OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on the Second Annual Report of the European Observatory for SMEs
Date: 1995-01-25
Institutions: European Economic and Social Committee
Subjects: economic policy, size of business, small and medium industries, small and medium-sized enterprises













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51995AC0052

OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on the Second Annual Report of the European Observatory for SMEs  


Official Journal C 102 , 24/04/1995 P. 0025 





Opinion on the Second Annual Report of the European Observatory for SMEs(95/C  102/09)On 16  June 1994, the Commission decided to consult the Economic and Social  Committee, under Article  198 of the Treaty establishing the European Community, on the Second  Annual Report of the European Observatory for SMEs. The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the  Committee's work on the subject, adopted its Opinion on 4  January 1995. The Rapporteur was Mr   Andrade. At its 322nd Plenary Session (meeting of 25  January 1995), the Economic and Social Committee  adopted the following Opinion by a majority vote with four abstentions. 1. Introduction 1.1. The European Observatory for SMEs was set up in  December 1992. It  forms one of a number of initiatives finally taken by the Community in the SME sector. The Commission Communication of 18  December 1990 (COM(90) 528 final), entitled Enterprise Policy:  A New Dimension for Small- and Medium-Sized Enterprises, included an undertaking to launch a  feasibility study on a European monitoring centre for SMEs. The intended purpose of the new body was quite clear: to monitor annual developments in the small  business sector in order to meet the need for 'analysis and strategic reflection'. One of the tasks of the centre would be to help 'evolve the broad lines of European enterprise  policy on the basis of the coordinated development of a statistical information system'. 1.2. A European Network for SME Research (ENSR) was set up to implement the project. The network  comprises twelve bodies, one from each Member State. 1.3. The Observatory has so far limited itself to the publication of an annual report coordinated  by the Dutch ENSR member, the EIM (Small Business Research and Consultancy). 2. The experience gained over two years of operation prompts a number of questions concerning the  Observatory's approach. 2.1. Point 1.1 underlines the weight which the Council and Commission accord the Observatory. Given  the lack of systematic data on company activity, the Council and Commission will draw heavily on  the information provided in the annual report when they map out future measures in support of  SMEs. The Committee hopes that the organizations which form the ENSR network realize the importance of  the report and hence make a clear commitment to the project. The financial resources allocated to the network should be increased so that each of the twelve  members can assign one or more of their specialists to the work on a full-time basis. 2.2. It is apparent from the second report that certain shortcomings concerning both the  organization of the work and the contributions from network members need to be remedied. One might ask whether data and research could be better coordinated in order to draw full benefit  from the knowledge, critical mass and experience built up over the years by the twelve  organizations. If a chapter of general recommendations is included, it should always be the joint responsibility  of all the members. 2.3. The Committee considers that the choice of subjects to be examined each year should take  account of the opinion of SME representatives, who should be consulted on the matter in good time. 2.4. On the question of working methods, the Committee feels that the more detailed specific  studies carried out each year should not have to await the publication of the report before they  can be issued. They should be issued as they are completed. 3. The Committee also questions three basic features of the report. 3.1. The studies concern the private non-primary sector. In the Committee's view, the Commission should give DG  XXIII the weight it deserves, in order to  provide a full response to the many problems faced by SMEs. 3.2. The criterion used to define a SME has the great advantage of being extremely practical (). However, it is difficult to understand why the cut-off point is 500 employees, and not 200 or 250. All the information in the rest of the report suggests that the latter figure would be more proper:  only 0,2 % of businesses have more than 250 workers. Furthermore, these firms have the same  organizational problems, the same influence on job creation, the same type of credit facilities,  and so on. The Commission itself has on several occasions used the threshold of 250 workers as a criterion for  defining a SME (and did so as recently as 1  July 1994 in the Notice to the Member States laying  down guidelines for operational programmes or global grants which they are invited to propose in  the framework of a Community initiative concerning the adaptation of small- and medium-sized  enterprises to the internal market - 94/C  180/03). The Committee draws the Commission's attention to the urgent need to define the term SME, first and  foremost for statistical purposes; it therefore supports the Commission's presentation of a  communication on the subject. 