SMEs and innovative businesses

Last update: 25 11 2009

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Background:

The European Commission presented a proposal for a Small Business Act for Europe   (SBA) in June 2008, aiming to unite all the existing initiatives under a single legislative document while also introducing a series of new measures to speed things up. The text was adopted by the EU's industry ministers at their meeting on 1 December 2008.

The following principles are at the heart of the SBA:

• Creating an environment in which entrepreneurship is rewarded.
• Ensuring that honest entrepreneurs who have faced bankruptcy get a second chance.
• Mainstreaming the 'Think Small First' principle into all fields of legislation.
• Making public administrations more responsive to the needs of SMEs.
• Adapting public policy tools to SMEs' needs, notably by facilitating their participation in public procurement and making better use of state aid.
• Facilitating SMEs' access to finance and developing a legal environment supporting timely payment in commercial transactions.
• Helping SMEs benefit more from the opportunities offered by the single market.
• Promoting skills upgrades and innovation in all its forms.
• Enabling SMEs to turn environmental challenges into opportunities.
• Allowing SMEs to benefit from the growth of markets.

Small firms have been worst hit by the credit crisis, with banks less likely to lend to companies viewed as being in a perilous position. SMEs have typically depended heavily on credit for survival, particularly in the early years, and are least able to survive without access to bank loans.

The dramatically more cautious approach of commercial banks towards companies is a major factor in rising unemployment across Europe. The European Investment Bank has made €350 million available for SMEs at a reduced rate through commercial banks across Europe, but business lobby groups have continued to express concern that the funding is not getting to those who need it most. The drying up of credit markets has been compounded by the scourge of late payments, with companies waiting longer for bills to be settled by clients in the public and private sector.

Governments in a number of member states are flexing their political muscle by leaning on banks which have been slow to lend to businesses and consumers. With financial institutions in most countries having benefited from an injection of government capital since the advent of the global financial crisis, governments now have greater influence over lending practices. In addition, a number of governments have rolled out guarantee schemes in a bid to support risk-averse banks.

CZECH REPUBLIC

Czech Statistical Office data indicate that some 70% employees of Czech non-financial industry work in SMEs (more than 50% in whole national economy). Some 60% of GDP of non-financial industry is created by SMEs. Regarding the implementation of SBA Karel Machotka, director of the business department at the Ministry of Industry and Trade, says that the Czech Republic cut red tape by 8% in 2007 and 2008 and hopes to achieve a 20% reduction by 2010.

Approving far-reaching amendments for micro-enterprises is seen as the biggest success to date, Machotka explained. It facilitates electronic communication with the authorities, and makes getting business licenses easier. Removing the administrative burden from businesses was also reflected in amendments of waste, income tax and social insurance laws, among others.

Micro-enterprises have to follow lower accounting requirements than standard companies. Moreover, they are allowed to deduct 50% of their income as expenses, and the rest serves as a base for calculating tax. Therefore, they do not have to keep receipts when making purchases in order to prove their expenses, as was previously required.

Worsening access to credit is a main problem SMEs have to solve during crisis. Three quarters of firms had to scale down their activities due to the lack of finance and more than half postponed or cancelled planned investments, a survey by the Czech Chamber of Commerce showed. Most of them were SMEs. Cash flow problems have forced 25% of companies to shed staff or to sell some property.

Public institutions play a key role in solving the problem owing 180 billion euro to European business. According to president of International Chamber of Commerce in the Czech Republic Jaromír Drábek, Czech public institutions decide due dates of invoices themselves without any limits set by law. Therefore, four months maturity dates are not exceptional especially in construction sector.
 
While talking about SMEs and tackling the crisis The Czech government is focusing its efforts to improve the business environment, rather than targeting particular types of company or individual industries. The government has already abolished regulations which required tradesmen to pay some taxes in advance.

To get credit flowing to exporting companies, loans are being made available through commercial banks and the Czech Export Bank. The government is also making it easier for SMEs to access EU funds.

The Czech cabinet is expected to cut social insurance paid by employers, as part of its efforts to reduce the cost of labour for employers, while the parliament has lowered the tax base for companies.

HUNGARY

“There is no other solution for Hungary as to be a useful member of the European Union.” – UEAPME vice-president Róbert Kassai recently told EurActiv Hungary in an interview.  The problems of the Hungarian SMEs are not much different then of those based in “old” Europe, but they are in a huge disadvantage regarding competition.

In Hugary only 22%of the SMEs have a bank account. High interest rates and the complicated bank instructions make it nearly impossible for them to take advantage of the various SME loans.

Commercial banks have nearly 12 billion euros in the Hungarian Central Bank, but they do not use in favour of SME-loans, Mr Kassai underlined. The UEAPME vice-president emphasized, “it is not to expected that commercial banks with foreign ownership serve the Hungarian economic interests”. Therefore he advises the Hungarian government to create a state owned bank that could coordinate SME-financing.

Representations of Hungarian enterprises agree that protectionism has to find it’s way in Hungary to support SMEs. Co-chair of the Hungarian Industrial Association, György Vadász stressed that „as much as the EU legislation is permissive, protectionism has to be strengthened in Hungary”.

SMEs employ 71 percent of the Hungarian workforce and are responsible for 50,2 percent of the GDP. Only 44% Hungarians see entrepreneurship as an opportunity, compared to the EU average of 58%. It is also the case that only around one fourth desire to become self-employed, which is below the EU average.

According to EU SME Performance Review, Hungarian SMEs have a higher share in public procurement contracts than is the EU average (68% compared to 42%). At the same time SME-representations say, that the tenders are not well targeted. They are more an offer for companies of a bigger size, more in line with the EUs medium size enterprise definition, while Hungarian micro- and small enterprises lack resources.

