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April 15, 2009
SMEs play a key role for economic and employment growth in Germany and in most of the countries under review. This has to be borne in mind in shaping the regulatory framework as well as when in view of the economic and financial crisis attention focuses on “bailout packages” for large companies that are more in the public eye. [more]
Dynamic diversity opens up opportunities International topics Current Issues Author Katharina Hohmann Editor Barbara Böttcher +49 69 910-31787 barbara.boettcher@db.com Technical Assistant Sabine Berger, Angelika Greiner Deutsche Bank Research Frankfurt am Main Germany Internet:www.dbresearch.com E-mail marketing.dbr@db.com Fax: +49 69 910-31877 Managing Director Norbert Walter A ttemp ting to ma ke un i ver sall y valid stateme n ts a b o u t sma l l an d me d ium -sized en ter p ris e s (SM Es) i s do o me d to failur e . W hether in G erm an y, th e E U or t he U S , differenc es do ex ist b et ween S MEs dep end in g on c om pan y s i ze an d th e s ec t or in which the y operat e. The o perat ing en vir onm ent, which inc l udes r e gul ator y c ond iti ons an d ac c es s to f in anc in g, d oes no t im pac t on all S MEs i n th e s am e wa y. T h e ec o n o mic sign ifica n c e of SM Es is sub stan tial. In e ver y c ou ntr y SM Es dom inate the c or por ate lan ds c ape, ac c ount ing f or m ore than 99% of f irm s . SM Es c ontr i bute m ore than 50% t o tot al em plo yment a nd val ue add ed in m os t c ountries . In ex t erna l tr ad e, b y c o ntras t, SM Es pl a y a s m aller part th an big f irm s . SM Es in CE E c ou ntries are pos ti ng h ig h gro wth rat es as the y m ak e up grou nd. T h e sign ifica n c e of mic r o en ter p rise s i s ver y high in ma n y ca ses. In Med iterr an ean c ountr ies a b ove al l t he y em plo y ex c ept i ona ll y l arge num bers of wor k ers . This c ontr as ts wit h Ger m an y and the US where the m ain em plo yers are m edium -sized a nd large c o m panies . A c los e c orr elat io n ex ists be t wee n th e s hare of m icr o enterpris es a nd t h e S ME em plo yment ra tio . SM Es exh ibit flexib i lit y a n d g r owth. Hi g h s elf -em plo yment ra tios ind icat e a hig hl y d ev elo pe d en tr epren euria l s p irit. W ith regard t o f r iend li nes s to entr epre neurs a nd c om pan y f l uc tua tio n rates G erm an y oc c upies a m idtabl e r ank ing in ternat io na ll y. In c ountri es where m icr o f irm s hav e a hi gh em plo yment s hare hi gh f luc t uat ion r ates r es ult in a m ore vol ati le wo rk ing en v ironm ent. Ea sy ac c e ss to fina n c i n g is vital to the sur v iv a l of SM Es. T he bank ing s ec tor pla ys a n es s ent ia l r o le in pro v id ing ex terna l f ina nc ing to SM Es in bot h Europ e and t he U S. Germ an S MEs c ho os e d ebt f in anc ing m ore of ten th an SM Es in o ther EU c ou ntri es . SME s in th e U S of ten f al l b ac k on c r edit c ar ds . I n n ovation , inter n ation a lisation an d hu ma n ca p ital ar e the keys to f u tur e suc c e ss. Mo re an d m ore SMEs are us in g g lo bal isati on via i ntern ati on al m ark ets and c oop erat ions . T he out ward m igrati on of s k illed p ers onn el r e pres ents a c hal le nge f or S MEs in t he ir c ountr ies of orig in. D ynamic diver sity opens up oppor tunities An international assessment of SMEs A p ril 1 5 , 20 09 0% 20% 40% 60% 80% 100% GR IT PT PL ES HU CZ EU - 27 NL BG SI AT SE FI IE UK DK RO FR DE US >250 50 to 250 10 to 49 1 to 9 Emp loyment s hare by company s i ze S ou r ce s: Eur o sta t 20 0 5 , SBA 2 0 0 5 H eadc ount : Current Issues 2 April 15, 2009 1. Introduction ................................ ................................ ................................ ................................ ............. 