic fabric. 
Moreover, when taken together with the already available evidence on the existence of 
fundamentally different problems, attitudes and behaviour within the SME sector 12, this 
finding can only strengthen the Commission in reconsidering the current definitions of 
SMEs with a view to adopt a general, though flexible, size class classification which would 
better reflect observed differences between different types of enterprises. 
9 See note 2 above. As was noted in the Commission's comments on the second report Austria, Finland 
and Sweden are much more oriented towards large enterprises than former EU Member States since 
they depict, as a whole, a lower number of enterprises per 1,000 inhabitants and higher average firm 
size than any other country. 
10 Defined as the number of persons working at least 15 hours weekly and including the self employed. 
1 * In this sense, the market forces alone would work towards an economic optimum, with SMEs and large 
firms tending to dominate those sectors and markets in which they generally can benefit from higher 
labour productivity. However, these results must be seen as provisional and still require further 
investigation. 
12 See COM (94) 352 final of 7 September 1994, p. 4. 
The Observatory has also considered useful to analyse estimated developments between 
1988 and 1995 by distinguishing three sub-periods, as those years can be seen as 
encompassing a succession of three different phases of growth (1988-1990), stagnation 
(1990-1993) and recovery (1993-1995). The results presented in the Report are in tune with 
previous findings suggesting that SMEs have in general outperformed large enterprises 
during the first part of that period, at least if their respective performance is measured by 
average annual growth rates in real value added, real turnover and employment. A reversal 
of this tendency, which could be the result of a decline in the economic performance of 
micro enterprises, appears nevertheless to take form from 1990 onwards as the growth 
differential between SMEs on the one hand and large firms on the other is found to become 
gradually smaller in all three dimensions, and is particularly evident in 1993-1995, when 
large firms grow even faster than SMEs. 
For the entire period of 1988-95 however, average yearly real turnover as well as 
employment growth in SMEs would have been in excess of that of large firms, and micro 
enterprises, although far from being recession-proof, would have been the only ones able to 
secure some significant net job creation. In particular, the employment growth differential 
was found to be positive in all countries but Ireland, Spain and Norway, and quite 
substantial in such sectors as wholesale trade, retail distribution, transport and 
communications, and producer services. Furthermore, some results from recent research 
indicate that the growth performance of SMEs has a considerable impact on overall 
economic growth, and suggest that small firm policy can be deemed as an instrument for 
reduction of unemployment or as a means of furthering economic growth. Whilst it is 
certainly conceivable that there are alternative routes to achieve the same rate of economic 
growth, the research evidence would thus imply that policies which put more emphasis on 
the small firm sector would have better chances to, at the same time, secure higher levels of 
employment. Thus being, it would be worth examining whether that apparent reversal in the 
relative position of SMEs and large firms is significant and pervasive or merely the 
transitory result of distinctive size class behaviour and temporal adjustment paths to the 
economic cycle, as some indications in the Report, referring to productivity and profitability 
development patterns, seem to point to. 
2. Business dynamics and entrepreneurship 
A considerable part of this chapter can be read as an update of work already done by the 
Observatory in the context of its first annual report. As it was then underlined, the 
heterogeneity of data and information sources available does not allow any definite 
conclusions to be drawn and the results presented therefore have to be con?Hered with 
caution. Some new insights into the significance of new enterprises in generating jobs and 
promoting industrial and commercial renewal have also been added, but these are, to a large 
extent, based on limited, and mainly anecdotal evidence only. 
Notwithstanding this analytical limitation the Report thus confirms the economic vitality of 
the European private sector in general, and the importance of self employment in the SME 
sector in particular. Quite unsurprisingly though, the remarkable stability that can be noticed 
in European trends referring to registration of new enterprises and self employment between 
1988 and 1993 turns out to be the most visible effect of several opposite, compensating 
developments when the analysis is carried out at a lower level of aggregation. In fact, whilst 
sectoral data underlines the significance of the ongoing process of tertiarisation of the 
European economy and seems to confirm prior evidence of faster renewal of the economic 
fabric in services, registration data seems to show that a significant increase in business 
creation in Denmark, Luxembourg, the Netherlands and Portugal went along with a 
dramatic reduction of start-up activity in such countries as Greece, the United Kingdom and 
Norway during the period in consideration ^. Moreover, some results relating to new firm 
survival, the starter's entrepreneurial background and the motives and driving forces behind 
business start-up, as well as to the main obstacles and barriers to start-up and enterprise 
growth, would suggest that the best performers, as regards new firm survival, are to be 
found within Member States where some formal systems of professional training and 
qualification requirements related to the access to some professions or activities were 
already well developed. 
The policy implications of these findings are not straightforward, as the data presented 
under different tables in the Report is hardly comparable and sometimes even looks 
contradictory 14 Yet, judging from the reported major causes of business failure and 
considering that the risk of unemployment was found to be an increasingly important motive 
to start up an enterprise, they clearly reinforce the Commission's belief on the importance of 
providing adequate information and counselling, as well as appropriate education and 
training to newly created enterprises. Likewise, they underline the importance of promoting 
mutual consultation and coordination between Member States, namely as regards the 
improvement and simplification of the business environment with a view to reducing 
burdens on businesses and unlocking their potential to create jobs, as advocated by the 
Integrated Programme. 
." More recent information nevertheless indicates that the number of business start-ups resumed an upward 
path in 1994 in the United Kingdom. 
14 For instance; figures for self employment include agriculture and are not always in line with those 
presented in previous reports, whilst data referring to new registrations per 1,000 inhabitants and per 
1,000 enterprises doesn't always receive confirmation from statistical information available on the 
number of enterprises per 1,000 inhabitants. 
3. Labour 
Whilst noting that policy making requires knowing not merely where the new jobs are 
created but also how and why they are created, the Observatory carefully assesses the 
current debate on job creation by enterprise size and adds some new empirical findings to 
the results it has already produced on this subject. It is concluded that the methodological 
criticism raised by some studies on SME job creation does not invalidate its previous 
analysis and that the statement that SMEs generally create more jobs than large enterprises 
remains valid in Europe. Moreover, it would seem that net job creation rates decline with 
the enterprise starting size, which would allow that conclusion to apply regardless of the 
relative position of the firm along its life cycle. On the basis of employment data for 1990 
and the Observatory's own estimates for average annual growth rates in employment by size 
class, it can in fact be noticed that job creation in SMEs has more than compensated job 
losses in large enterprises during the period 1988-1995 15. 
In spite of these encouraging signs, it remains clear that employment creation in the 
European business sector is far from impressive and still a long way from contributing 
significantly to curb unemployment. Moreover, the evidence presented in the Report clearly 
indicates that SMEs may also have been loosing jobs in the most recent years. In general 
terms, and on a medium term perspective, the Commission therefore considers that 
increased attention should be paid to such issues as improving employment opportunities for 
the labour force by promoting investment in vocational training and raising the quality of 
human capital, increasing the employment intensity of growth by encouraging changes in 
work organisation and working time, reducing non-wage labour costs, especially at the 
lower end of the wage and productivity scale, and improving the effectiveness of labour 
market policies and measures designed to fight against social exclusion, namely by 
enhancing flexibility in the fields of professional and geographical mobility and considering 
incentives to create and take over new jobs. As regards SMEs, the Commission will 
endeavour to stimulate, innovate and supplement the range of existing actions, namely those 
already adopted under the SME Initiative and the Integrated Programme, in order to 
facilitate the creation and subsequent development of enterprises, to reduce the 
administrative burdens borne by SMEs, to improve their access to capital and finance, and 
to assist them in their efforts to fully benefit from the opportunities of the Internal Market, 
namely when it comes to reinforce their participation in the various Community 
programmes and to engage into some form of international cooperation. With that in view, 
and in line with the conclusions of the Cannes European Council, it intends in particular to 
submit a report on the means of improving the effectiveness of current SME policies to the 
Madrid European Council. 
15 Actually, both medium and large enterprises seem to have been loosing jobs at an average annual rate 
of about -0.5% (meaning a total of some 75,000 and 140,000 jobs lost per year during the period in 
consideration, and respectively). Thus being, job creation was almost completely due to micro 
enterprises (0.75% or about 235,000 new jobs per year), since small firms have only achieved a small 
increase in their employment level (less than 0.1 % per year, on average). 
At the same time, it is generally recognised that SMEs are not a completely independent 
engine of employment growth and that special attention has to be paid to industrial 
interactions between enterprises of all sizes. Thus, the contribution of SMEs towards 
flexible production, and its implication on job quality is also considered in this chapter. 
Although clearly recognising SMEs to be instrumental in absorbing the less sought-after 
categories of the workforce, the Report then suggests that flexible production, as a by­
product of large enterprises' reaction to an uncertain, ever-changing economic environment, 
has a considerable negative impact on SME job quality. 
In particular, it builds on some well known, extensively documented and interacting trends 
(increase in the female participation rate and employment share, sectoral shift in 
employment from manufacturing to services, and increase in the number of part-time and 
temporary jobs, amongst others) to conclude that SMEs are, in general, more likely to have 
a significant proportion of their workforce covered by part-time or temporary contracts than 
large enterprises. At the same time, SMEs are also found to make relatively more use of a 
less educated, and therefore less productive, workforce, to be relatively less inclined to 
engage in vocational training, and to offer poorer working conditions, at least in terms of 
wages and fringe benefits. 
However, the evidence presented in the Report to support the view that SME job quality is 
somehow "the dark side of flexible production" seems far from conclusive. Alongside with 
considerable differences observed between Member States, that can be due to a combination 
of developmental and cultural factors 16, the involuntary dimension of part-time and 
temporary work is largely overlooked by the Observatory, and there are reasons to assume 
that sectoral aspects are at least as important as size class differences in explaining job 
tenure and job quality. As they stand, the Report's findings can only but stress the need for 
further analysis on these issues before any operational conclusions can be drawn. 
In the mean time, and considering that inferior job conditions in SMEs, as long as they lead 
to lower costs of production, might provide a compensation for size-related cost 
disadvantages compared to large firms, it is important to stress that SMEs do have their 
own specific problems that must be addressed, if they are to develop, namely by means of 
new targeted innovative initiatives, particularly ones aimed at resolving problems of scale, 
knowledge, complementarity and coordination. Yet, the issue is not primarily whether 
SMEs or large firms are better locations of employment so much as improving the social 
and economic performance of all firms. At a time when labour is increasingly seen as a 
resource rather than simply a cost, the Commission would therefore suggest that 
instruments be sought which directly link the raising of working standards with the raising 
of competitiveness. 
16 It is interesting to note, for instance, that part-time working is almost insignificant in 
Southern/peripheral countries (Greece, Italy, Ireland, Portugal and Spain) and that most of them can be 
ranked amongst those having longer working weeks (the United Kindgom replacing Italy in the top 
five), and that temporary contracts are, by far, particularly important in Spain. 
10 
4. Regional disparities 
Recognising the importance of the regional dimension in SME and employment policy, the 
Commission welcomes the inclusion of a chapter on regional disparities in the Report, 
especially as it seems to confirm a number of key trends in relation to the role of SMEs in 
alleviating those disparities. 
The data in the Report, which, incidentally, refers only to manufacturing employment, 
confirm that SMEs make a particularly significant contribution to employment creation in 
less developed regions. However, if an analysis like this is to add value to the Commission's 
policy-making effort, it must either present some new facts or provide more in-depth 
explanations of the present regional situation of SMEs. The main criticism of this chapter is 
that it does not seem to fully achieve these objectives. 
On the one hand, the Report states that Objective 2 regions are relatively less dependant on 
SMEs in employment terms but this is hardly relevant from a policy-making point of view, 
as the basis for the adoption of Community initiatives RECHAR, RESIDER and KONVER 
was not that Objective 2 regions were less dependant on SMEs but that for historical 
reasons there was no tradition of entrepreneurship in these regions. It is for this reason that 
SMEs are less important in Objective 2 regions. Accordingly, the programmes now being 
put into operation under the Community Initiatives have as a major objective to stimulate 
SME development to compensate for the loss of employment in large declining industries 
such as coal and steel. 
On the other hand, the Observatory found that Objective 5b regions do not display a 
consistent pattern as to their level of dependence on SMEs for employment. The 
Commission nevertheless considers that SMEs constitute the very essence of the 
entrepreneurial fabric on rural areas and that their development is one of the determining 
factors to ensure economic diversification of these areas. It would therefore suggest that 
future reports tackle this question and address the specific difficulties with which SMEs 
have to cope in rural areas, in particular with regard to insulation, insufficiency and 
maladjustment of support services, absence of sub-contracting companies, difficulties of 
attracting high qualified personnel, and the high cost of connection to modern 
communication networks. Moreover, the Commission wishes to point out that the European 
Observatory of innovation and rural development, set up within the framework of the 
Community initiative LEADER II in order to identify, characterise, validate and facilitate 
the transfer of innovations undertaken in rural environment, could in particular contribute to 
the exchange of good practices aiming at the support of SMEs in the rural areas. 