3.3. The concept of 'craft dominated sector' has been devised with a view to assembling data on the  craft sector on an empirical basis. The criterion applied may give rise to criticism and is far  from universally accepted, since the sector is not precisely defined in many Member States. The conclusions drawn with regard to the sector should take account of this fact (see the table in  point 5.9.2 below). Another solution might have been to divide the Member States into two groups, one for countries  where the craft sector is not deemed significant and one for countries where it makes a significant  contribution to the economy and to employment. 4. Statistics on SMEs are directly to blame for some of the problems met by the report's authors. Often data simply do not exist, while in other cases they are inadequate, and in others they are  not comparable. It is obviously difficult to work in such conditions, and the results of such work could even be  scientifically unsound. The Commission will have to make a determined effort to rectify this major shortcoming at EU  level. 5. The various chapters of the report are examined below. 5.1. SMEs in the European Union (Chapter 2)5.1.1. This chapter is important for the wealth of  information which it contains. The way in which the indicators are presented and the care taken to  show trends over the last few years offer valuable insights into the situation of SMEs. This interesting chapter was coordinated by the EIM. The main source used was the Eurostat database  'Enterprises in Europe'. 5.1.2. SME employment5.1.2.1. The EU workforce stood at 133 million in 1990, 95 million of whom worked in  the private non-primary sector; 68 million of these worked in SMEs (these figures do not include  former East Germany). Micro and small enterprises employed 53,7 million people, 17 million of whom (32 %) were the  enterprises' owners. 5.1.2.2. The average number of employees per SME was 4,3. In large firms, the average was 2 119. The overall average was six employees per firm. 5.1.2.3. In percentage terms, SMEs accounted for 71,9 % of total employment in the private  non-primary sector in 1990. 31,8 % of this was in micro enterprises and 24,9 % in small  enterprises. 5.1.2.4. Between 1988 and 1993, micro and small enterprises registered a net increase of 2,6  million jobs. Between 1988 and 1990, micro enterprises' share of total employment rose by 1,6 % and small  enterprises' share by 0,1 %. In contrast, over the same period the shares of medium-sized  enterprises and large enterprises fell by 0,6 % and 1 % respectively. 5.1.2.5. The trend was not uniform throughout the Member States. Micro enterprises' share of total employment fell in Ireland (6,7 %), Luxembourg (4,4 %) and the UK  (1,1 %). In contrast to the general trend, there were increases in the employment share of large enterprises  in Ireland (4,8 %), Spain (1,7 %) and the UK (0,4 %), and in the share of medium-sized enterprises  in Ireland (4,2 %), Luxembourg (3,2 %) and France (0,6 %). 5.1.2.6. The sectors with the highest net job creation between 1988 and 1993 were retail  distribution and personal services. Manufacturing industry, in contrast, registered a sharp fall. 5.1.2.7. Two criticisms of this part of the chapter: firstly, one should not use the same term for  completely different areas. Table 2.4 gives a figure of 4 210 000  enterprises under the heading of  'personal services', while table 2.5 arrives at a figure of 571 000 under the same heading. Secondly, since this sector was a net job creator, it would have been well worth attempting to  ascertain which 'personal services' made the greatest contribution. 5.1.2.8. In 1988, micro and small enterprises employed 43 % of the total workforce in the EFTA  nations, compared to 55 % in the EU. In the United States, large enterprises also have a larger share of total employment than in the  EU. 5.1.3. Scale of SMEs5.1.3.1. In 1990 there were 15,8 million enterprises in the EU (excluding former East  Germany), of which 99,9 % were SMEs. Micro enterprises, at 14,8 million, formed 93,3 % of the total. In the same year there were just 13 000 firms with more than 500 employees, and 14 000 with between  250 and 499. Each of these groups accounted for 0,1 % of the total. 5.1.3.2. Large enterprises dominate the extractive industries, transport, communications and  producer services. Micro enterprises are predominant in the retail sector and personal services. 5.1.3.3. Between 1988 and 1993, the number of SMEs rose by 9 %. Over the same period, the  population rose by just 2,5 %. Hence there seems to be a growing attraction for entrepreneurship. The 9 % rise was concentrated in micro and small enterprises, while the figure for large firms  fell. 5.1.3.4. In the Mediterranean nations, there was an average of 65 enterprises per 1 000  inhabitants, while elsewhere the average was below 40. In the EFTA nations, in contrast, the  average was below 25. 5.1.4. SME turnover5.1.4.1. In 1990, SMEs accounted for 69,4 % of total turnover. Although micro enterprises account for 93,3 % of businesses, their turnover represented just 23,4 %  of the total, compared with 30,6 % for large enterprises, 25,8 % for small enterprises, and 20,1 %  for medium-sized enterprises. 5.1.4.2. Between 1988 and 1993, the relative position of SMEs improved (and particularly that of  micro enterprises). The exceptions were Spain and Ireland, where large enterprises assumed a more important role. 5.2. Macroeconomic environment (Chapter 3)5.2.1. This chapter, which was coordinated by the EIM, could  undoubtedly be deemed one of the weakest. This is inevitable as it attempts an ambitious analysis  in just a few pages. 