3 2. Differing definitions ................................ ................................ ................................ ................................ 3 3. Mittelstand  a “black box” of major economic importance ................................ .............................. 4 3.1 Company size structure – almost identical, but different after all ............................ ………………. 5 3.2 Employment structure – dispute about SMEs being ―the engine of job creation‖ .......................... 5 3.3 Value creation – SMEs are responsible for the lion’s share ................................ ........................... 8 4. Opening the “Black Box” – SMEs are subject to numerous interconnected phenomena ............. 8 4.1 Sectors of the economy and industries – where is ―small‖ the strongest? ................................ .....9 4.2 Regulatory conditions and operating environment determine structure and success ................. 11 4.3 Growth and change  dynamic SMEs display flexibility ................................ ...............................12 4.4 Self-employed as SME initiators .................................................................................................. 13 4.5 Access to funding is essential for an SME’s survival ................................................................... 14 5. Where will the journey lead?  Future determinants for SMEs ................................ .......................18 5.1 Innovation – economic growth driven by progress ....................................................................... 18 5.2 Internationalisation of SMEs – seizing the benefits of globalisation and focusing on inherent strengths ................................ ................................ ................................ .........................19 5.3 Recruiting problems dogging SMEs? ........................................................................................ 21 6. Conclusion ................................ ................................ ................................ ................................ ............23 An international assessment of SMEs April 15, 2009 3 “Mittelstand” or SMEs The t erm us ed int ernat ionally is SME, but t he wor d ―Mittelstand‖ has established itself as an export it em, espec iall y in the English -speaking world. For exam ple, one quote f rom t he New York Times reads: ―Mittelstand, a coll ec tion of m ostly f ami ly-owned c ompanies  …  forms the backbone of employment‖. In addition to the quant it at ive aspect of the definit ion, t he t erm ―Mittelstand― is m ostly also ass ociat ed wit h a partic ular mi nds et and ent repreneurial s pirit: Mittelstand companies are oft en fami ly -run and have c los e t ies wit h a region and a bus iness location. The purely quantitative label ―SME‖, whic h appli es to very large numbers of m icro ent erpris es, does however als o include firms wit h a s t ock market listing or wit h alt ernat ive owne rs hip structures , and theref ore does not s ufficiently reflect the connot ations of the term ― Mittelstand‖ as us ed in Germany. 1. Introduction S m all an d m edium -sized e nterpris es ( S MEs) are r ega r ded as t he lif ebl ood of the Ger m an ec onom y, and the Mittelstand (the c ol lec t ive name for Germany’s SMEs) considers itself to be something special. Critics, by contrast, call SMEs the ―spoilt recipients of economic policy largesse‖. How much do German SMEs differ from those in nei ghb ouri ng Europ ea n c o untr ies or the US ? An int ernati ona l c om parison r e vea ls th at S MEs d om inate th e c orpor a t e la nds c ape . Both in E urope an d th e US virtu al l y e ver y c om pan y is an S ME : o ver 99% of al l f irm s fit this des c r ipti on. But des p ite the ir m ajor ec onom ic im portanc e SM Es of ten s t il l app