Banking on small business

Directorate for Science, Technology and Industry

It takes an intrepid entrepreneur to start a business in Europe. High social charges, taxes and complex bureaucracy are only the initial hurdles he or she will have to negotiate. Such barriers tend to discourage risk-taking and innovation; and that’s before trying to meet the challenges of competing in a high-tech, international environment.

Still, entrepreneurs keep trying, even if perhaps too many fail. When they succeed, most do not create empires like Microsoft, but rather smaller, quite ordinary businesses. Over 95% of OECD enterprises are small and medium-sized businesses (SMEs), and they are the backbone of a vibrant growing economy. So the ministerial conference on “Enhancing the Competitiveness of SMEs in the Global Economy” that took place in Bologna (Italy) last June was a welcome break from Big-Business-as-usual.

“Entrepreneurship is becoming a central theme for Europe,” said Marie-Florence Estimé, the economist in charge of the OECD Working Party on SMEs. “But not only in Europe - almost 50 countries participated in the conference, and they all adopted the Bologna Charter. It’s a major breakthrough.”

The Bologna Charter maps out the direction government policymakers need to follow in order to make setting up SMEs more attractive. It highlights co-operation and partnerships and identifies how policy might improve conditions for entry, such as reforming regulations and institutional barriers that discourage new ventures; developing better equity and venture-capital markets; improving the diffusion and use of technology in the SME sector; facilitating access to global markets through e-commerce; and building on local and regional factors to enhance performance and competitiveness.

Some small facts

What are these SMEs and why is it important to encourage them further? SMEs are small, non-subsidiary independent firms, defined in the European Union as employing fewer than 250 workers, and in the United States as fewer than 500. They account for 60-70% of total employment in most countries. The employment potential of SMEs is one of the reasons why policymakers are showing such interest; indeed, it is predicted that small firms will provide more than 60% of new jobs in the US from 1994 to 2005. SMEs often do not have some of the traditional divides and hierarchies that characterise larger firms. In the United States, women-owned SMEs grew by 89% over the past decade, twice as fast as other businesses.

The Bologna Conference bore out the fact that the United States has the most entrepreneurial culture. A study by the Global Entrepreneurship Monitor in London argued that this was mainly because citizens value the independence associated with starting and managing a business. The population tends to recognise business opportunities; and risk-taking is a value reinforced by the educational system. Most of all, it’s relatively easy to establish a new venture and obtain financing. A request for a loan can be turned around in less than 36 hours in the United States, whereas in some European countries it can take up to nine months.

Although the point was made at the conference that emulating one country’s enterprise methods won’t necessarily work in, for instance, an Asian or African context, it was recognised that for SMEs to expand, market liberalisation and regulatory reforms will probably be needed. To rectify financing deficiencies in some countries, governments are fostering the development of secondary stock markets (EASDAQ in Europe and KOSDAQ in Korea) to allow easy entry and exit for venture investors. They are also building “business angel” networks, which bring together small companies and wealthy investors.

Will the encouragement of small businesses spur the same kind of productivity, employment and growth seen in the United States? Do they play an essential role in the “new economy”? Possibly, and the Bologna Charter is at least a first step on the road to finding out. The real work is for the governments to do, by formulating not more, but better, policies.

In the meantime in many countries, enterprise will remain a pursuit reserved for the very brave, the very rich, or indeed, the very foolhardy. 

©OECD Observer No 223, October 2000

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

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