5.2.1.1. The first question to consider is whether a separate chapter on the macroeconomy is  justified. It would appear more logical to make macroeconomic analyses throughout the report as necessary, in  order to explain why SMEs face certain types of problem. 5.2.1.2. We could cite a number of examples of the incomplete coverage of this topic. For instance,  no account is taken of the economic effects of inflation (the word 'inflation' appears only once,  in the penultimate line). And, even more astounding, there is no reference to interest rates. 5.2.2. Since the chapter mentions the importance of exchange rate fluctuations, the Committee asks  the Commission, Council and EIB to find a way of providing an advance guarantee (at the time of the  transaction) of the ECU exchange rate for the date of payment of the good or service.  Alternatively, measures should be devised so that SMEs can have a simpler and less expensive method  of engaging in forward currency transactions through existing financial institutions. This would help to familiarize businesses with the idea of a single currency more rapidly and  remove some of the uncertainties from international transactions, which everyone agrees should be  encouraged and developed. 5.3. Impact of the internal market on SMEs(Chapter  4)5.3.1. This chapter was coordinated by the  Centre for Planning and Economic Research (KEPE) and the Greek SMEs and Crafts Organization  (Eommex). 5.3.2. Three fundamental points emerge from it: A. There is still a long way to go towards liberalization of trade and free movement of goods,  services and capital. B. Small businessmen are dissatisfied and wary of the internal market's impact on them. C. Experts from countries with a high proportion of SMEs feel that the internal market has had  generally adverse effects on SMEs. 5.3.3. Intra-Community trade has risen steadily over the years and its share of Member States'  overall trade has increased. 5.3.3.1. However, there are a number of reasons why progress has not been more rapid. These include  delays in the transposition of Community legislation into national law, the unsatisfactory progress  on the convergence criteria, the existence of red tape, the lack of information, differing  regulations in the Member States, and the public procurement difficulties faced by non-national  firms. 5.3.3.2. At the same time, the opening of national borders has offered firms access to new markets  and economies of scale, obliging the less well equipped to restructure and encouraging  technological advances and vocational training. In the longer term, all this can be highly  beneficial for the business world in general and SMEs in particular. 5.3.4. The short-term impact on SMEs is often negative. This is evident from the survey by Eurochambres. It could be argued that the number of businesses  polled is not significant. However, the Committee considers that the gravity of the problem and the serious misgivings of the  main parties concerned are grounds for carrying out an urgent survey in all Member States. 5.3.4.1. The misgivings felt by small businessmen are largely due to increasing competition, rising  costs and their lack of information and technical expertise. These businessmen feel that the internal market has favoured large firms which are better prepared  technically, have easier access to capital, and are better structured to exploit new business  opportunities. 5.3.5. The Committee recently adopted a major Opinion () on the Commission's 1993 report on the  internal market (). This contains a detailed analysis of developments. 5.4. Employment creation and human capital(Chapter 5)5.4.1. This chapter was coordinated by the  University of Warwick's SME centre. The attempt to go a little further than most research in this field is noteworthy. However, the lack of statistics in the various Member States unfortunately made it impossible to  obtain the desired results. 5.4.1.1. This is blatantly clear from the last section, which considers the link between training  and labour productivity but is obliged to base its conclusions on comparative studies of groups of  business in just two countries. It is obvious that any attempt to extrapolate these findings EU-wide is scientifically unsound. 5.4.2. Mention is again made of the important role of micro and small enterprises in job creation  (also considered in the first chapter of the report). However, here it is considered in much greater detail. The chapter highlights research into  self-employment, job creation, training in SMEs, and the differences between education systems. 5.4.2.1. The figures for self-employment indicate wide disparities between Member States, from 30 %  of total employment in Greece and Italy to 10 % in Denmark, France and the Netherlands. The likelihood of such businesses taking on paid staff also varies greatly: from 4 % in Italy to 60  % in Germany, with an EU average of 30 %. 5.4.2.2. The study of the job-generation process is extremely interesting. It concludes that company expansion generates twice as many jobs as the start-up of new  businesses. Similarly, in many countries, more jobs are lost as a result of lay-offs than of company closures. 5.4.2.3. SMEs are wary of investing resources in staff training, partly because of their high staff  turnover. 