ear to be ―black boxes‖ or unknown quan tit ies . It is virtu al l y im pos s ible to m ak e univers a ll y va lid s tatem ents about an d i nter nati ona l c om parisons be t ween s m all a nd m edium -sized c om panies , bec aus e t he y d iffer gr eatl y i n term s of c om pan y s i ze, em plo yme nt s hare, s ec tor affil iat ion , l eg al f orm , degre e of int ernat io nal isat i on a nd inn ov ati ve nes s . The operat in g env ironm ent with re gard t o r egul ati on, rec r u itm ent of s k illed s taff or ac c es s to f undin g a lso im pac ts SM Es in different wa ys dep end ing on th eir s i zes and the s e ct o r s in which th e y op erate. T his r eport pr o vid es a g en e r al ex am inati on of a var iet y of SME ind icators a nd proffers an i nternat io na l c om parison of SM Es in G erm an y, th e E U an d th e U S. The aim is to in ves t ig ate which f ac tors determ ine the ec o n om ic im portanc e of SM Es a s well as ho w and with which i nte ns it y th e y d o s o. 2. Differing definitions T here are m aj or differences bet ween the def in iti ons of sm all an d m edium -sized b us ines s es both int ernat io nal l y an d wit hin Euro pe, which m ak es c om parisons difficult. 1 As a r ule , th e term us ed internationally is ―Small and medium -sized enterprises‖ (SMEs) or ―Small Businesses‖ (SB). In G erm an -speak ing c oun tr ie s the term c omm onl y us e d is Mittelstand . To put an en d to the c o nf us ing vari et y of def init ions us e d with in t h e EU ( and to pro v ide harm onise d c r iteri a f or f unding or inc en ti ve pro gram m s ) , the Europ ean Co m m iss ion has lai d d o wn a s t an dard def ini t ion. It is bas ed on f our f ac tors  staff headc o unt, an nua l t urno ver, ba lanc e s h eet tota l a nd a uton om y ( s ee Box p. 4). Ac c ordin g to the EU def in iti on, SM Es are c om panies with f e wer t han 250 em plo yees . Dist inc ti on s are m ade bet ween micro enterprises with f e wer t ha n te n em plo yees , small enterprises with 10 to 49 em plo yees and medium-sized enterprises with 50 to 2 49 em plo yees . Com panies wit h at leas t 250 em plo yees a r e large enterprises . The d ef init io ns are d ifferent in G erm an y a nd th e U S: tr adit ion al l y th e y bot h c ate g oris e f irm s wit h u p to 500 e m plo yees as m edium -sized. This means that a substantial portion of Germany’s Mittelstand ( c om panies wit h 25 0 to 500 em plo yees ) ar e no lo nger SMEs according to the EU’s narrow definition, although they are no t perc ei ved to be large f irm s in Ger m an y. T he EU def in it ion is ge ared to wards t he b us in es s s tr uc ture i n s outhern Eur ope an c ou ntri es where ver y l arge num bers of ver y sm all f irm s c o -ex ist wit h s e vera l v er y larg e ec o nom ic entit ies . The 1 The huge number of SMEs world wide m akes it virtuall y impossible t o c oll ect c omplete dat a s ets or to m ake accurat e projec tions. E uropean st atistics in partic ular are not yet harmonised, nor are t hey updat ed constant ly. Differing dat a c oll ect ion m et hods across the mem ber stat es and cost ly coll ation at the E U level m ake it difficult t o gain acc ess to standardis ed, reli able and comparable dat a . This m eans that ident ifying t rends is the bes t t hat can be achieved. DE EU US Number of SMEs (million) 3.6 19.7 6 Share of all companies (%) 99.5 99.8 99.4 Persons employed in SMEs (million) 12.5 85 58.7 Share of entire w orkforce (%) 61 67 41 Value added (EUR billion) 553 3,090 n.a. Share of total value added, % 53 57.6 n.a. Export share, % 11 8 5 SME statistics overview Sources: Eurostat 2005, SBA 2005 1 Current Issues 4 April 15, 2009 v irtu al aut onom y of the c o m panies is also an im portant f ac tor: f irm s that bel ong to larg e gro ups are not c las s if ied as S MEs. 2 O n ac c ount of the a va il ab il i t y of dat a a nd f or the s ak e of better c om parabi lit y we s ha ll us e t he q uant ita ti ve, hea dc ou nt -bas ed EU def init io n of SM Es . 