11 
The Report puts much emphasis on the importance of micro-entreprises to the creation of 
employment. However, there is no analysis of the impact of displacement both within 
regions and between regions which can be a by-product of micro-entreprise dynamics. 
Furthermore, there is no indication of the sectors in which micro-entreprises are relatively 
more important at the regional level and the issue of the indirect employment contribution 
of micro-enterprises, which can vary significantly amongst sectors, is still to be addressed. 
The Report refers to the spatial process of decentralisation and indicates that smaller towns 
and peripheral areas have increased their employment relative to larger towns and cities. It 
would be more interesting to know whether employment in smaller towns has actually 
increased in absolute terms. 
The Report also puts some emphasis on analysis of divergences between border regions. 
Nevertheless, there is no clear explanation of why such detailed analysis is carried out on 
this point and it does not seem to lead to any strong conclusions from a policy perspective. 
The Commission thus feels that the topic examined in this chapter was too broad to enable 
one to draw strong policy conclusions and that for the future it would be more valuable to 
examine a more clearly defined topic. For example, as the analysis of this year's Report 
suggests that some less developed regions have been very effective in stimulating SME 
activity to address employment needs, it would be valuable to have a detailed analysis of 
how SMEs have evolved in these regions including case studies and surveys, as were used 
in earlier reports of the Observatory. A second area worth examining is the process of 
entrepreneurship itself in less developed regions. The conclusions on entrepreneurship of 
this Report are predictable. It would be useful to have some data on the impact of different 
types of policy initiatives, namely those which currently receive Community support under 
the Structural Funds, in stimulating entrepreneurship in declining regions. Again case 
studies or surveys would be useful. 
On the other hand, assuming that neither a high dependence on small and medium-sized 
firms nor on large firms solely are to be optimal, it could be worthwhile examining whether 
the regions which have experienced the most favourable development of economic well-
being are those that had a good mix of industries and business sizes, and whose business 
sector was characterised by a relatively rapid pace of change. In fact, if the potential for net 
job growth via new firm births is the greatest in regions that have historically not been 
SME-dominated, and is to be explored at reasonable cost without actually discriminating 
against existing businesses, there should therefore be some room for policies aiming both at 
improving the general business climate and increasing the number of start-ups in industries 
for which the regional market conditions are relatively favourable or relatively unimportant. 
12 
5. Export and international orientation 
This chapter of the Report is meant to deal with SME export and international orientation. 
In fact only exports are treated and this leaves a large part of the current process of 
internationalisation untouched 17. Since the Commission's enterprise policy does not deal 
with export promotion but with the other aspects of internationalisation, the Report is of 
direct little help in formulating future policy or in assessing the efficiency with which its 
instruments promote the internationalisation of SMEs, whether it be within the Union on the 
Internal Market or outside the Union. 
Much of the chapter is taken up by the observation that firms from smaller economies 
export more than those from large ones. This is inevitable since smaller countries can 
sustain a narrower range of industries on their domestic markets than larger ones and must 
therefore trade to acquire the products for lacking industries. Larger countries engage in 
more intra-sectoral trade and in many ways this represents a more interesting subject of 
examination. In any case, the distinction made should be between intra and extra EEA trade 
rather than EU trade. By combining this approach with regional regroupings into for 
instance the Northern countries, Benelux, British Isles and the Iberian peninsula, the effects 
of the size of national economies and local preferences could be minimised and more 
worthwhile analysis of exports undertaken. 
Concerning the higher export propensity of large firms, a statement of this kind requires 
qualification, even if a positive correlation can be found between the average firm size in an 
industry and its share of exports in turnover. On the one hand, technological intensity is 
likely to constitute a key variable for exporting by SMEs and, on the other hand, many 
SMEs, particularly in the service sector, serve local consumer markets. Firms serving such 
markets can not usually export in the traditional sense since overseas clients must come to 
them. The increasing tendency for exports from service sector SMEs is likely to be the 
result of producer services development, where either the supplier goes to the client or 
telecommunications are used to offer a truly cross-border service. It would in any case be 
more useful to compare the export propensity of firms in those sectors where exporting can 
easily be undertaken 18. 
17 For example, and according to UNCTAD, one out of ten investments abroad is currently undertaken by 
SMEs. Moreover, modern forms of international business cooperation such as alliances or licensing 
agreements could also be of increasing interest for SMEs. 
18 Apart from these general comments, it can also be noticed that the text is less accurate in some points. 
It is not strictly correct to speak of deregulation of trade tariffs, which have been lowered over 
successive GATT rounds, nor of harmonisation of standards, since mutual recognition also occurs. 
Finally, Norway voted not to accede to the Union and should not be presented as a Member. 
13 
6. Macroeconomic environment 
There are no particular comments on this chapter, which heavily bears on macroeconomic 
data published by the Commission services. On the whole, it confirms that the European 
economy has entered a phase of recovery, led by some rapid growth in external demand, 
and that significant progress has been made towards nominal convergence, improving both 
the price competitiveness of European industries and their profitability. Yet, some additional 
efforts seem to be required in several Member States to bring down their public and external 
debt to a more acceptable level, and unemployment is expected to show only a modest 
decrease in the near future. 
Recent improvements in the current state and perspectives of the European economy do not 
significantly change the nature and dimension of the macroeconomic challenges faced by the 
Community, as they have been presented in the "White Paper on Growth, Competitiveness 
and Employment" and relate mainly to achieving and consolidating high rates of job creation 
and ensuring that the necessary conditions for a smooth transition to the Economic and 
Monetary Union are met. Fulfilling these objectives will therefore require the adoption and 
development of policies aiming at increasing the overall levels of competitiveness and 
efficiency of the European industry, improving the functioning of the labour market, 
creating favourable conditions to an increase in production capacities, and securing a stable 
macroeconomic environment. 
7. Recent policy developments affecting SMEs 
The Report reviews a number of initiatives and policies undertaken by the Member States in 
support of SMEs. This illustrates the increasing recognition by the Member States of the 
decisive role played by SMEs in job creation, competitiveness and economic growth. The 
nature of the different measures adopted also shows that there is a certain convergence 
between the various Member States both as regards the key problems affecting SMEs and 
the possible ways of dealing with them. This also suggests that the European Institutions 
could play a complementary role in this field, particularly by promoting the exchange of best 
practice. 
As regards the methodology adopted by the Observatory, the Commission nevertheless 
thinks that the quality of the analysis could be improved in several respects in the future. For 
example a clear and concise presentation of recent developments by type of measure rather 
than by Member State, along the lines of what has been done in connection with 
environmental policy, would have facilitated comparative analysis and hence increased the 
value of this chapter. 
14 
8. Labour market 
This chapter largely focuses on the enterprise environmental aspects of labour issues and 
usefully complements those on "labour" and "education and entrepreneurship". The 
Commission will therefore refrain from further commenting here those points that are 
already being addressed elsewhere. 
In the light of the undergoing, and much expected, general economic recovery, some of the 
evidence in this chapter can nevertheless be disturbing. To name just a few examples, there 
are signs in many parts of Europe that, in spite of high labour availability, enterprises are 
facing difficulties in finding people with the skills they require and that this may still inhibit 
output growth and job creation. Or that increasing use of numerical and functional 
flexibility, important as it may be for economic efficiency, can lead to a suboptimal 
utilisation of human resources and contribute to the emergence of some kind of "dual" 
labour market, due to an expected polarisation of work qualifications. 
But facts need to be looked at as a means of analysing problems and identifying possible 
solutions, and not as matters to be dismissed if they do not meet with how we would like 
things to be. In this vein, and by showing that similar constraints are being dealt with in very 
different ways by different Member States, as seems to be the case with regard to labour 
market issues 1", this Report clearly underlines the need to promote mutual consultation 
and joint coordination, namely in the field of considering and exchanging "best practices" 
between Member States. 
Certainly, the complex nature of labour markets, and their central role in fulfilling social as 
well as economic objectives, means that Member State systems need to be understood in the 
context of distinctive national features- in the business environment as well as in the 
institutional and legislative arrangements that are in place. Yet, the Community has an 
important role to play in providing a framework within which Member States can freely 
choose the means they use to pursue their employment objectives. While fully respecting 
national choices or preferences it would thus seem useful to consider whether it is possible 
to combine different experiences to improve overall performance, and to encourage 
Member States to cooperate in policy development in order to minimise its costs and ensure 
compatibility between different national systems whenever they need to interact across the 
Union. 
19 Both the level (% of GDP) and the structure of public expenditure on labour market policies can be 
noted to vary markedly across Europe. In particular, Denmark, Germany, Luxembourg, Norway and 
Sweden have a relative high level of expenditure (particularly as opposed to Greece, Italy, Spain and 
the United Kingdom), and spending on training and youth measures dominates in France, Italy, Ireland 
and Portugal, while job subsidies are more important in Belgium, Denmark and Spain. 
15 
9. Capital and finance 
This chapter in the Report does not call for particular comments on the part of the 
Commission. However, it should be pointed out that the SME facility mentioned by the 
Observatory for interest rebates on EIB loans to SMEs creating new jobs was a temporary 
instrument scheduled to expire on 31 July 1995. 
This chapter gives an overview of the various efforts made by Member States to facilitate 
access by businesses to sources of finance. This is still a problem for SMEs even if the 
Report lists a large number of measures in force. It would therefore be interesting to 
examine the reasons why the specific programmes or other activities conducted by the 
public authorities or the financial institutions themselves are not providing an adequate 
response to the needs of SMEs. 
It should also be pointed out that the relations between banks and SMEs, which are an 
important aspect of improving SME access to sources of finance, are a central issue at the 
Banks-SMEs Round Table, following up the Communication from the Commission on the 
Report of the Round Table of leading representatives from the banking sector 20. The 
Commission will also continue its work on improving access by businesses to finance and 
credit, particularly as regards strengthening own resources in innovative and high-tech 
companies and facilitating access by SMEs to capital markets. 
10. Infrastructures 
In view of the importance of communications infrastructures in today's economy, the 
Commission is particularly pleased that this question was dealt with in a specific chapter of 
the Report, especially as the study was not restricted to infrastructures in the traditional 
sense, but also took account of modern virtual infrastructures. The quality of infrastructures 
directly affects business productivity but, as the Report stresses, regional disparities 
continue to be substantial. 
The Commission is also pleased that the Report looked into the question of the leverage 
effect of public investment on business productivity. However, it would have been useful if 
the approach to investment in infrastructure had not been exclusively macro-economic and 
if a few specific examples had been provided. This chapter could also have tried to 
determine the place of infrastructures among the factors determining business location, 
compared with other factors which might influence an investment decision (proximity to the 
market, quality of the workforce and environment or financial incentives). The Report also 
made no mention of the elements which would have allowed identification of the types of 
companies, in terms of size, sector or nationality, for which the quality of infrastructures 
had the greatest influence on the production process. 
20 "Towards a more efficient partnership between financial institutions an4 SMEs", COM(94)435 final of 
28 October 1994. 
16 
Moreover, and since this chapter is meant to consider infrastructures in a broad sense, it 
would also have been useful to take already into account the effects of energy costs and of 
the realisation of the internal energy market on SMEs, in line with a previous remark made 
by the Commission 21. in fact, proper availability of energy at the best possible prices and 
on the best possible terms, namely by ensuring security of supply and guaranteeing 
sustainable, non-inflationary growth while protecting the environment, is deemed to be a 
determinant factor in strengthening the overall competitiveness of the European economy, 
and that of SMEs in particular. 
While approaching the effects of the new infrastructures by type is relevant, insufficient use 
has been made of the data, particularly as regards roads and railways. For example, there is 
not much point in knowing how many kilometres of motorway were built in Spain and 
Portugal between 1986 and 1992, and the proposed analysis of railway infrastructures is too 
brief to take full account of the effects which the establishment of a network of new high­
speed lines or the development of combined rail/road transport could have in Europe. 
However, telecommunications have been dealt with better and could serve as a model for 
both the contents and presentation of an analysis. 
As regards the questions arising from the introduction of new infrastructures, the 
Commission fully agrees with the conclusions of the Observatory. The construction of new 
infrastructures cannot in itself provide a solution to the problems of saturation or pollution. 
Only a long-term vision taking account of the social usefulness of the various types of 
infrastructure could be of use. As stressed in the Report, efficient infrastructures are 
necessary but not sufficient to bring about positive effects on the economy. However, it 
would have been useful if the Observatory had drawn more practical conclusions concerning 
the preferable type of infrastructure and the benefits which the SMEs should draw from it. 