5.4.2.3.1. While the Committee realizes that it is generally difficult for a business with just  three or four employees to do without some of them during working hours, it points out how  important it is that such employees should also receive training. 5.4.2.3.2. It should be stressed that the author of this chapter does not suggest public  intervention in this field, but simply cites specific examples of such intervention. 5.4.2.4. The differences in education systems should also be highlighted, as they may affect young  people's future prospects. 5.5. Capital and finance (Chapter 6)5.5.1. This interesting study was coordinated by the Basque Studies  and Research Institute (IKEI). 5.5.2. As mentioned above, the Committee considers that this chapter should have been linked to  that on the macroeconomic environment. It must be remembered that SMEs find it particularly hard to gain access to credit. 5.5.3. In a study of SMEs, it is vital to identify the various interest rates applied to them and,  inter alia, the mutual guarantee systems available to them. 5.5.3.1. Table 6.1 shows interbank lending rates and public debt yields which are far removed from  the rates applied to SMEs. In Portugal, for instance, the prime rate (only granted to large firms with a very good credit  rating) varied between 19 % and 16,3 % in 1992 and between 16 % and 13,5 % in 1993. 5.5.3.1.1. It is incorrect to state that a small firm pays on average only two percentage points  more than a large one. The difference varies enormously from one Member State to another, depending on interest-rate  levels in the country concerned. Since in the Member States with the highest interest rates the  figure is above 6 % (e.g. Greece and Portugal), a European average of 2 % is somewhat unlikely. 5.5.3.1.2. Another important factor which has been overlooked is whether a specific tax is charged  on interest rates. In countries where such a tax is charged, SMEs' capital costs are increased  still further. 5.5.4. Financial structure has a direct effect on both net results and competitiveness. Since most SMEs are reliant on short-term loans at high rates of interest, how can they compete  head-on on an open market with large firms which can secure long-term loans at much lower  rates?5.5.5. As soon as possible, the Observatory must assess the effectiveness of the  Commission's pilot schemes for tackling these financial problems. 5.6. Innovation and diffusion of technology(Chapter 7)5.6.1. This chapter was coordinated by the  French Association for the Promotion of Industrial Development (Aprodi). 5.6.2. It concludes that in 1991 the four largest EU economies took up 88 % of total R &  D  expenditure. This figure might not be accurate. Statistics do not reflect the efforts made by SMEs, which are  constantly seeking to innovate and looking out for new products and manufacturing processes. If  they were not, they would find it impossible to withstand market competition. 5.6.3. The main obstacles to research and innovation are high risk, cost, lack of financing and  skilled staff, and poor knowledge of the market. 5.6.4. In order to encourage research, closer intra-EU links should be promoted not only between  businesses but also between businesses and EU universities and research institutes. 5.7. Regional aspects (Chapter 8)5.7.1. The EIM coordinated this chapter. 5.7.2. Particular attention was paid to the situation in border regions. Specialists in various  types of organization with a direct interest in this issue were interviewed by telephone. 5.7.2.1. They confirmed that cross-border cooperation is still making very slow progress. 5.7.2.2. How can one hope for an effective internal market and sustained, open trade between  businesses in the Twelve if favourable results cannot even be achieved in border areas, despite the  provision of a programme specifically designed to help them?5.7.2.3. If the situation is to  improve, the local and regional authorities and local business leaders must agree on clear  strategies for resolving the problem. 5.8. Policy for SMEs (Chapter 9)5.8.1. This chapter was coordinated by the German SME Research  Institute (IFM). It provides an interesting insight into Member States' differing attitudes to SME  support policy. 5.8.2. All Member States consider that support is justified for both the start-up and development  of SMEs. 5.8.3. Aid mainly goes to start-ups and growth, R  &   D, capital and finance, investment, exports,  business cooperation, education and training, and job creation. 5.8.4. The instruments used include subsidies and grants, soft loans, direct participation, tax  relief, export guarantees, and the provision of various services. 5.8.5. The study gives an interesting list of the main measures taken by the Member States and  regions. It would be helpful if future reports could include an analysis of the practical implementation of  measures to promote free competition (especially those to prevent abuse of a dominant market  position or the formation of cartels in certain sectors). The Committee feels that encouragement should be given to information-swapping on successful  projects, in order to see whether they could be repeated elsewhere in the EU. 5.9. The craft trades (Chapter 10)5.9.1. This theme study was drawn up by the Luxembourg Chambre des  Métiers and the EIM. 5.9.1.1. Its authors state at the start, and again in point 10.4.1, that their aim is to provide  policy-makers with data on the craft sector. They are thus fully aware of the potential  implications of their findings for both the Council and the Commission. 