3. Mittelstand  a “black box“ of major economic importance Ir r es pec tive of nat io nal bo u ndari es S MEs c ons t itut e th e res oun di ng m ajorit y of al l c om panies . I n Ger m an y there are ar oun d 3.6 m illio n SM Es , repr es en ti ng aro un d 99.5% of al l c om panies . I n the EU -27 there ar e s om e 19.6 m ill ion SM Es ( 99. 8% of al l c om panies ) . Ev en in the U S th e SM E s hare is 9 9.4%, s i nc e th e 6 m ill io n or s o SM Es contrast with ―just‖ 20,000 large companies. This m eans there are j us t sm all differenc es be t ween th e S ME s hare of c om pani es f r om one c o untr y to ano ther. 3 F urtherm ore, SMEs in m os t c ountri es m ak e the larg es t c ontr ib uti on to employment and value creation . I n ex tern al tr ade , b y c ontr as t, SM Es pl a y a s m aller part th an b ig f irm s . In order to d et erm ine their ec onom ic im portanc e we s hal l ut il ise t hree ind icators : c om pan y s i ze s tr uc ture, num ber of em ployees and va lu e c r eat ion. 2 A ccording t o t he Comm ission recomm endat ion (2003/ 361/ E C), aut onom y m eans t hat no ot her company m ay own a s t ake of m ore t han 25% in t he c ompany c onc erned. 3 E uros t at, 2005; Instit ut für Mittelstands f orschung (IfM) B onn, 2007; U.S . Small B us iness Admi nistrat ion (SBA ), 2005. Country Small enterprise Belgium Denmark (1) Up to 9 employees (1) (2) Annual turnover of up to EUR 1 m (2) France UK (1) Annual turnover of max. GBP 2.5 m (1) (2) Balance sheet total: max. GBP 1.4 m (2) (3) Maximum of 50 employees (3) Ireland Italy Netherlands Portugal Sw eden US U.S. Small Business Administration (SBA) Up to 50 employees 50 to 249 employees Employees: Up to 500 employees for the majority of the manufacturing and mining sectors: Up to 100 employees for w holesaling Turnover: < USD 5 m: retail; services < USD 17 m: construction < USD 7 m: „ special trade contractors ” < USD 0.5 m: agriculture Source: Grichnik (2003): Finanzierungsverhalten mittelständischer Unternehmen im internationalen Vergleich Up to 499 employees Up to 9 employees 10 to 100 employees Up to 500 employees Up to 200 employees ( „ micro enterprises ” : up to 10 employees) Up to 499 employees At least tw o of the follow ing three criteria Annual turnover ofmax. GBP 11.2 m Balance sheet total: max. GBP 5.6 m Maximum of 250 employees Up to 100 / 250 employees Up to 100 employees Germany (Institut für Mittelstandsforschung, Bonn) 10 to 499 employees Annual turnover of EUR 1 m - EUR 50 m No single definition for SMEs Medium-sized enterprise 2 Micro enter- prise Small enter- prise Medium- sized enter- prise Head- count <10 10 to 49 50 to 249 Annual turnover, EUR 10 to 50 m Balance sheet total, EUR 10 to 43 m SME: EU definition Up to 2 m 2 to 10 m Autonomy (no stake of 25% or more held in the enterprise) Source: European Commission 3 An international assessment of SMEs April 15, 2009 5 3.1 Company size structure – almost identical, but different after all O ne l ook at the ent erpr ise s i ze c las s es and the c ountr y -sp ec if ic differenc es bec om e appare nt. The d om inant s i ze c las s ac r os s all nati ona l b oun dari es is th at of the m icr o f irm s , which m ak e up ov er 80% of c om panies . O ne m aj or s tr uc tural differenc e bet wee n Ger m an y an d other c ountries is r ev ea led b y l oo k ing at th e m edium -sized f irm s . In G erm an y th ere is a rel at ively large share of ―large Mittelstand companies‖ (with 250 to 500 employees), which are not SMEs ac c ording to t he narr o w d ef ini tio n, b ut ar e ne vert he les s r ef err ed to as bel ong in g to the Mittelstand . F urtherm ore, in Ger m an y an d th e US th e s hare of SM Es with 10 to 25 0 em plo yees is m uc h hig her than the Euro pea n a vera ge ( DE: 1 7%; U S: 20%; EU-27: 8%) . Num erous Europe an c o unt r ies , b y c ontr as t, ha ve ver y large proport ions of m icr o enterp r ises ( EU -27: 92%; DE: 83 %) . 