Finally the Commission is pleased that the Report deals with virtual infrastructures and to a 
great extent shares the Observatory's concern that the information society should be placed 
in a liberal context and that the new technologies should be disseminated among SMEs. 
The Report stresses the problems encountered by SMEs in gaining access to the information 
society and rightly lists the advantages which such access could provide. In this respect the 
three fields identified (training, teleworking and award of public contracts) are relevant, and 
this chapter gives a useful picture of what is at stake in the establishment of infrastructures 
in Europe. Nevertheless, it is regrettable that insufficient emphasis was placed on the risk of 
regional disparities, particularly as regards the development of new technologies. Thus, 
although the analysis is mostly accurate, it is too general in some respects and does not pay 
sufficient attention to the specific characteristics of SMEs. 
21 See COM (94) 352 final of 7 September 1994, p. 6. 
17 
11. Technology and innovation 
The Commission recognises the quality of the analysis performed in the Report as regards 
the technology and innovation chapter. The indications showing that SMEs are responsible 
for a very high share of the innovations are certainly one of the most prominent elements of 
this analysis. Nevertheless, the reading of this chapter clearly shows the limitations of the 
quantitative information used by the Observatory as the statistical data collected only 
provides very partial highlights on the situation of SMEs in specific countries leaving very 
little room for effective comparisons and overall conclusions. 
In this vein, it would have been desirable to have more statistical information on the 
economic importance over time of small technology based enterprises. They are described 
as playing a significant role in the overall innovation process of the largest countries in the 
Union, but little is said about their development pattern in less advanced countries or 
whether they can be expected to become more and more important in their economies. 
Regarding the financing of innovation in SMEs, it would have been appropriate to look in 
more detail at the characteristics and importance of internal resources which usually 
represent the number one source of finance for innovation. At the same time, it would have 
been interesting to analyse the importance of collaborations with other enterprises or 
universities as a critical factor for innovation in SMEs. 
Finally, participation in European R&TD programmes is said to become increasingly 
popular among SMEs. However, looking at the number of SME participants in the 3rd 
framework programme shows that it is only a tiny minority of SMEs that participate and 
those enterprises usually have high research capabilities. Community R&TD programmes 
base their selection of applicants on very competitive criteria such as technological 
excellence and innovative character of the project. The application of these criteria will 
inevitably dismiss enterprises with little or no research capability of their own. The CRAFT 
programme was introduced to answer the needs of more traditional enterprises as it allowed 
groups of SMEs to contract out their research needs for a specific project. The introduction 
of this SME specific type of project in the Brite-Euram (1991-1994) programme led to the 
tripling of the number of SMEs participating in this programme, most of these new 
participants belonging to traditional sectors. As a result, this type of project has now been 
introduced in other programmes. A clearer distinction between the traditional projects and 
the expanding CRAFT type programmes would have been necessary. 
18 
12. Education and entrepreneurship 
This chapter of the Report aims at drawing a general picture of the current state of affairs in 
education and tentatively assesses its importance and limitations for fostering 
entrepreneurship. Although valuable in itself, namely since it is the first time that the 
Observatory explicitly addresses these issues, it largely amounts to a reasonable, honest 
survey of available research and inquiiy results, with little value added of its own as to the 
possibility of identifying some would-be specific features of entrepreneurship-based, as 
opposed to general education. 
As it is stated in the Report, observed differences between Member States as regards the 
education level of their population and student participation rates are less important now 
than they were in the past and largely restricted to the percentage of students in tertiary 
education. Although welcoming this general finding, which clearly shows that significant 
progress is being made towards a better educated and trained workforce, in itself more able 
to adapt to the pace of change in technological progress and the requirements of 
increasingly flexible labour markets, the Commission nevertheless wishes to point out that 
any serious analysis of education and entrepreneurship also has to take into consideration a 
whole range of social and cultural factors that influence both the relative position of 
different Member States and their developments paths in this field 22 
The Report nevertheless shows that for all countries for which data is available, 
entrepreneurs and starters have a higher level of education than the average in the labour 
force. Furthermore, there are positive links between the level of the entrepreneurs' 
education and the growth of the enterprise and its likelihood to export. However, most 
entrepreneurs have no specific education on entrepreneurship. The Commission strongly 
agrees with the Observatory that further attention should be paid to encouraging the 
development of entrepreneurial skills through the education and training system, including 
such issues as a multi-disciplinary approach, personal skills and the training of teachers. 
Stimulating exchanges of information and experience on the several pilot projects that 
already exist in Member States, such as those reported in this chapter, would be welcome. 
13. Legal environment 
This chapter of the Report is largely a statistical overview of the legal forms of companies 
and their implications towards risk, liability, capital requirements and administrative 
formalities. There are also clear links with such issues as the transfer or transmission of 
enterprises, whether by inheritance or sale. 
22 Complementary data published by Eurostat shows, for instance, that the percentage enrollment in 
education for 15-24 years old persons is remarquable low in the United Kingdom and Ireland, probably 
corresponding to an earlier entry into the workforce, and that knowledge of data processing and post-
compulsory education are the lowest in Southern countries (Greece, Italy, Portugal and Spain) whilst 
being particularly high in such small, central countries as Denmark and the Netherlands. 
19 
As the conclusion points out, there are not so much good or bad legal forms of companies 
but the entrepreneur should have the possibility of choosing the legal form which best suits 
his business and personal circumstances 23 in this respect, the Report gives a good 
overview of the issues and underlines the need for some Member States at least to find a 
better balance between such aspects as capital requirements and liabilities. Tax rates, that is 
either income tax or corporation tax, have an impact here too. 
A major policy implication to be drawn from this study could be that the Commission 
should continue to encourage Member States to look at their company law structure in 
order to best meet the need of entrepreneurs wishing to set-up a business. It should also 
look at the possibility of expanding the concept of the EEIG by reducing or simplifying the 
conditions towards setting one up, and to remove the barriers to the activities that they can 
undertake. This would also be in line with one of the Recommendations in the Molitor 
Group Report. 
On the standards issue the Report confirms the Commission's previous understanding that 
SMEs feel left out of the standards-making process and do not have enough information 
about what is happening. There is probably something in the suggestion that standards can 
be used by large companies to limit competition. The Commission would therefore agree 
that SMEs should be better represented in the standards-making process and that bodies 
such as CEN and CENELEC should pay increased attention to their views. 
The short section on quality assurance for European SMEs is also in line with the 
Commission's previous understanding. There are a number of issues such as quality 
assurance and certification, eco-audit and eco-labelling requirements, which are not 
compulsory, but which become so when SMEs are either required to do so to qualify as 
sub-contractors, or feel that need in order to remain competitive. This means that the 
quality assurance and certification processes need to be user-friendly and not too expensive 
for SMEs. As the Report clearly show s, the cost of ISO 9000 certification per employee is 
higher for SMEs than for large companies. 
14. Administrative burdens 
In view of the interest currently focused on improving and simplifying the business 
environment, particularly for SMEs, tliis is a very timely theme study. This is probably the 
first time that a serious attempt has been made to present an inventory of the current state 
of play of administrative burdens on businesses in Europe and to give some estimates as to 
the impact this has on them. 
23 As one should expect, the Report considers that the sole trader and partnerships formats have 
significant relative advantages during the first stages of the enterprise's life cycle (namely as regards 
start-up and early development) and that the limited company format (whether private or public) makes 
it easier to deal with such issues as later development or transmission. 
20 
The estimates indicating that obligations that result from being in business actually caused 
between 60 and 70 % of all administrative burdens support the Commission's understanding 
of the main problems for enterprises, particularly those which have just started-up and small 
businesses. The problems of understanding both company and income tax, as well as the 
social security and other obligations from taking on employees are clearly a heavy burden. 
It is reassuring to see that the Report also suggests that the key to reducing administrative 
burdens lies both in individual Member States as well as in the European institutions. This is 
an aspect which is increasingly recognised in other reports, and has been underlined by the 
Molitor Group. Indeed, it is clear from the recent work undertaken that national legislation 
is a major source of administrative burdens, particularly in the areas of taxation and social 
security contributions. 
It is alsp interesting to see the Report indicates that in the opinion of entrepreneurs the main 
causes for administrative burdens are the complexity and the number of forms that they are 
required to complete. This issue will continue to call for particular attention by the 
Commission and was already highlighted as a theme in its recent Forum in Paris (19-20 June 
1995) on improving and simplifying the business environment, particularly for start-ups. 
This Report is also the first which attempts an overall assessment of the costs of 
administrative burdens for businesses in Europe. The estimate of between 180 and 230 
billion ECU, or between 3 and 4 % of GDP, gives ample justification for what the 
Community is doing and more particularly what the Commission is advocating through- its 
Integrated Programme in favour of SMEs and the craft sector. It is perhaps not surprising 
to see from the figures that the total costs of administrative burdens on each enterprise are 
higher for large enterprises than the small ones, but that the costs per employee are higher 
amongst smaller enterprises. This gives further justification, if it was still necessary, to focus 
attention on the particular problems of SMEs. 
Finally, the Report suggests that, at the European level, the most important actions in order 
to reduce administrative burdens are to improve information and advice, to consider the 
replacement and/or simplification of existing laws, and to look at the possible impact of new 
legislation on businesses. It also points to the differing levels of progress in this area that 
have been made by the Member States. Again, this is further evidence for the Commission 
to carry on its work within the remit of the Integrated Programme, and in particular to 
advocate the spread of best practice between the Member States through concerted actions. 
21 
15. Producer services 
The Commission welcomes the inclusion of a theme study on producer services in the 
Report, particularly as it demonstrates a clear grasp of the subject and issues at hand on this 
field. In general terms, producer services are correctly defined as being service activities 
whose outputs are, in the main, purchased by enterprises. They thus include business and 
professional services (consulting, advertising, engineering and software), financial services, 
insurance services and real estate services, as grouped under classes 81-85 of the NACE 70 
classification of economic activities, and are deemed to be of paramount importance to 
SMEs, both from a supply and a demand point of view. 
It can nevertheless be considered that the usefulness of that definition, as well as of 
subsequent analysis, is then limited by excluding transport and communications, which are 
said to be distributive services, from the scope of producer services. An alternative 
application of the definition given above could in fact be based on a fourfold division of the 
input-output tables according to two criteria: whether the output is mainly to other 
enterprises or to final demand and whether inputs are mainly from the enterprises own 
resources or from purchases from other enterprises. 
Sectors which purchase less than the economy average from other enterprises but sell more 
than the average of their output to other enterprises would then be deemed primary input 
sectors. Today in Europe, they comprise all producer services and nothing but producer 
services. Their output is used by all sectors of the economy rather than going to one or 
other sector in particular, and this illustrates their strategic role in the modern economy. 
Sectors which both purchase more than the average from and sell more than the average to 
other enterprises could be deemed intermediate manufacturing ones. They comprise such 
traditional primary sectors as agriculture and energy, whose added value now comes from 
processing and refining rather than growing or extraction, along with capital and investment 
goods suppliers such as office machines and transport equipment producers. The last two 
categories would relate to sectors which sell more than the economy average to final 
demand. According to whether they purchase more or less than the economy average from 
other enterprises, they could be characterised as final manufacturing or final services. 
Bearing in mind that services are to be found either at the beginning or at the end of the 
economic process, would then make clear that they ought to be treated separately, and that 
any policy implications were likely to be different for each category. 
22 
The chapter also correctly identifies the sub-sector of producer services usually known, for 
want of a better word, as "business services" 24 Again, however, the content of this sub-
sector is subsequently too narrowly defined. In addition to the so-called advanced tertiary 
industry of professional and technical services are to be found many more banal activities 
such as office cleaning, temporary work agencies or security services. In the past these have 
made a significant contribution to the growth of business services, which is the second 
largest market sector in the European economy after wholesale trade and retail distribution. 
According to the Observatory, the relatively low demand for producer services on the part 
of SMEs is mainly due to the difficulties they have in identifying their requirements and their 
lack of awareness of the services on offer to meet these requirements. However, these 
problems could be alleviated through training and information for SME staff and by 
measures encouraging SMEs to make use of service providers. This tends to confirm the 
usefulness of activities such as Euromanagement, aimed at the training of SME staff, as well 
as, amongst others, certain aspects of the Portuguese PEDIP programme, of which SMEs 
can take advantage only if they use selected service providers for drawing up their 
applications. 