5.9.1.2. Research in any sector must be based on the precisest possible definitions of the areas to  be covered. 5.9.1.3. The Committee understands and accepts the reasons for attempting to find a definition of  the craft sector that can be used to make comparisons between Member States. However, the Committee feels obliged to sound a note of caution about the data and conclusions  formulated in the report on the basis of the term 'craft dominated sector', as these might give a  false impression of the real importance of the sector in each Member State. Similar caution will be needed if these data are to be used as a basis for drawing up policy  strategies. 5.9.1.4. The approach adopted may mean that in most Member States it will be very difficult to  distinguish between an industrial SME and a craft business. The report actually identifies the Pedip () programme in Portugal as one of the three cases of  specific government support for the craft sector. 5.9.2. >TABLE>This table compares the data given in tables 10.7 and 10.8 of the report  concerning share of employment. It gives some idea of how the notion of craft dominated sectors  distorts the situation. 5.9.3. The information supplied by experts is interesting. 5.9.3.1. 46 % of experts think that craft firms are in favour of the internal market and of the  Treaty of Maastricht. Curiously enough, when the same experts were asked about the internal market's likely effects, a  majority (32 %) anticipated an increase in risks (!) while the number who expect it to increase  opportunities (22 %) is only slightly higher than those who think it will have no effect (20 %). The vast majority think that it will increase costs and reduce the number of businesses. 5.9.3.2. 39 % of those polled consider that craft businesses will lose market share if they do not  adopt new technologies, while 36 % think that they will not. The remaining 25 % do not put forward  figures. Contrary to what is said in the report, technology centres were set up in Portugal to support  industrial SMEs, not the craft sector. 5.9.3.3. Harmonization and the cost of environmental protection measures are seen as a further  burden on craft businesses. 5.10. Monitoring SMEs in the internal market: synthesis (Chapter 11)5.10.1. The EIM coordinated this  chapter, which aims not only to give an overview of the state of SMEs in the EU and in the  individual Member States, but also to develop a SME internal market monitor. 5.10.2. Indicators at the Union level, which were examined in earlier chapters of the report, are  here presented in summary form and in some cases (e.g. employment) updated. Hence at one point in this chapter we read that manufacturing industry played an important part in  job creation between 1988 and 1990; yet we already know from page 41, figure 2.3 of the report that  between 1990 and 1993 it played an important role in increasing unemployment. Most new jobs came  from the service sector. 5.10.2.1. It is also regrettable to note once again (this time in a summary), that the actual  position of the craft trades in each country is ignored, and replaced by the inaccurate concept of  'craft dominated sectors'. 5.10.3. In the country profiles it is strange, to say the least, that in the diagrams showing the  percentage share of SMEs in various economic sectors in 1990 (construction, wholesale trade,  personal services, retail distribution and producer services) the percentage of each country (with  the exception of Greece) almost always coincides with the European average. 5.11. General recommendations (Chapter 12)5.11.1. This chapter too was coordinated by the EIM. 5.11.2. The first question to consider is whether the Observatory is justified in presenting  general recommendations. Committee members are divided on this point. 5.11.3. Point 2.2 of the introduction to the present Opinion put forward the view that general  recommendations, if included, should be formulated by all ENSR members, and not simply coordinated  by one of them. 5.11.4. However, the approach selected is perfectly acceptable and comprehensible, since  unemployment is one of the main challenges facing the EU. 5.11.4.1. The suggested ways of involving SMEs in efforts to overcome this major problem are also  interesting. The Committee congratulates the authors of this chapter on its high quality. 5.11.5. However, the Committee considers that a little more could be expected from a chapter of  general recommendations in a report which only appears once a year. 5.11.5.1. The problems facing SMEs vary greatly from country to country and even from region to  region. The EIM itself acknowledges this at the start of the chapter. This implies that different solutions will often be needed, and future proposals must always take  this into account. Done at Brussels, 25  January 1995. The Presidentof the Economic and Social CommitteeCarlos FERRER() Throughout  the Report, the European SME sector is taken to comprise enterprises (except in agriculture,  hunting, forestry and fishing) employing less than 500 persons. Additionally, the following broad  size classes are distinguished within the SME sector:  - micro enterprises: 0-9 employees;  - small enterprises: 10-99 employees, sometimes further subdivided into 10-19, 20-49 and 50-99  employees;  - medium enterprises: 100-499 employees, sometimes further subdivided into 100-249 and 250-499  employees.  () OJ No C 393, 31. 12. 1994.  () COM(94) 55 final.  () Pedip: Specific development programme for Portuguese industry.