4 T his picture is c o nf irm ed b y the SM E d ens it y stat istics . Nati ona ll y, the d ens it y of SMEs per 1, 000 inh ab itan ts r ang es f r om les s than 25 to m ore than 7 5. The hi ghe r the SM E de ns it y, th e l arge r the n um ber of sm all f irm s in the c ou ntr y c onc erned. S ME dens it y in G erm an y is c om parati vel y lo w b y i ntern atio na l s tan dards , which is due t o th e r elat ivel y large prop ortio n o f m edium -sized f irm s . Howeve r, S ME dens it y prov id es littl e i nf orm ation abo ut wheth er a c o untr y has achieved ―SME saturation‖ since it is impossible to determine an ―optimum‖ number of SMEs. 3.2 Employment structure – dispute about whether SMEs are “the engine of job creation” SM Es are f r eque ntl y hai le d as be ing the eng in e of j ob c r eation i n an ec onom y. In s o d oi ng, ho weve r, a dist inc ti on m us t be m ade bet wee n the r e lat ive s hare of the wo rk f orce em plo yed b y S MEs, the ris es and f alls in em plo yment ov er th e bus i nes s c ycle an d th e i n di vid ua l s i ze c las s es . A s weep ing j udg e m ent on whet her SM Es are the eng ine of j ob c r eati on woul d th us be t oo s im plistic. Des pit e th e s ubs ta nti al nu m ber of SMEs the y are m uc h les s s ignif ican t i n term s of the num ber of people the y em pl o y. In a ll t he Europ ean c ountr ies s urv e yed S MEs em plo yed at le as t 50% of a ll peop le in wor k . In the US, b y c o ntras t, th e s hare was aroun d 42 %. In G erm an y the s hare of the work f orce em plo yed b y S MEs c om es to aroun d 61% , which is r oug hl y on a p ar with t he intern atio na l avera ge. 5 In s o uthern E urop ean c o untr i es s uc h as It al y, G r eec e, Portu gal an d S pa in t he c orr es pond in g f igures ar e part i c ularl y h i gh, with ro ug hl y 7 0 -80% of all peop le in wor k being em plo yed b y S MEs. SM Es in the c o untr ies of C entr al an d E as tern Euro pe ( CEE) a lso prov ide em plo yment to s o m e 70% of the work f orce. This m eans that tak en toget her SM Es are t h e bi gges t em plo yers . H o wever, th e c oroll ar y of th is is th at t he f e w l arge f irm s that c ons titut e j us t 0.5% of 4 R egional differenc es in Central and E ast ern Europe (CEE ): Balt ic stat es : mi c ro ent erpris e share of 77 -82% ; P oland, Czec h Republic, Slovak ia, Hungary and S lovenia: micro ent erpris e s hare of m ore t han 90%. 5 E uros t at calculat es that SMEs provide jobs for 61% of t he work f orc e in Germany, whe reas t he Instit ut für Mittelstandsf orsc hung in B onn arrives at a figure of 55% us ing the same definition. This clearly il lustr at es t he problems ass ociat ed wit h dat a c oll ect ion on S MEs not only in Germany, but als o ac ross E urope as a whole and in t he US. According t o t he German def init ion (up t o 500 employees ) t he s hare of em ployment would however be 70 . 6%. We c an t heref ore conclude t hat companies wit h 250 t o 500 employees provide jobs f or roughly 15% of t he work f orc e. 0 20 40 60 80 100 CE E -12 EU -27 DE US 30 22 48 65 80 110 260 319 380 680 1,430 1,714 9,510 9,180 8,270 7,902 >250 50 to 249 10 to 49 1 to 9 En terpri s e s i ze class es differ i nternati onall y S ou r ce s: Eur o sta t, SBA 2 0 0 5 % 4 0% 20% 40% 60% IT PL EU -27 FR DE US >250 50 to 249 10 to 49 1 to 9 Emp loyment s hare by enterpri s e s i ze S ou r ce s: Eur o sta t 20 0 5 , SBA 2 0 0 5 5 Current Issues 6 April 15, 2009 Employment effects A verage headc ount figures smooth t he effects of company size structure and employm ent and are anot her indicat or of the import anc e of various ent erpris e s ize classes. In the US in 2004 t he average S ME employed ten work ers in a single facil it y. The average large f irm in t he US, by cont rast, employed 3,313 work ers at 62 fac ili t ies. Average c ompany size in Germ any is 7. 