Another reason for the low level of use of producer services by SMEs is the cost of these 
services, which smaller companies often regard as too high compared with the limited funds 
available to them. In such cases, measures such as those in force in certain Member States 
including, in particular, France and Italy, involving the granting of aid in the form of tax 
exemption or subsidies if companies make use of services, would be suitable remedies and 
their extension to other Member States should be encouraged ^5 
In addition, it would seem that SMEs and particularly micro-enterprises are the most 
important providers of producer services. In particular, employment in the producer 
services sector has increased substantially in recent years. This remarkable growth, which 
should continue still further with the Internal Market, confirms the importance of these 
sectors in terms of employment and hence the importance of sustaining the development of 
employment in service SMEs as recommended in the White paper on Growth, 
Competitiveness and Employment, both by improving the productivity of producer services 
and by means of initiatives such as the enterprise and innovation centres aimed at promoting 
the creation and development of innovative enterprises by making a whole range of services 
available to them. 
24 In fact producer and business are synonyms in this context, but one is used in a broad and the other in a 
narrow sense. 
25 it is possible though, in addition to the issue of price raised in the chapter, that externally provided 
services can only be supplied in a minimum quantity that exceeds the requirements of the smallest 
firms. Equally, smaller firms may have greater recourse to the services provided by their own 
organisations rather than the market sector, in particular in those countries with public law chambers 
which they are obliged to contribute to. 
23 
When considering the growth of producer services and the development of productivity, the 
serious inadequacy of the national accounts as a data source needs nevertheless to be taken 
into consideration. There are no adequate measures of physical output for services, so that 
labour input is very often used as a surrogate for output. In practice this sets labour 
productivity gains at zero and seriously distorts the growth potential of services, whose 
value tends to rise faster than that of the economy as a whole for qualitative reasons 
indicated in the Report as well as a result of their higher labour intensive nature. 
Furthermore, the question on whether and to what extent does the development of producer 
services provide new growth opportunities for European SMEs either as suppliers of such 
services or by enhancing their performance on domestic and international markets remains 
largely unanswered, as the overly quantitatively oriented analysis of basic service statistics 
still masks these more fundamental problems. Recognising the need to overcome these 
fundamental difficulties the Community has already adopted a comprehensive development 
programme of service statistics which should allow for increased availability of 
comparable, more useful data in the near future. 
16. The craft trades 
The Report rightly draws attention to the considerable discrepancies in the way the various 
Member States define the craft trades and for this reason the Commission often adds the 
phrase "small enterprises" when referring to the craft trades, since in spite of organisational 
and legislative differences, the craft trades and smaller enterprises have a great deal in 
common. The organisational structure of the craft trades is often the result of a long process 
of evolution and craftsmen recognise each other through their national structures, which 
they do not wish to see changed. There is no need for harmonisation of definitions because 
of the Internal Market. 
For this reason, the Commission has always said that it has no intention of proposing an 
harmonisation of the definitions of the craft trades. Admittedly, it is difficult to obtain 
consistent statistics on the craft trades because of the many differences in the number of 
professions included, the economic weight of the sector, the size of businesses, the 
organisational structure or the training of apprentices, journeymen and master craftsmen, 
but the Commission cannot go along with the Observatory's wish to recommend 
harmonisation of the definitions of the craft trades in order to resolve statistical problems as 
suggested in the Report. However, it is prepared to support the statistical work in close co­
ordination with Eurostat, with a view to improving the existing statistics whilst minimising 
risks of any undue increase in enterprises' compliance costs. 
As to the results of the second European Conference on the craft trades and small 
enterprises held in Berlin on 26 and 27 September 1994, the Commission has presented a 
brief report which outlines how it intends to react to the its conclusions and what initiatives 
it might recommend to the Member States. 
26 Council Decision 92/326/EEC of 18 June 1992. 
24 
17. SME Internal Market Monitor 
By extending the analysis carried out in earlier reports, this chapter focuses on the threefold 
interrelationship between SME performance, SME dynamics and the business environment 
in the light of completion of the Internal Market. Moreover, as actual and estimated 
developments in those variables refer to the period 1988-1994, the Observatory has 
considered useful to distinguish between two different groups of countries (EUR-12 and 
EFTA-4), according to whether or not they were Union members during that period. 
On the whole, the information included in the Report clearly shows that recent 
improvements in the overall economic situation and progress made in real and nominal 
convergence at the macroeconomic level do have an equivalent at the enterprise level. In 
fact, not only did SMEs perform fairly well in the EUR-12 as their business environment 
doubtless evolved towards a higher degree of coherence . At an aggregate level, 
convergence is particularly noticeable in such domains as fiscal and monetary policies, 
technology and innovation, capital and finance, labour markets, and macroeconomic 
strength and presence in global markets, whilst at an indicator level only three of the 
individual variables taken into consideration by the Observatory have shown some 
significant divergence over that period. Moreover, the business environment in the EFTA-4 
also appears to have become increasingly similar to that prevailing in the Union in most of 
those domains, the only exception being capital and finance where some relatively 
unfavourable developments in fixed capital formation and availability of venture capital 
appear to have taken place. 
Notwithstanding this general tendency, some divergence is reported to have occurred, 
however, in labour market policies (coupled by some diversion of the EFTA-4 from the 
EUR-12, and in spite of identified convergence tendencies in unemployment benefits, as 
measured by replacement rates, and start-up policies), burdens on businesses (especially 
regulatory burdens) and industrial relations (especially on labour regulations, which, 
incidentally, where not found by the Observatory as significantly affecting SME 
performance). Although it should be noticed that these domains are exactly the three that 
were found to be the most coherent in 1988, in this sense allowing also for a higher degree 
of liberty in national policies, this result seems to provide further evidence as to the 
importance of paying specific attention to the distinctive features of different Member 
States' employment and legal systems, as has been underlined in previous sections, 
whenever an assessment of the business environment impact on SME performance is to be 
made. 
27 See, for instance, the "1995 Annual Economic Report", COM (94) 615 final of 13 December 1994. 
As in the Report, the concept of convergence (or divergence) has here a dynamic nature and 
corresponds to a movement towards increased (or decreased) coherence, which is viewed as its static 
counterpart. 
(4) 
25 
In fact, and as could be expected, a closer look into the various country-plots drawn by the 
Observatory most of the times makes it possible to identify distinct groups of countries, and 
thus to look at general similarities and differences between them. Yet, nowhere is this more 
striking than with regard to burdens on businesses, where four distinct patterns clearly 
emerge . Considering that divergence in labour market policies was, by and large, found 
to be the result of a general movement towards higher levels of public expenditure on active 
labour market policies and that it can probably be explained by a similar trend in the dual 
nature of labour markets, the Commission therefore feels that the Report's findings 
considerably emphasise the importance of pursuing its own efforts towards further 
simplification of the (administrative) business environment, namely by means of concerted 
actions with the Member States, as advocated by the Integrated Programme. 
As regards SME performance, and apart from having found a certain degree of divergence 
that seems to result from a few, individual deviant cases, the Report suggests that recent 
improvements in profitability and generation of value added were only to a limited extent 
matched by employment growth. Whilst a general increase in the enterprises' self-financing 
capabilities is certainly to be welcomed, especially since it can surely act as an enhancing 
factor for future investment, other studies also suggest that the business propensity to invest 
is still being negatively affected by inflationary expectations, interest rates differentials and 
exchange rate instability. Thus being, promoting the development of a stable 
macroeconomic environment by means of sound macroeconomic policy would indeed seem 
to be one of the most important single factors in stimulating business development and 
entrepreneurship, as well as employment growth and the international competitiveness of 
SMEs. Again, policies that put more emphasis on the small firm sector would be particularly 
well suited to achieve these objectives, as the Observatory has found that the structure, 
rather than the level of public expenditure tends to be associated with stimulating, or 
depressing factors of SME performance • . 
Finally, the Report's overall conclusions can only but be particularly welcomed by the 
Commission. In general terms, the business environment was found to have improved 
during the last six years, convergence in the business environment is said to have 
contributed towards SME performance and, most of all, completion of the Internal Market 
appears as having a positive influence on both the business environment and SME 
performance. 
29 
Meaning higher than average financial and regulatory burdens in Austria, Belgium and Germany, 
higher regulatory and lower financial burdens in France, Denmark, Luxembourg and the Netherlands, 
higher financial and lower regulatory burdens in Greece, Italy, Ireland, Portugal and Spain, and, 
finally, lower regulatory and financial burdens in Finland, Norway, Sweden and the United Kingdom. 
In this sense, fiscal and social policy, as well as R&D efforts have been considered in the Report as 
elements of the business environment that have deteriorated, from the point of view of SME 
performance, during the 1988-1994 period. 
26 
Naturally, these conclusions have to be read with some caution, as it is still too early to fully 
evaluate the impact of the Internal Market on SMEs. In particular, as longer time series 
become gradually available and the time elapsed since its official coming into force allows 
more of its effects to be visible, the Observatory will certainly be called to further pursue 
and refine its analysis, namely by considering new causal relations and adjusting their size 
scope. Yet, since the Internal Market has been billed as an enabling programme that should 
open up new possibilities for companies previously confined to one Member State's market 
by offering them an opportunity for growth, it is reassuring to find out that, as far as the 
available evidence goes, it is keeping up its promises. By strengthening coordination of its 
own activities with those undertaken by Member States, the business community and 
intermediaries responsible for providing assistance to enterprises and supporting the 
development and adaptation of SMEs and the craft sector, the Community will continue to 
devote its best efforts to ensure that those objectives are met in the best possible way. 
18. Policy issues 
The Report contains a number of recommendations on policies to promote SMEs. These 
are addressed primarily to the European Institutions, although they are broadly speaking 
also valid at national and regional levels. 
The Commission broadly supports the view that policies in favour of SMEs should be better 
adapted to the fundamental changes in the context in which SMEs are operating in the 
European Union. The Report rightly refers to the globalisation of markets, at both 
European and World level, the development of the information society and the challenges to 
SMEs resulting from the White Paper on Growth, Competitiveness and Employment. 
These fundamental changes have already led the European Union to strengthen its policies 
aimed at supporting SMEs, particularly in the following areas which are quoted in the 
Report: 
- a stable macro-economic framework; 
- an open competitive environment; 
- a network of infrastructures, transport, telecommunications and information 
technologies; 
- strengthening the competitiveness of businesses; 
- a favourable environment for businesses; 
- support measures for businesses. 
A stable macro-economic framework 
The Report says that the most efficient approach which governments could take to support 
SMEs would be to improve the macro-economic conditions in which they operate. 
27 
The Commission has made a number of recommendations in this field in the White Paper on 
Growth, Competitiveness and Employment, in which it stresses that progress towards EMU 
is one of the essential elements in the establishment of a stable macro-economic framework 
for businesses. 
An open competitive environment 
The Report confirms that the efforts of the European Union aimed at expanding the markets 
for businesses both within the European Union and in non-member countries, (EEA, WTO) 
have generally been of benefit to SMEs in spite of certain adjustment costs. SMEs have 
rapidly increased their share of exports and have benefited from greater competition on their 
domestic markets. The Commission will continue to keep an eye on the smooth running of 
the Internal Market, particularly as regards SMEs, and to encourage exports to non-member 
countries. 
Public authorities are also responsible for avoiding distortion of competition on the markets. 
The Commission has its own responsibilities in this field, both within the European Union 
(competition policy applicable to businesses and monitoring of state aids) and vis-à-vis non-
member countries (commercial policy). 
In its annual reports on competition policy, the Commission has stressed the vital 
complementary role played by competition policy in the context of globalisation of trade 
and the requirements of growth, competitiveness and employment •**. As stressed in the 
Report, it is vital to take account of the specific characteristics of SMEs in this context. The 
Commission has also adapted its competition policy and monitoring of state aids in the light 
of the size of businesses ^ particularly with a view to enabling SMEs to cooperate with 
each other or to establish partnerships with large companies in order to ensure their survival 
in a climate of increasing internationalisation, while avoiding agreements or practices which 
would disturb the smooth running of the markets. 
A network of infrastructures, transport, telecommunications and information 
technologies 
The Report recommends public authorities to offer businesses appropriate networks of 
infrastructures, telecommunications and transport and, in particular, to facilitate access by 
SMEs to such networks. 
The European institutions will continue their work in this field, particularly through action 
by the EIB and the Structural Funds and the development of trans-European networks and 
the information society. 
31 See in particular the XXIVth (1994) and XXIIIrd (1993) reports on competition policy. 
32 See in particular the XXIInd report (1992) on competition policy, p.57. 
28 
Strengthening the competitiveness of businesses, particularly through an improved 
education system and a strengthening of R&TD 
As stressed in the Report, the education and vocational training systems should be better 
geared to the needs of companies, particularly in the craft sector. The White Paper on 
Growth, Competitiveness and Employment recommends a number of specific Community 
initiatives to complement the work being done by the Member States. 
Strengthening the competitiveness of businesses also calls for an additional effort in the field 
of research and technological development (R&TD). In its reports on the co-ordination of 
activities in favour of SMEs ^, the Commission described the various actions in this field, 
particularly those aimed at SMEs. 