To bridge this gap, the European Parliament suggested establishing separate funds for SMEs. Mr Kassai would go even further and separate sums for those micro and small enterprises whose turnover does not exceed 2,7 million euros a year.

Regarding the proportion of state aid, also official numbers are relatively low. In Hungary the government allocates 4% of it’s GDP to SMEs, while in Europe in average this is considered around 11%.

Cutting the red tape needs also more efforts especially in tax area which causes several problems. Also administrative burdens are hard to diminish as in Hungary expenditures of bureaucratic measures foot up to 6,8% of the GDP.

SME sector also lacks innovative thinking. Hungarian SMEs still do not see the main idea of the innovation. “To a baker who just baked bread - until today, taking milk-loaf to the menu for tomorrow means also innovation.” – Gyula Barta, vice-director at Hungarian Foundation for Enterprise Promotion pointed out.

However, also staid aid in this area is missing. The share of R&D on Hungarian GDP is less then 1 % and decreasing compared to the increasing trend (3-7%) in Western-Europe. UEAPME vice-chair underlined the key role of education for the future entrepreneurs. Mr. Kassai believes that a change in structure is very visible: Europe is moving to technology-based, modern economy instead of labor-intensive, poorly innovative production. “Therefore we need excellent brains and high skilled workers.” – he stresses.

The director of the National Business and Innovation Center, Magdolna Csákváry also urged the government to secure constant regulatory background instead of the current, always-changing structure as this is setting back innovative initiatives. 

POLAND

SMEs are driving force of the Polish economy and their contribution to national GDP was 47 % in 2007. They are active in retail and wholesale trade, services and in production and employ 2, 1 person on average. Their density per 1000 inhabitants varies quite significantly from region to region. Poland is close to the European average (and ranks as 15th) in terms of  “enterprise density”. Most of them operate on the local level with just 16 % share on the country’s export.

The EU initiative Small Business Act (SBA) was accepted “with satisfaction” by Poland’s government. The Polish Agency for Enterprise Development (a governmental agency) is in charge of the implementation of the SBA. On 31 March 2009 the one-stop-shop principle was introduced for starting new businesses.

SMEs have several advantages which are particularly precious during a crisis and fall in demand. These companies are not involved in risky financial operations, they do not try to access unknown market segments. This conservative approach is often under fire of criticism during economic expansion but when crisis loomed it showed that SMEs avoided mistakes which led bigger companies into trouble thanks to that.

Micro-enterprises are also very flexible. They can increase and decrease the scale of their operation to reasonable extent relatively quickly. Moreover, since Polish SMEs are particularly active in services and trade, so they depend on the domestic demand rather than exports. Small businesses in Poland operate in relatively safe market niches. The automobile repair sector is a good example: many car owners have to postpone their decisions to buy new vehicles and the demand for repairs of old cars has increased.

However, despite these advantages SME sector has not been totally able to avoid troubles related to crisis. One in four companies reports problems due to downturn and among their biggest “headaches” in the difficult times they list: too high taxes, administrative burdens, lack of institutional aid, credit crunch. Small companies which co-operate with bigger ones are often heavily dependent on their big clients, usually one and only.

The most vulnerable are SMEs operating in risky industries such as furniture production, automotive sector, shipbuilding which are unable to deal with bad debts. Late payments particularly affected construction industry where many companies have to wait more than three month for payments from their business partners.

On the other hand - 42% of Polish SME’s have not noticed so far the impact of the crisis on their economic condition and 7% of them even report increase in turnover. In a case like that the affected companies cannot count on a significant support from the state or state institutions. They have to rely on themselves and their own abilities to survive.

SLOVAKIA 

European Commission estimates that there are approximately only 8 SMEs per 1000 inhabitants in Slovakia, which is considerably below the EU27 average of almost 40 and the lowest value of all Member States. In line with this result, the relative economic importance of the SME sector in Slovakia in terms of employment and value added is also smaller than the EU average.

Slovakia is working to improve regulations for companies as part of its economic recovery plan. In 2007, the government published a document entitled 'Better regulation in the Slovak Republic: Action programme for reducing administrative burdens in Slovakia 2007–2012'. As a part of its stimulus plan to ease impact of the current economic downturn, the Slovak government made a commitment to fully implement this action plan.

Government bodies have cooperated with entrepreneurs and associations of SMEs to define what they consider to be the biggest administrative burdens in terms of legislation. The government wants to identify measures to meet its ambitious plan to cut red tape by 25 % by 2012.

One of the already approved measures is the exemption of micro-enterprises from accounting requirements. Entrepreneurs are granted exemptions from double entry accounting in cases where their business has no other employees and its income does not exceed €170,000. Expenses can be written off according to the principles of 'bookless accounting'.

According to an analysis of the impact of the global economic crisis on SMEs by the National Agency For the Development of Small And Medium Enterprises (NADSME), only 2% of SMEs feel access to credit is a serious problem.

However, late payments remain an issue for Slovakian SMEs, with 65% of small firms admitting to experiencing liquidity problems as a result. In response, companies are postponing payments to their own suppliers, instead seeking bank loans and selling assets.

Jozef Hudák of the Economy Ministry said the government was not keen to intervene in disputes between suppliers and consumers, and the problem of late payments could be solved by borrowing. The government has increased access to credit and simplified the tax and VAT system.

Relaxed state aid rules have enabled the Slovak authorities to channel more resources to SMEs from European structural funds. The government is seeking to link its support to energy-efficient innovations and technology transfer, and has begun to establish clusters of SMEs which can access major European funding programmes. As part of a series of measures to support SMEs, the Slovak Guarantee and Development Bank (Slovenská záručná a rozvojová banka; SZRB), has signed a contract with commercial banks to provide rapid bank guarantees.