7 employees , where as in Medit erranean c ount ries s uch as Italy or Greec e t he average S ME headcount is just t wo or t hree pers ons res pect ively. The very sm all average c ompany size reflects t he high proportion of famil y -run mi c ro enterpris es , whe reas in the US it is the b ig companies that have t he largest share of t he work forc e on t heir payroll s. al l ent erpr ises em plo y an a verag e of r oug hl y 3 5 -40% of the en tire wor k f orc e. Dis tin gu ishin g b et ween t he s i ze of c om panies , s e vera l differenc es c an be f ou nd b et ween var i ous c ount ries a nd c ou ntr y groups : — W hereas in CE E c o untr i es m ore than 1 i n 3 peo pl e i n wor k are em plo yed b y m icr o enterpri s es ( wit h u p to 9 em plo yee s ) , in th e US th e rat io is on l y s li ght l y abo ve 1 i n 10 . — Com pared with oth er c oun t r ies G erm an y has a bo ve -averag e num bers of people wor k ing in s m all a nd m edium -sized enterpr ises and f or larger m em bers of the Mittelstand . This c onf irm s the uni que nes s of the Ger m an s tr uc ture, as a l r ead y s ho wn with the s i ze c las s e s . — Alt hou gh t he U S a nd G erm an y s hare s im ilari ties r e gar din g c om pan y s i ze s tr uc ture, t he r e are m aj or differenc es bet ween their r es p ec ti ve em plo ymen t s tr uc tures . Ne verth el es s it is true that in c o untr i es l ik e Germ any, Fr a nc e an d th e U S m icro enterpr ises em plo y fe wer s t aff than th e s m all and m edium -sized f irm s . In m an y oth er EU-27 c ountries t he opp os ite is th e c as e. G ive n th eir h ig h c ontr ibu tio n to em plo yment it is of ten as s um ed that SM Es pro vid e a bi gger boo s t to the l abo ur m ark et (prim aril y b y c r eating j obs ) tha n l arge c o m panies ov er the bu si nes s c ycle, c o pe better with dec lin es in em plo yment duri ng ec onom ic do wnturns and dism iss fewer em plo yees t han larg e f irm s . Res earc h c onduc t ed in s evera l c ou ntries 6 , ho wev er, r eve als th at a t l eas t i n m icro enterpr ises hi gh j ob gro wth r ates of ten g o h and in ha n d wit h h igh j ob loss rates, which calls into question the assertion that SMEs are ―the engine of job creation‖. Although SMEs create more jobs overall m ost of the tim e, the y d o th is in a ver y d ynam ic m anne r, as s ho wn i n the c hart on G erm an c om pani es on pag e 7. 7 Sm aller c om panies are r es pons ib le f or a larg e pro p ortion of j obs c r eated an d j obs los t. Nearl y 4 0% of c om panies whos e s taff num bers have r isen or f al le n em plo y f e wer th an t en p eo ple. The num bers f or the U S are s im ilar, where SM Es ha ve c r e ated p r oport ion al l y f e wer j obs as the y b ec om e larger. T his m eans that larger c om pan ies te nd t o un derg o f ewer f luc tuati ons th an s m aller c o m panies . Sm all f irm s b y c o ntras t are s ubj ec t to m uc h m ore vol ati le em plo yment pr oc es s es than larg er ones , which m eans les s job s ec urit y f or em plo yees of s m aller c om panies . Sm aller c om panies h av e th e a dv anta ge th at th e y c a n ac t m ore f lex ibl y and m ove f as ter in the la bo ur m ark et bes id es be ing abl e to adj us t m ore r apid l y to s tr uc tural an d c ycl ical f lu c tuati ons . Con vers el y, th e d i sad va nta ge is t he unc erta int y t hat t h es e f luc tuati ons tri gger am ong em plo yees , which m eans that h ig her - sk ille d pe op le f in