A favourable environment for enterprises 
The Report rightly stresses the importance of establishing an improved legal, administrative, 
fiscal and social environment for business. The White Paper on Growth, Competitiveness 
and Employment also stresses that one of the SME weak points is their structural capacity 
to cope with the complexity of the administrative and legal environment (particularly 
administrative and legal obligations, the establishment of new environmental or social 
regulations, the introduction of a new system of standardisation and certification in 
connection with the implementation of the Internal Market and the obstacles to conducting 
certain activities). 
Obviously, the legislators and administrations in this field at national or Community level 
have a direct responsibility, and for this reason the Commission is continuing with its own 
activities aimed at reducing excessive burdens and constraints (particularly the system for 
evaluating the impact of Community legislation on enterprises) and is continuing to support 
action by the Member States. In connection with the later, the Commission has already 
organised a forum in Paris on 19 and 20 June 1995, as part of its concerted actions with the 
Member States provided for in the Integrated Programme in favour of SMEs, which 
enabled best practice in the Member States to be identified and exchanged. 
33 See in particular "Community actions to assist SMEs and the craft sector", COM(94)221 final of 7 
September 1994. 
15) 
29 
As pointed out in the Report, an improved legal environment for businesses would not only 
mean deregulation, since for certain key problems, such as payment periods, transfer of 
businesses and legal forms, legislative initiatives may be very useful. The Commission has 
therefore adopted recommendations to the Member States in the fields of payment periods 
34 and the transfer of enterprises •" it also encourages the development of appropriate 
legal forms for enterprises operating at intra-Community level (particularly the EEIGs, for 
which the REGIE network has been set up, and the European legal forms for co-operatives, 
associations and foundations). 
Support measures 
The Report also refers to the important contribution to the competitiveness of enterprises 
that may be made by support services. Indeed, the complexity of the management of a 
company and development of strategic orientations still raise particular difficulties for a 
considerable number of SMEs. As stressed in the Report, progress in this field necessitates 
wider availability of such services, particularly in peripheral regions, and a greater demand 
for, and use of, the existing support measures by SMEs. 
The Commission will continue to improve the support measures which it offers, particularly 
in the fields of information (EIC network) and co-operation (BC-NET, BRE, 
Europartenariat, Interprise). In addition, it will conduct concerted actions with the Member 
States aimed at the exchange of best existing practice as regards the supply of services for 
businesses (Madrid Forum, November 1995) and ways of promoting the demand for 
information, training and advice on the part of enterprises. 
CONCLUSIONS 
The Observatory annual reports have seen the day with the completion of the Internal 
Market, and developed ever since. Not only by means of a careful adaptation of their scope 
and structure, but also thanks to a gradual extension of their geographical coverage, which 
now encompasses most of the EEA Member States, they regularly provide a 
comprehensive, useful analysis of SMEs within the European economy. 
Broadly speaking, the first report has drawn up a general overview of European SMEs and 
analysed the prospective consequences of the completion of the Internal Market in a 
qualitative way. In this sense, it amounted to a "zero-measuring" of the state of SMEs in the 
European Union. 
34 OJ C 144 and L 127 of 10 June 1995. 
35 OJ C 400 and L 385 of 31 December 1994. 
30 
The second report had more focus on dynamics than the first one. Whether on employment 
creation and training, capital and finance, or innovation and diffusion of technology it 
proved possible to present developments in addition to structures, and presented the results 
of a preliminary convergence/divergence analysis, thus monitoring anticipatory effects of the 
completion of the Internal Market during the period 1988-1993. 
The present third Report, like its predecessors, is full of facts and useful information. Apart 
from the usual annual update on SME performances, it has focused more in particular on 
several aspects of the business environment and paid increased attention to the development 
of the SME Internal Market Monitor. Theme studies have been carried out on 
administrative burdens, a field to which much policy attention is drawn, and producer 
services, a sector that is of special interest for upgrading operations and productivity in 
SMEs. 
In particular, the Report clearly shows that during the past six years the business 
environment in which SMEs operate has converged in the former twelve Member States, as 
conditions on capital markets, domestic efforts regarding technology and innovation and 
fiscal and monetary policies became increasingly similar in the European Union. Moreover, 
in the same period the business environment in the new Member States (Austria, Finland 
and Sweden) and in Norway already became closer to the business environment in the 
Union. 
However, it also leads to the conclusion that SMEs are not yet fully benefiting from the 
current economic recovery. Compared to the 1988-93 period, in which SMEs more than 
compensated for job-losses in larger enterprises, the SME job-machine is now stagnating, as 
slow recovery in SMEs was preceded by a slowdown in the growth of the number of 
enterprises in Europe, due to a slight decline in new enterprise creation and an increase in 
closures. There are large differences in birth rates of new enterprises across Europe, the 
birth rate being relatively high in Germany and Finland, and rather low in Italy, Spain and 
the United Kingdom. This contrasts with the similarity of motives throughout the Union 
(such as the will to be independent, or the threat of unemployment) and success factors 
associated with starting an enterprise (such as management experience and the educational 
level). Apparently, remaining differences in the business environment, such as the prosperity 
of the population and specific tax policies directed at SMEs, have an important influence in 
new entrepreneurship. 
The initiative of entrepreneurs, their decisions on hiring and investing are paramount to 
growth. The aim of any public policy must then be to provide a coherent and transparent 
framework within which economic operators can compete freely on the basis of equal 
treatment, and therefore to induce a virtuous circle of initiative, employment and growth. 
To do that, individual incentive to productivity need to be strengthened, competition 
stimulated and, in general, market flexibility increased. 
31 
The Council Resolution of 10 October 1994 gave full scope to the dynamism and innovative 
potential of SMEs in a competitive economy, whilst clearly recognising that their 
development, and in particular their flexibility and adaptability to changing circumstances, is 
still being hampered by a number of both internal and external hurdles. A simple, logical and 
coherent policy framework would accordingly be essential in seeking the most effective 
ways for overcoming their difficulties and building on their strengths. As it stands, the 
Report clearly confirms this reasoning and reaffirms the need for fostering the Community's 
continuous commitment towards improving the business environment and supporting the 
development and adjustment of enterprises along the lines presented in the Integrated 
Programme in favour of SMEs and the craft sector, which paves the way towards a second 
generation of enterprise policy. 
In this vein, the prime objective of the Commission will continue to be to ensure that there 
is a high degree of added value in the Community's enterprise policy and to contribute to 
economic resurgence and growth in employment by developing activities of direct interest 
to enterprises and stepping up interaction between existing instruments. With this in mind, it 
will in particular endeavour to stimulate and reinforce mutual consultation and cooperation 
with all its partners, the Member States, the European institutions and the business 
organisations, so that the efforts of the Union in favour of SMEs are translated into growth, 
competitiveness and employment. 
32 
EXECUTIVE SUMMARY 
THE EUROPEAN OBSERVATORY FOR SMEs 
Tliird annual report 
Report submitted to Directorate-General XXm 
(Enterprise policy, distributive trades, tourism and cooperatives) 
of the European Commission by: 
ENSR - European Network for SME Research 
and co-ordinated by: 
EIM - Small Business Research and Consultancy 

33 
INTRODUCTION 
This is the executive summary of the Third Annual Report of the European Observatory for 
SMEs. The First Annual Report was published in May 1993 and concentrated on the 
structure of SMEs and their fields of operation. The Second Annual Report reviewed 
developments that affected SMEs and was published in April 1994. Both reports dealt with 
the twelve European Member States. In this year's report also Austria, Finland, Norway 
and Sweden are included, anticipating on the joining of these countries to the European 
Union on the first January 1995. Unfortunately Norway decided otherwise. So this Third 
Annual Report covers all countries of the European Economic Area, except for Iceland. 
To a limited extent the structure of the Report has changed. The main part concerns the 
development of the SME Internal Market Monitor (SIMM). This monitor measures the 
effects of the completion of the internal market on SMEs. The completion of the internal 
market has influenced both the business performance and the business environment of 
SMEs. Therefore a distinction is made between information gathered on the Business 
Performance of SMEs (Part I) and information collected on the Business Environment of 
SMEs (Part H). The theme studies of this year's report (Part III) concern Administrative 
Burdens on SMEs and the Producer Services sector. Some of the information included in 
the last year's theme study on craft trades has been updated. In the last part (Part TV) 
conclusions are presented. This consists of the main results of the SIMM and an overview 
of the policy issues resulting from the information contained in the Report. 
PART I 
1. ECONOMIC GROWTH AND SECTORAL DEVELOPMENT 
The size-class pattern of economic growth 
Economic development in Europe-16 during the period 1988-1995 can be subdivided into a 
period of growth (1988-1990), a period of stagnation (1990-1993), and a recovery (1994-
1995). In spite of differences in their overall growth rates, EU-12 and EFTA-4 show the 
same sectoral and size-class patterns of economic growth. 
It appears that each stage of the business cycle has a different impact on SMEs and LSEs. 
The world wide economic stagnation hit the export oriented LSE-sector first, while SMEs 
were affected after a time lag. During the period of recovery the opposite process occurs. 
Because the recovery is strongly export led, LSEs have benefited first. From 1994 onwards, 
however, the increased industrial and consumer confidence has had a stimulating impact on 
economic growth. Domestic demand, however, is increasing only slightly because of 
moderate growth in real incomes. 
34 
The economic stagnation severely hit the labour market. The total number of private sector 
jobs in Europe was roughly similar in 1988 and 1995, but there has been an increase in 
labour productivity. In the period 1988-1990 annual employment growth in SMEs was over 
2%, while employment in LSEs increased only marginally. Employment in SMEs decreased 
by 1% annually, and in LSEs by almost 2%. During the initial stages of the economic 
recovery, employment growth recovered in LSEs first, followed after a time by SMEs. For 
SMEs especially, the process of job creation is expected to be slow due to over-capacity. 
During the period 1988-1990 the number of enterprises increased strongly. The most 
rapidly expanding sectors were the wholesale trades, transport and communications, and 
producer services. In most countries the growth in the number of enterprises slowed down 
during the recession. During the period of economic stagnation the unfavourable economic 
conditions had a negative impact on the creation of new firms and also led to an increased 
closure rate amongst enterprises. 
In the 1988-1995 period labour productivity of SMEs has increased by 2% annually, but 
productivity growth has accelerated since 1990. During the recession and the recovery 
greater international competition has forced both SMEs and LSEs to increase their 
efficiency. Increased labour productivity, together with only modest growth of wages, has 
resulted in a decrease in real unit labour costs, and this improved profitability. 
Sectoral characteristics 
The sectors with a relatively large average enterprise size are extraction, manufacturing, 
and, to a lesser extent, transport and communications. In construction and most service 
sectors the average enterprise size in Europe-16 is below the overall average of 6 
employees. Generally, a positive correlation between capital intensity of production and 
enterprise size seems to exist. This can be explained by the fact that higher capital intensity 
gives rise to increasing economies of scale and to barriers to entry. 
A small average enterprise size amongst SMEs in an industry corresponds with a high 
relative labour productivity amongst the SMEs in that industry. For example, in most 
sectors in trade and services SMEs have the highest labour productivity, while, conversely, 
in extraction and manufacturing, LSEs generally have the higher labour productivity. 
Therefore, the distribution of SMEs and LSEs over the sectors of industry appear to be 
efficient from a macro-economic point of view. 
35 
Over the 1988-1995 period growth rates have been highest in the export oriented sectors: 
extraction, manufacturing, and transport and communications. This holds for both SMEs 
and LSEs. This emphasises the importance of international integration and specialisation for 
economic growth. Construction, the retail trades, and personal services, which are highly 
dependent on domestic markets, achieved the lowest growth rates. Within most sectors 
SMEs experienced higher growth rates in value added than did LSEs. Only in 
manufacturing were LSEs more successful on this measure. 
It is striking that sectoral differences in employment growth only correspond to a limited 
extent with differences in value added growth. The tendency towards cost reduction led to a 
decrease in employment especially in the export oriented sectors of manufacturing, and 
transport and communications. In these sectors enterprises increased their value added, 
while they decreased their employment. Therefore, the sectors that experienced the highest 
value-added growth also achieved the highest growth in labour productivity. 
At the sectoral level it appears that a moderate growth in unit labour costs - as a measure of 
competitiveness - coincides with a relatively high growth rate in value added. This holds 
especially for LSEs but also, to a lesser extent, for SMEs. It is hypothesised that SMEs, 
which are less flexible in adjusting their stock of labour to changing demand, partly 
maintained their competitiveness by reducing profit rates during the years considered to a 
greater extent than LSEs. 