d s m all c om panies les s attr ac t ive em plo yers . In term s of net c hang es in em plo yment, the larg es t s win g s oc c ur at ver y s m all and ver y lar ge f ir m s . O verall , it is d isc ernib le that in t he US a nd G erm an y t here is a n in vers e c orr e lat ion bet we en j ob 6 Wagner, K oll er und Schnabel (2007). Sind m itt elständische Bet riebe der J obmot or der deut schen W irtschaft? Günt erberg und Wall au (2007). Besc häft igungs beit rag des Mittelstands 2007 in Deutschland, IfM B onn. Helf and, Sadeghi und Talan (2007). Em ployment dynamics: sm all and large f irms over t he busines s c ycle, B LS USA , Mont hly Labor Review. Van Praag (2007). W hat is t he value of ent repreneurs hip? A review of recent r es earc h, IZA Discussion P aper. 7 IAB Discussion Paper 2/2008. KMU und Arbeitsplatzdynamik − Eine Analyse auf B as is der B esc häft igten -Historik-Dat ei. This data is for wes t Germany as only s eparat e st atistics are avail able for t he wes t ern and east ern parts of the c ountry. The t rends in east Germany are, however, c omparable. 0 10 20 30 40 50 60 70 80 90 0 20 40 60 80 100 Dens it y of SMEs (per 1, 000 inhabit ant s ) D ensi ty of SMEs and S ou r ce : Eur o sta t 20 0 5 S ME em ploym ent s hare (% ) ES CZ DE EU -27 FR IT PL UK HU e mployment s hare 6 75 80 85 90 95 100 0 20 40 60 80 100 CZ DE ES EU - 27 FR IT PL UK HU S hare of m ic ro ent erpris es , % (right) S ME dens it y (lef t ) D ensi ty of SMEs and mi cro enterpri s es S ou r ce : Eur o sta t 20 0 5 7 An international assessment of SMEs April 15, 2009 7 ga i n/l os s r ates an d c om pany s i ze. The bi gg er the c om pan y, the lo wer t he t urno ver r at e. O veral l, ho wev er, n o u ni ver s all y val id c o nc lus ion c a n b e dr awn f r om thes e f igures . Com panies i n a s i ngl e s i ze c l as s do not all r es pon d i n the s am e wa y t o th e b us in e s s c ycle an d s tr uc tural c ha nges , a nd the y d iffer in term s of sec tor, ex port b eha v iour and the l ik e. In the US i t was s m all f irm s that wer e res pons ibl e for the m aj orit y of j ob los s es duri ng t he r ec es s i on in 199 1, whereas in 2 001 m ost j ob los s es oc c urr ed at larg e f irm s . The onl y ex pla nat io n f or this obs erva ti on is s tr uc tural an d c ann ot b e attr ibu ted to c o m pan y s i ze alo ne. Micro enterprises play a major role in many countries Abo ve al l in M ed iterr an ean c ountries s uc h as G r eec e a nd It al y i t is m icro f irm s that em plo y the larges t prop ortio n of the wor k f orc e. T he large num ber of m icr o enterpr ises in turn r es u lts i n hi gher em plo yment b y SM Es . G en erall y t here is a pos it ive c or r elat ion bet ween t he perc ent age s h are of the wor k f orc e em plo yed b y m icr o f irm s and the c ontr ibu tio n t o tot al em plo yment of SM E s in a n ec onom y. This obs er vat ion s ho ws that m icr o enterpris e s are the driv in g f orc e of j ob c r eatio n in m an y c ou nt ri es on ac c ount of th eir num bers . Whereas in the U S on l y c om parativel y f e w p eop le wor k f or m icr o firm s or SMEs, i n Spa in and Ita l y f or ex am ple there are m an y m ore wor k ers than a verag e who are em plo yed b y m icr o f irm s or SM Es . 8 In Germ an y this c orr elat ion be twee n m icr o f irm s and SMEs is less pronounced, which suggests that the ―medium -sized‖ SM Es pl a y a b ig ger r ol e as m entioned abo ve . M icr o en terpr ises i n G erm an y th us pro ve t o b e s om ewhat les s d ynam ic en gin es of j ob c r eation tha n in o ther c o unt r ies . 8 T o qualify t his, it should be noted that t he low proportion of work ers employed by mi c ro f irms in the US is partly due to t he way t he dat a is coll ect ed, as m any sole propriet ors hips do not appear in the S MEs st atistics. 