2. BUSINESS DYNAMICS AND ENTREPRENEURSHIP 
New enterprises trends 
European countries have shown important differences with regard to trends in new 
enterprises formation over the past five years. In general there has been a slight decline in 
the rate of new enterprise formation in Europe. 
The largest share of new enterprises were established in the service sector. 
On average, of all European start-ups, 87% survive their first year, 68% survive for at least 
three years, and 55% survive to the end of their fifth year. However, European countries 
show important differences, for example, the five year survival rate varies from 45% in 
Luxembourg, to 63% in Germany. 
36 
New enterprises, job generation and growth 
New enterprises account for an important amount of gross job creation in most European 
countries, but large differences exist between countries. Furthermore, the expansion of 
existing enterprises is, in most countries, a more important source of job generation than 
start-ups. 
It should be stressed that a large majority of entrepreneurs are not interested in expanding 
their business; only a minority have growth ambitions. 
The starter's profile 
Whatever the country, the typical European business starter is a man, aged 35, who has 
previously experienced SMEs through middle-management or as a skilled worker, his level 
of education is similar to the average in his country's population. 
However, important differences exist between European countries, for example in the share 
of women and the unemployed amongst new entrepreneurs. The entrepreneur's profile also 
varies according to the type of activities of the enterprise started. 
Motives and success factors to start and expand an enterprise 
Pull motives such as self-fulfilment, the wish to be independent, and the exploitation of 
business opportunities seem to be the most important motives to starting a new enterprise, 
alongside (the risk of) unemployment, a push factor which has become increasingly 
important in recent years. 
Although many European studies indicate that prior managerial experience, commercial 
knowledge, positive motivation, strong confidence, and education, are important success 
factors, it should be noted that the choice of business and good pre-start-up preparation 
seem to be at least equally important. 
Obstacles and barriers to start and expand an enterprise 
A lack of capital is by far the most severe obstacle to both starting and expanding an 
enterprise. This is followed by market related problems, inadequate business skills, and level 
of taxes and social contributions. 
37 
3. LABOUR 
SMEs and job generation 
Recently the claim that SMEs, and especially micro enterprises, create most jobs in 
industrialised economies has been questioned. Among others, the Organisation for 
Economic Co-operation and Development (OECD) has pointed to the fact that problems 
related to data-acquisition and data-analysis might have led to an over-estimation of job-
creation by SMEs. 
This chapter deals in detail with the methodological problems concerning this issue. It 
concludes that in some studies there may have been some over-estimation of job-creation by 
SMEs in the recent past, but that the statement that SMEs generally create more jobs than 
LSEs remains valid. 
In the recent discussion on the job-creation by SMEs, a theory has been developed that a 
large part of the growing employment-share in SMEs is the result of deliberate strategies of 
LSEs seeking to reduce uncertainties through flexible production and through the out­
sourcing of non-core-business activities. This chapter assesses this argument, and deals with 
issues of flexibility and job-quality in SMEs. 
Flexibility in SMEs 
Patterns of labour flexibility in SMEs have several dimensions, of which part-time work and 
temporary work are the most prominent. Part-time working is growing in importance in 
most European countries. In general, women are more likely than men to work part-time, 
and services are more likely to use part-time workers than manufacturing. 
The enterprise size dimension to part-time working is clearly linked to the sectoral 
dimension. For example, while in Denmark small enterprises are typically associated with 
part-time working in all sectors and large enterprises with full-time working, in the 
Netherlands SMEs use more part-time: working in some sectors, like personal services, but 
the reverse is true in other sectors, for example construction. 
Temporary working involves a significant share of the European workforce (10% of females 
and 7% of males) and has been increasing in absolute and proportional terms over the 
period 1987-1991. In some countries (Spain, Denmark, and Portugal) the levels of 
temporary working are well above the European average. 
There is some evidence that large enterprises are more likely to resort to temporary 
contracts, but when a small enterprise does use temporary contracts, a greater proportion of 
its staff tends to be covered by them. 
38 
Job quality in SMEs 
SMEs generally employ younger and less educated workers than LSEs, segments of the 
workforce which are generally employed in poorer working conditions. 
Other evidence regarding the quality of jobs in SMEs points in the same direction. The 
evidence shows that the incidence of enterprise level health and safety organisations 
increases steadily with enterprise size, but concerning work accident rates, sectoral 
influences are more important than enterprise size. 
4. REGIONAL DISPARITIES 
SMEs' share in industrial employment at regional level 
Confirming previous Observatory Reports, this chapter shows that SMEs, and especially 
micro-firms, play a significant role in employment in the European regions. Moreover, it 
demonstrates that strong and significant regional disparities exist within countries in the role 
of SMEs in industrial employment. These disparities are largely explained by the sectoral 
specialisation of regions, being either regions with SME dominated manufacturing sectors 
('dominated' in terms of employment), or being regions with LSEs dominated 
manufacturing sectors. 
The highest intra-national differences are found in the Netherlands, Finland, France, Spain, 
Portugal, and Norway. Industrial employment in Objective 1 regions is especially SME 
dominated compared with other intra-national regions. The pattern is not so clear for the 
Objective 2 regions, and is even less clear for the Objective 5 regions. Finally, the 'border 
effect' described in the First Annual Report is confirmed, with SMEs' shares of industrial 
employment showing important differences either side of European borders. 
Industrial employment change by size class at regional level 
Most regions have experienced heavy losses in industrial employment during the 1988 -
1992 period. However, industrial employment decline has been more acute in LSEs than in 
SMEs, and micro-enterprises have performed especially well. 
As far as the Objective regions are concerned, in most of these industrial SMEs have shown 
either an increase in their employment or a smaller decrease than LSEs. This pattern is 
especially true of micro enterprises. 
Manufacturing employment decline has been greater in the large city regions than in the 
regions which specialise in traditional industries. 
39 
Self-employment and new enterprises at regional level 
In those countries where data is available, evidence exists of large internal disparities in the 
regional rates of self-employment. 
Although each country has its own geographical pattern, the evidence from France, 
Germany, Italy, Spain, and Norway, reveals that capital and large city regions have a lower 
rate of self-employment. The share of self-employed is generally higher in traditionally SME 
dominated regions. On the other hand, regions formerly dependent on heavy industries have 
a low rate of self-employment. A strong presence of a wage-earning culture, together with 
lower qualifications in the labour force, could explain this last pattern. 
Data from France and Ireland also indicates that regional differences in the creation of new 
enterprises are closely related to existing differences in regions' economic and cultural 
environments. 
5. EXPORT AND INTERNATIONAL ORIENTATION 
Export by countries 
In all sectors the share of enterprises that export increases with the number of employees. 
However, data from Portugal, France, Ireland, Denmark, and France indicates that the 
number of exporting small enterprises is increasing. Some sectors: manufacturing industry 
and the wholesale trades, tend to be more export-oriented than others, but due to 
internationalisation this seems to be changing. Data from the United Kingdom, the 
Netherlands, Spain, and Portugal shows that exporting by retailers and service enterprises is 
increasing. 
Due to the internationalisation of production the number of small, particularly innovative, 
enterprises that export is rising, and these enterprises enter export markets with new 
products very soon after launching them in the domestic market. 
Export intensity 
The correlation between export intensity and enterprise size class for all sectors is not very 
strong. However, for manufacturing enterprises export intensity does increase with the size 
of the enterprise. SMEs in smaller countries usually have a higher export intensity than 
those in larger countries, but figures for the recent years indicate that differences are 
narrowing. 
Export strategy 
There is no single export strategy amongst SMEs, exporting behaviour is typically a mixture 
of learning-by-doing, strategic commitments, and random factors. 
40 
The quality of the product is the main determinant in the decision to export or not, but key 
factors for success in export markets are the management's capabilities and direct 
engagements with that market, in brief, active exporting. These characteristics are more 
often found in large enterprises than in small enterprises. 
The export barriers for SMEs are very closely linked to the barriers for growth and 
development. The main internal barriers are a lack of capital, and insufficient management 
skills. The main external barriers are technical trade restrictions and bureaucratic 
procedures, marketing and distribution problems, and, in the more peripheral countries, high 
transportation costs and communication problems. 
Public procurement 
The importance of public procurement is increasing considerably, but international 
procurement has not increased significantly in the 1990s. In 1993 only 2% of public 
procurement contracts were won by foreign enterprises. Tendering abroad raises several 
problems for SMEs, these relate to cultural differences, language problems, an insufficient 
knowledge about the market, and a lack of resources for promotion activities. 
European Economic Interest Grouping (EEIG) 
EEIGs are an interesting new legal form for transnational business co-operation where the 
enterprises remain economically and legally independent. The number of EEIGs is 
increasing rapidly. The greatest number are located in Belgium, France, and the 
Netherlands. They are, however, mainly established among medium-sized enterprises active 
in services and manufacturing industry 
PART II 
6. MACROECONOMIC ENVIRONMENT 
In the early 1990s the world economy was hit by a recession. GDP growth in Europe-16 fell 
back from more than 3% in the late 1980s to 1% in 1992, and reached an absolute low of-
0,5% in 1993. In 1994 a remarkably rapid recovery began, which is expected to continue in 
1995. Booming world trade is the driving force behind the recovery. Compared with the 
USA, growth in the EU is lagging, but growth in the EU exceeds that in Japan. Most EU 
countries experienced the nadir of the recession in 1993, the only exceptions being the 
Anglo-Saxon countries and Denmark. The magnitude of the downturn varied considerably. 
The southern European countries were especially hard hit, as were Germany, France, and 
Belgium. Investments and private consumption were particularly depressed in the early 
1990s, but in 1994 there was a clear up-turn, and in 1995 a strong increase of investments is 
expected, but only a modest recovery in consumption. 
41 
Although growth is accelerating within the EU, inflation has declined to 2.5% (in 1994). 
Differences in inflation between EU countries remain considerable, but are diminishing. 
Inflation is highest in southern European countries. Except for 1992, interest rates in the EU 
essentially followed the German rates. Short term interest rate declined in 1993-1994, but 
long term rates rose. 
The labour market situation in the EU is still a cause for concern. In the 1991 to 1994 
period employment in the EU declined sharply due to the recession. In 1995 a modest 
increase in employment is predicted with a continuing over-capacity of labour within firms. 
Wage increases in the EU have been small in recent years. Because productivity growth was 
high in 1994, unit labour costs have declined sharply, and through this, the price 
competitiveness of EU industries has improved. In comparison with the USA and Japan unit 
labour costs grew fastest in the EU over the period 1988 to 1993, but in 1994 the growth 
was lowest in the EU. 
EU currencies have shown considerable volatility in recent years, partly due to political 
turmoil and budgetary problems. It is expected that currency markets will remain vulnerable 
in 1995. 
Regarding government expenditures, the six highest spending governments of Europe-16 
(as a proportion of GDP) are Sweden, Denmark, the Netherlands, Belgium, Italy, and 
Norway (all of these spend more than 55%» of GDP). On average, Europe-16 government 
expenditures amount to 51% of GDP, compared with 38% in the USA and 31% in Japan. 
Government tax and social security receipts in Europe amount to 45% of GDP, compared 
with 34% in the USA and Japan. The large debts that many EU governments have built up 
over recent decades are a cause for concern. Only six countries presently comply with the 
EMU-criterion of 60%-debt. In Belgium, Greece, and Italy, government debts are over 
100% of GDP. On average, net government borrowing in EU-12 amounts to 6%. In 1993 
the largest budget deficits were in Sweden and Greece (both had deficits of 13% of GDP). 
Luxembourg is the only EU country with a positive government balance. 
7. RECENT POLICY DEVELOPMENTS AFFECTING SMEs 
Recent developments 
The purpose of this chapter is to review recent policy developments that concern SMEs in 
the European Union. In particular, it highlights new directions of support from national 
governments. 
42 
Policies designed to strengthen SMEs include assistance with innovation, product 
development and risk taking investments, assistance with exporting, and better access to 
finance. To reduce SMEs' dependence on bank finance many countries have introduced 
schemes to encourage formal and informal investments in SMEs. 
Administrative burdens are widely recognised as falling relatively heavily on SMEs. 
Government SME policies in Austria, Belgium, France, Italy, and the Netherlands pay 
special attention to this issue. Further information on this subject is provided in chapter 14. 
Efforts have been made in connection with improving the human capital in firms (for 
example, in Denmark, Finland, Norway, Portugal, and the United Kingdom). These are 
mainly in the form of management and workforce training programmes. 
The establishment of information and service infrastructures that complement the internal 
competencies of SMEs are a particularly significant development in the support available to 
SMEs. These are usual regional networks of information providers designed to be 
accessible and to provide transparent policy support to SMEs. They are a recognition that 
easy access to information is a key requirement of many SMEs. 
Environmental policies 
In the majority of countries there have been significant advances in environmental standards 
and policy, however, there are still major differences between the most environmental 
advanced countries, particularly the Scandinavian countries, Austria, and Germany, and the 
less advanced countries. Taxes and subsidies are the most commonly used environmental 
policy instruments. 
8. LABOUR MARKET 
The labour market: an overview 
High and increasing unemployment in almost all European countries indicates a high supply 
of labour in quantitative terms. This could lead to the conclusion that SMEs' labour needs 
can be easily met, however, the labour market is experiencing increasing segmentation 
which disrupts this pattern of general over-supply. 
43 
Skill shortages and recruitment problems 
A high supply of labour in quantitative terms does not mean that enterprises have access to 
a satisfactory supply of labour in qualitative terms. This chapter shows that in several 
sectors, and in several professions, SMEs in most of the European countries have 
experienced both quantitative and qualitative skill shortages. 
At the same time SMEs do not generally report severe problems arising from these skill 
shortages. For example, they have not lead to reduced production in the short run. On the 
other hand, these problems may hamper SMEs future competitiveness, employment growth 
and production in the long run. 
The causes of these skill shortages may be external, for example the education system may 
not provide a sufficient pool of highly skilled, or appropriately skilled, labour. But skill 
shortages may also arise out of internal shortcomings, for instance, SMEs often pay 
insufficient attention to the management of their human resources, through, for example, the 
inadequate use of vocational training courses. 
Whether high replacement rates are, or are not, a problem for SMEs to cover their labour 
requirements is an important current debate. Although these rates differ widely amongst 
European countries, there is no evidence of a correlation between a high replacement rate 
(unemployment benefit as a percentage of previous earnings) and the existence of 
recruitment problems in SMEs. 
Labour market policies 
Very large differences exist in the amount spent nationally on active labour market policies. 
Expenditures on active labour market policies as a percentage of GDP range from about 1% 
in Luxembourg to almost 7% in Finland. 
Most of the initiatives in active labour market policies are not especially designed for SMEs, 
but some are of special interest to SMEs. 
In all the countries, active labour market policies include training activities, but expenditures 
on this kind of policy are especially important in Germany and Sweden. Active policies also 
include wage subsidies for the employment of target groups of the unemployed, for example 
young people or the long-term unemployed. In Belgium, France, and Germany, these 
schemes are especially used by SMEs. All the countries have also implemented schemes 
which provide grants to unemployed people who start an enterprise. 
Finally, the discussion turns to two interesting Danish and French initiatives which aim to 
strengthen professional competencies in SMEs. 
44 
9. CAPITAL AND FINANCE 
Information gaps in the SMEs market 
Banks complain that they do not get sufficient information on SMEs. General economic 
information is often sporadic, or inadequately detailed, but is too costly for financial 
institutions to collect and analyse information on this scale by themselves. SMEs are 
themselves rather reluctant to give detailed information to financial institutions, for 
confidentiality reasons, and because they are simply not able to provide high-quality 
information. Therefore banks are setting up their own databases and, in addition, are 
gathering information from specialist information services such as enterprise databases with 
information from annual reports of enterprises. Increasingly credit rating mechanisms are 
being established in the EU, but these are not particularly useful for SMEs since rating is 
considered as a good measure for bond issuing companies which are rare amongst SMEs. It 
is very important that there is a long-term relationship between the individual SMEs and 
their bank, so that it becomes easier for the bank to judge the financial strength and capital 
requirements of the SME. 
The appropriateness of the credit solutions 
The majority of external financing for SMEs is provided by banks. The banking system for 
the financing of SMEs has always been characterised by a short-term approach, with 
secured lending, and risk averse investments. Small enterprises usually also have to pay 
higher interest rates than their larger counterparts. Therefore almost all governments have 
implemented a broad spectrum of programmes offering SMEs support with external 
financing, for example, by a loan guarantee scheme, or by stimulating the establishment of 
mutual guarantee systems. 
Equity financing 
Small enterprises are traditionally very independent and are therefore very reluctant to share 
equity. The governments of many countries are trying to improve the availability of equity 
capital to SMEs, which can be done through the availability of informal as well as formal 
venture capital. Informal venture capital has been stimulated by, for example, avoiding 
double taxation. With formal venture capital, one of the major problems is that venture 
capital companies are primarily investing in larger enterprises, and avoid start-ups. Reasons 
for this are the high risk and time consuming nature of such investments, combined with the 
low liquidity of the new companies. Governments have tried to solve these problems; in 
Greece and Portugal, for example, governmental agencies make cofmancing instruments 
available to seed and venture capitalists. 
To reduce some of the problems with external equity for SMEs some countries have 
established second-tier stock markets. However, these experiences have generally been 
unsuccessful, resulting in low levels of equity, and a limited interest from investors. 
45 
Management capabilities 
SMEs are not provided with enough information on the available financial instruments, but 
sometimes also have underdeveloped managerial capabilities with which to handle financial 
matters themselves. However, this situation has improved through the development of 
training facilities. 
10. INFRASTRUCTURES 
SMEs and physical infrastructures 
The establishment of a real trans-European network of infrastructures represents an 
important objective in the light of the achievement of the Internal Market. It should have a 
positive impact on Europe's SMEs not only because of the sub-contracting opportunities it 
implies, but also because of its possible impact on their competitiveness. 
Regarding the initial endowment of infrastructures in roads, railways, and telephony, it 
should be recalled that European countries have different problems according to their level 
of economic development. Whilst the less advanced countries have a clear infrastructural 
deficit, both in quantitative and qualitative terms, the advanced countries face problems of 
saturation especially in their road networks. This said, convergence is increasing in these 
three fields. 
Attention should be paid to the fact that infrastructures are a necessary but not sufficient 
condition for economic development, and more particularly, for the development of SMEs. 
The possible negative effects of new infrastructures should also be assessed. 
SMEs and communication and information technologies 
The information revolution and 'information highways' already exist and will develop 
further in the future changing the way of life, and the working environment, across Europe. 
SMEs can already gain great advantages through the opportunities offered by the new 
communications technologies, even if LSEs appear to be making greater use of them at the 
present time. It should be noted that the costs of introducing and first using these services, 
and weaknesses in the internal capabilities of small enterprises constitute barriers to their 
use by SMEs. 
Nevertheless, case studies in different European countries reveal the great potential for 
SMEs of the new and existing communications technologies. Southern countries could 
benefit from the experiences that the northern countries have gained through the 
introduction and application of new information products and services. 
46 
Together, distance learning, tele-working, electronic tendering, and telematic networks 
offer numerous opportunities to SMEs. These include access to various on-line information 
services, the exchange of information with main contractors, and the management of bank 
accounts. 
11. TECHNOLOGY AND INNOVATION 
Contribution of SMEs to the innovative output 
This chapter shows that SMEs play a major role in innovation. There is strong evidence that 
this is true in both high-technology and traditional industries. In traditional industries, 
innovative SMEs rely mainly on inputs such as technical change embodied in equipment, 
and the adoption of technologies developed in other sectors. Therefore, it is shown that 
SMEs can be innovators even though they may not undertake formal R&D activities. This 
changes the established image of the innovative contribution of countries such as Italy or 
Spain, which have large numbers of SMEs in traditional industries, but which have low 
national R&D expenditures as a proportion of GDP. 
SMEs, innovation and the business environment 
As regards business environment, case studies in several European countries support 
conclusions about the positive impact on innovation of geographical concentration of SMEs 
that belong to the same sector of industry. These, so called industrial districts, play an 
especially important role in the traditional industries of Italy, Spain, and Austria, and in 
other countries, such as the United Kingdom, science parks allow high-technology SMEs to 
strengthen their relationships with the scientific infrastructures. Whilst traditional industrial 
districts may be long-established and the result of 'natural" economic processes, the 
phenomenon of science park is more recent and dependent on a deliberate policy 
intervention. 
National technology policies 
Most European countries have implemented policies, both at national and regional levels, 
which aim to stimulate innovation and the technological capabilities of SMEs. The 
instruments used include tax incentives, subsidies for R&D and innovation, and support for 
technology transfers. France and Germany are two countries with very developed 
technology policies. 
SMEs and European R&TD programmes 
European R&TD programmes play an especially important role in the less-advanced 
countries, and are generally becoming more accessible to SMEs. However, it should be 
stressed that recent European R&TD programmes are still more relevant to high-technology 
SMEs and LSEs, rather than to SMEs in traditional industries. 
47 
12. EDUCATION AND ENTREPRENEURSHIP 
Education in European countries 
Compared with the northern countries, the southern countries of Europe still have a lower 
share of their populations with a high level of education, however, this difference will 
probably narrow in the future as almost all the countries now offer the same education 
opportunities for young people. 
As regards the student participation rates, the differences between countries are now largely 
restricted to the percentage of students in tertiary education (from 4% in Portugal to 10% in 
Finland). It is also at the tertiary level that gender differences exist. In general women are 
more involved in non-university based tertiary education, and there are more men in 
university based education. Furthermore men are much more involved than women in 
science and engineering courses. 
Level of education, behaviour and performance of entrepreneurs 
In all the countries for which data is available, entrepreneurs and starters show a higher 
level of education than the average of the labour force, but most have had no specific 
education in entrepreneurship. 
In particular, innovative and high-technology starters are generally better educated than the 
average business starter. 
This chapter also shows that for some sectors the survival rate of enterprises is better when 
the level of the entrepreneur's education .is higher. This could be due to the fact that these 
starters tend to be better prepared. 
Furthermore, positive links exist between the level of the entrepreneur's education and the 
growth orientation of the enterprise, its tendency to network, and its likelihood to export. 
The approach of entrepreneurship in the educational system 
Education has the potential to cultivate an entrepreneurial spirit, and there are good reasons 
why it should. First, education recognises the socio-economic importance of SMEs. 
Second, it acknowledges that it can stimulate entrepreneurship by developing a number of 
entrepreneurial skills. Third, students and graduates show an increasing interest in 
entrepreneurship. Finally, co-operation with SMEs could improve the attention to 
entrepreneurship within the educational system. 
48 
There are however a number of barriers which must be overcome. First, education is too 
theoretical is not sufficiently adapted to business or SMEs. Second, education is not 
sufficiently multi-disciplinary in approach. Third, too little emphasis is put on the 
development of personal skills which are desired by businesses, and the managers of small 
enterprises in particular. Fourth, education in general devotes much more attention to large 
institutions and a wage-earner culture than SMEs or entrepreneurship. And finally, teaching 
staff are insufficiently familiar with entrepreneurship and SMEs. 
13. LEGAL ENVIRONMENT 
Legal forms 
The legal forms of enterprises generally have the same broad characteristics in all European 
countries. Sole traders exist in most countries (except Luxembourg and Sweden) and are 
the legal form most frequently used by the self-employed, and amongst businesses in the 
retail trades and services. However, statistics on legal forms show important differences 
between European countries. 
In particular, while sole traders are very dominant in Portugal, Spain, Greece, and Germany, 
limited liability companies account for a large share of businesses, including small 
businesses, in Sweden, Luxembourg, Norway, the United Kingdom, France, Finland, 
Belgium, and the Netherlands. Partnerships are very important in the United Kingdom, 
Italy, Finland, Austria, Greece, and to a lesser extent in Sweden, and the Netherlands, but 
they are not prominent in the other countries. For five countries (France, the Netherlands, 
Spain, Austria and Sweden) there is data on legal forms by size class. In all of these 
countries except for Sweden, the majority of micro-enterprises are sole traders. The share 
of sole traders decreases as the enterprise size class increases. Most enterprises with more 
than 10 employees are limited liability companies or public limited companies. 
Legal form by size and sector apart, there are two areas in which important differences exist 
between European countries: the rate of tax on profits, and capital requirements for 
companies. These factors help to explain the different legal forms favoured in the different 
Member States. For example, it is clear that a differential between the income tax rate and 
the rate of corporation tax which clearly favours the latter will encourage the businesses to 
have limited liability status. Other important factors such as the social security system may 
also explain the choice for a limited liability status. 
49 
Norms 
Although the implementation rates of European norms and standards are high in most 
countries, SMEs remain sceptical and misinformed about the harmonisation process and the 
advantages it produces. It should, however, be pointed out that this process is probably 
most favourable to LSEs in the large advanced countries. 
Quality assurance 
An important share of European SMEs remain reluctant to gain quality assurance 
certification. SMEs are more often "pushed" into getting ISO certification than approach 
this in a voluntary manner. Furthermore, barriers such as the costs involved, the time 
required, loss of flexibility, and the many administrative burdens, raise problems for 
certification in SMEs. Although the cost of certification increases with enterprises size, the 
cost per employee is greater amongst SMEs than for large enterprises. 
PART m 
14. ADMINISTRATIVE BURDENS 
Administrative burdens are defined as 'compulsory administrative procedures resulting from 
legislation that enterprises are obliged to carry out'. 
In the chapter two main legislative areas are distinguished which create administrative 
burdens on enterprises, these are legislation relating to all enterprises (burdens for 'being an 
enterprise') and employment related legislation (burden for 'having employees'). 
The study finds that administrative burdens that arise for 'being an enterprise' cause 
between 60 and 70% of all administrative burdens. The areas of corporation tax, tax on 
dividends, revenue taxes, the annual accounts, VAT and excise levies cause the greatest 
share of these administrative burdens. 
Administrative procedures that result from having employees cause between 30 and 40% of 
the total administrative burden. In particular the levying of wage tax and payment of social 
premiums cause most of these burdens. 
Although thorough research on administrative burdens is scarce within the Member States 
of the EU, it has been possible to estimate the total cost to private non-primary enterprises 
that arise through compulsory administrative procedures. The total amount of 
administrative burdens on enterprises in Europe is estimated at between 3 and 4% of GDP 
per annum, which is between 180 and 230 billion ECU a year. 
50 
The total costs arising from compulsory administrative procedures-are higher in large scale 
enterprises than in small and medium sized enterprises. However, the costs per employee 
are higher in SMEs. 
At the European level as well as in individual Member States initiatives are being taken to 
reduce the administrative burdens on enterprises. 
At European level, the most important strategies, policies, and measures to reduce 
administrative burdens are actions regarding the improvement of information and advice, 
the replacement and simplification of existing laws, and the attention to possible 
administrative burdens connected to new legislation. 
At national level, different strategies, policies, and measures are being used to reduce 
administrative burdens in different countries. For example, in Belgium and Greece the focus 
is on the simplification of forms and reporting requirements. In Finland and Norway the 
focus is on administrative procedures and the institutions which process this information. In 
Portugal, Sweden, and the United Kingdom, existing laws are being replaced by new laws 
which reduce the compulsory administrative procedures required of enterprises. And, in the 
Netherlands, and the United Kingdom, attention is paid to the possible administrative 
burdens caused by new legislation. 
15. PRODUCER SERVICES 
Producer services are defined as service activities whose outputs are, in the main, purchased 
by enterprises. These services are intermediate or auxiliary to the production processes in 
other industries. They include business and professional services, financial services, 
insurance services, and real estate services. 
SMEs are involved in a highly competitive environment; the use of producer services is a 
crucial factor in their competitiveness by: promoting access to technological information, 
the development of product and process innovations, the growth of exports, and for 
improving market access. However., the demand for external services by SMEs is 
concentrated in the most mainstream services such as accounting. Amongst SMEs the 
demand for other producer services such as marketing, and education and training, still 
seems to be relatively low. An important reason for this is that managers and entrepreneurs 
in SMEs are often unable to identify problem areas which could benefit from the use of 
external services, and are unaware of the extent of the services available. Another reason 
may be the fact that many services have been developed to meet the requirements of large 
firms, and are not well designed for use by smaller enterprises. 
51 
Small firms are characterised by a high degree of internal service provision, with services 
often being provided by the entrepreneur himself, or informally through his personal 
contacts. The demand of external producer services is higher amongst medium sized 
enterprises, which are more capable of interacting with external providers and can more 
easily afford these services. Large firms can afford to tailor internal services to their specific 
needs, but they also develop synergies between providing routine capabilities in-house and 
seeking specialist external services. The degree of combined internal and external provision 
is therefore highest amongst large enterprises. 
Producer services account for about 11% of Europe's total private non-primary 
employment. Within producer services business services usually have the highest share of 
employment. The supply of these services is dominated by SMEs in every country. 
However, banking and insurance are dominated by large firms. 
Between 1988 and 1994 producer services have shown the highest average annual growth 
rate of any sector in terms of employment, a slightly below average growth rate in terms of 
value added, and the lowest performance in terms of productivity. Regarding employment, 
micro firms in producer services showed the highest average growth rate, followed by small 
enterprises. 
In various countries there is an extraordinary degree of concentration of producer services 
within the most developed regions, and the central areas with the main cities. This is partly 
due to the availability of supporting infrastructures, opportunities for face to face contacts, 
the availability of qualified personnel, and to the prestige of being located in the central 
areas. However, the areas that are gaining the greatest increase in producer services are 
often those just outside the major agglomerations, where congestion and rents are lower, 
but which remain within easy reach of the client base. 
There does not seem to be an explicit public policy toward the development of these service 
activities in any country, but several programmes have stimulated both the supply and 
demand of these services. Public authorities are also designing new policy schemes which, 
through the development of technology and service provision, aim to improve the quality of 
the local environment in which SMEs operate. 
16. THE CRAFT TRADES 
Characteristics 
Craft enterprises are characterised by a high labour intensity in production, and being small 
scale but with a relatively high proportion of highly skilled workers. They are mainly 
independent in status, with combined ownership and management, and there are usually 
close links between the enterprise and the family. 
52 
Importance 
At the European and national levels the importance of the craft sector is becoming 
increasingly recognised as a factor in economic stability, as the foundation of vocational 
skills, and as a source of new entrepreneurship. However, the amount of attention paid to 
the craft sector differs between the Member States. This is one of the reasons for the 
diversity in available statistical data. Even in countries in which great attention is paid to 
crafts, and in which crafts are legally defined, statistical data on crafts may be scarce as the 
definition is often profession-oriented, while genuine economic statistics are sector-oriented. 
Towards a common concept 
To make European-wide statistical monitoring possible, steps are being taken to develop 
comparable statistics for the Member States. In the Second Annual Report of the European 
Observatory for SMEs a first attempt was made to develop a common delineation of Craft 
Dominated Sectors which would allow sensible cross country comparisons. Indeed, this 
non-comparability of national craft statistics became a prominent issue during the 
preparation for the Berlin Crafts Conference. The European Commission organised a pre-
conference on craft statistics in June 1994 in Gôttingen and a preparatory conference on 
craft definitions and statistics in September 1994 in Rome. Finally, at the Berlin-conference 
in September 1994 it was concluded that the development of comparable statistics on the 
craft trades should be pursued in the near future. 
Craft trades and the Berlin Conference 
Conclusions from the twelve pre-conferences, which preceded the Berlin Conference, 
resulted in the 'Outline of the Twelve Pre-Conferences', on which the European 
Commission drew the working paper: 'Craft Industries and Small Businesses'. Subjects of 
major interest to the craft trades and small businesses were discussed, problems were listed, 
and recommendations made. 
Towards an adequate policy 
Since the first Conference on Crafts in Avignon the European Commission has proposed the 
Integrated Programme in favour of SMEs and the Craft Sector with new approaches 
targeted at mutual consultations and the exchange of experiences between the Member 
States, and collective efforts between them to improve the business environment for 
enterprises. However, the means at the disposal of crafts and small enterprises, in terms of 
information, financing, or training remain insufficient to allow them to fully benefit from 
existing actions and programmes. The Second Annual Report of the European Observatory 
for SMEs set out the problems and made recommendations. The Berlin Conference did the 
same later on. 
53 
The main points of the Second Annual Report and the Berlin Conference were similar, 
recognising the general problems that confront small and craft enterprises. Both called for: 
a common European identity of crafts and small enterprises, and the need to enhance 
the knowledge of the role and the economic importance of the craft sector through 
detailed studies and sectoral analysis; 
a sensible training policy, attuned to business practice with post-apprenticeship training 
and the international exchange of experiences and trainees; 
harmonising regulations, taxes, and administrative and social obligations; 
easier accessibility to finance, with similar conditions in all Member States; 
the stimulation of trade associations for greater co-operation at the national and 
international levels. 
PART IV 
17. SME INTERNAL MARKET MONITOR 
In the 1988-94 period employment growth in SMEs, although favourable in comparison 
with LSEs, was disappointing given that value added in SMEs grew substantially more 
rapidly than employment. Indeed, value added growth in SMEs has been productivity led, 
giving rise to the observation that, although there certainly has not been a jobless growth in 
SMEs, growth in SMEs has been job-extensive. 
The analysis of the SME Internal Market Monitor (SIMM) pointed to the fact that this job-
extensive growth can - partially - be explained by two factors, being the unsuitability of 
mainstream labour market policies, forcing entrepreneurs to 'choose' a labour-extensive 
growth-path given current recruitment prpblems and the fact that SMEs more and more are 
playing on global and exposed markets rather than on domestic and sheltered markets. 
SIMM points to the fact that, in general, the business environment in which SMEs have to 
operate is converging in the EU-12. Concerning government policies, fiscal and monetary 
policies are converging; labour market policies in the Union are diverging. Regarding 
general market conditions in the EU-12, the strength and prosperity of the Member States 
have converged over the 1988-94 period, as have the conditions in the capital and labour 
markets, and domestic efforts related to technology and innovation. 
The dynamics of SMEs have also been converging, as has profitability, but the performance 
of SMEs (in terms of value added, employment, and exports), has diverged over the 1988-
94 period. This is mainly due to the deviant behaviour of SMEs in Italy and the United 
Kingdom. 
54 
In general the business environment, business dynamics, and SME-performance in the 
EFTA-4 countries has become increasingly similar to the EU-12 over the 1988-94 period. 
The distance between the EU-12 and the EFTA-4 countries nevertheless remains 
substantial. 
In SIMM some analyses have been carried out to explain SME-performance in terms of the 
business environment, thereby extending the practical utility of SIMM to policy-makers. 
The analysis suggests that government policies, especially fiscal and monetary policies, have 
a definite role in stimulating SME-performance, current labour market policies are not well 
suited to the needs of SMEs, and government R&D policies seem to be almost entirely 
geared to the large scale enterprise sector. These may even crowd out small scale modes of 
production. 
The industrial relations indicators did not influence SME-performance. 
Finally, SIMM provides some preliminary conclusions on the development of the quality of 
the business environment, from the viewpoint of SMEs, and on the convergence of the EU-
12. An assessment of the business environment concluded that this has improved in the 
1988-94 period, at least for SME-performance, and there is also evidence that the 
convergence of the business environment in the Member States of the European Union has 
had a positive effect on SME-performance. 
18. POLICY ISSUES 
In the previous reports much attention was devoted to policy recommendations aimed at 
stimulating the growth of SMEs and craft trades, and to the creation of jobs. In this report 
the policy issues refer to the basic relationships between SME performance, the functioning 
of markets, and the business environment of the more unified Europe. 
These policy issues refer principally to the European level of policy, however, they may be 
useful for national and regional policy approaches as well. 
Competition in markets seems to differ widely by sector and by country, as can be seen 
from entry, exit, and survival rates. These differences in competition, or the functioning of 
markets, both affect, and are affected by, the economic position of SMEs. 
The process of cross border trade deregulation has been followed by a strong tendency to 
deregulate markets more thoroughly, both at the national level, and at the European level. 
55 
These deregulation policies, which aiming to remove rigidities in business operations, are 
primarily focused on the better functioning of markets. It is expected that by creating more 
competition on local, national, and international markets, the enterprise sector will become 
more competitive in world markets. Consequently this will lead to more business 
opportunities, and the creation of jobs. 
A well balanced strategy for the design of policies in the area of deregulation and 
competition policy should be sought. 
Conflicting features of these policies which lead to reduced entry barriers on one hand, but 
also to business strategies geared to the formation of larger entities on the other, should be 
well considered within the overall aim of having markets function optimally. Policy 
strategies should be stimulated to lower the artificial entry barriers that have been created by 
governments in an attempt to protect existing firms rather than to optimise the functioning 
of markets. 
Referring to creating a more favourable business environment in which SMEs can start, 
survive, and grow (and thus create jobs), more policy attention should be devoted to the 
legal framework in which SMEs have to operate, the availability and use of modern 
infrastructures, the administrative burdens on them, the availability and use of producer 
services, and the supply of management and entrepreneurial training. 
A special policy trajectory should be developed to focus on the issue of administrative 
procedures and their impact on business. The development of appropriate strategies for 
reducing the impact of administrative procedures on enterprises, and in particular the micro, 
small and medium-sized businesses, is advocated. More concerted action should be taken 
through the exchange of experiences gained in individual Member States. 
Instruments to improve this situation include the development of an objective and 
comparable Administrative Burden Indicator. Such an indicator could be used as a target to 
be applied by policy makers in the design of new policies. 
The use of new technologies such as EDI, and considering the use of relatively new 
organisational concepts for the collection of social premiums, for example, should be 
stimulated to help combat the burden of administrative procedures. 


ISSN 0254-1475 
COM(95) 526 final 
DOCUMENTS 
EN 08 
Catalogue number : CB-CO-95-570-EN-C 
ISBN 92-77-95407-8 
Office for Official Publications of the European Communities 
L-2985 Luxembourg