0 20 40 60 gain los s gain los s gain los s gain los s gain los s gain los s 1 to 9 10 to 49 50 to 99 100 t o 249 250 t o 499 Over 500 S hare (% ) f or res pec t ive com pany size Emp loyment gains and S ou r ce : IAB 2 0 0 8 l oss es 1995 -2005, wes t Germ any 8 -8 -6 -4 -2 0 2 4 6 1995 2000 2005 Ne t changes i n employ - S ou r ce : IAB 2 0 0 8 B y com pany size, wes t Germ any me nt 9 10% 20% 30% 40% 50% 60% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% E m ploym ent share of m ic ro ent erpris es (0 - 9) C orr elati on between employment s hare of SMEs and employment s hare of S ou r ce s: Eur o sta t 20 0 5 , SBA 2 0 0 5 S hare of work f orc e em ployed by S MEs US EU -27 DE IT AT FR ES CEE CZ PL HU SI SK mi cro enterpri s es 10 Current Issues 8 April 15, 2009 SME share of value added higher in Mediterranean countries Small companies operate in sectors typified by flexibility and limited economies of scale 3.3 Value creation – SMEs are the biggest contributors Besides their impact on employment in an economy SMEs’ overall ec onom ic s ignif icanc e is r ef lec ted in the ir s hare of va lu e ad ded, which is ab ov e th e 50 % thr es hol d f or nearl y al l c ou ntri es s urve yed. T his m eans that SM Es m ake a d ec isi ve c o ntrib uti on t o gros s dom es tic produc t. SM Es in G erm an y g enera te a bou t 5 3% of va lue adde d, which is hi gh er tha n in Sl ov ak ia, Po la nd a nd R om ania, where t he s h are is les s tha n 50%. In m an y Med iterr a n ean c o untr i es and t he Ba ltic s tat es , b y c o ntras t, th e s hare is h igh er t han in G erm an y at o ver 6 0%. Both f ac tors – share of em plo yment and v alu e a dde d – are ind icators of the ec on om ic signif icanc e of SM Es . As th e c hart s ho ws, in c ountr ies with a h igh er SM E em plo yment s h are ( which is in t urn c los e l y c orr ela ted wi th th e s elf -em plo yment rat i o), the va lu e adde d s hare is a lso h igh er. 4. Opening the “black box” – SMEs are subject to numerous interconnected phenomena Di ffering c om pan y s i ze c las s es , em plo yment s har es an d v alu e - adde d c ontr ibu tio ns of SM Es f r om c ountr y to c o untr y are the r es ult of a vari et y of f ac tors . The foll o wing eig ht fac tors are in tend ed t o enab le r ead ers to b ec om e better ac qua int ed with the phen om enon of SMEs a nd t he int erc onn ec ted vari ab les to which th e y are s ubj ec ted: 1. Countr ies h av e s tr engt hs i n different sectors , which h a s an im pac t on c om pan y s i ze s tr uc ture. In som e s ec tors small er c om panies ha ve a n a dv ant age bec aus e of their f lex ibi l it y or th e lim ited a va il ab il it y of ec ono m ies of sc ale. This ap pl ies , f or ex am ple, to to uris m and to the s k ille d trad es . O n t he o t her ha nd, it is onl y larg er c om panies t hat c an ex pl oi t s ynergi es in m an y s ec tors s uc h as pla nt e ng in eerin g or large -sc al e i ndus t r y. 2. Regulation and the external environment s uc h as bure auc r ac y, tax es or r egu lat io n c os ts im pac t on c om pan y gro wth, c om pan y s i ze s tr uc tur es and f luc tuat i on. 3. A large num ber of s ta rtups and a h igh fluctuation in m ark et entr ies and ex its c ou ld r es u lt i n m ore m icr o f irm s tendin g to be in the m ark et s inc e s tartups u s uall y beg in as m icr o enterpris es an d ex pand o ver t im e as the y b ec om e m ore s uc c essf ul ( c orporate gro wth) or ex it t he m ark e t. 0 20 40 60 80 100 AT CZ DE EL ES EU - 27 FI FR HU IT LV NL PL PT SI SK UK V alue added s hare E m ploym ent share S elf-em ployed share V alue added s hare S ou r ce : Eur o sta t 20 0 5 C om pared wit h t ot al em ploym ent share and self -em ployed share (% ) 11 An international assessment of SMEs April 15, 2009 9 Similar sector structure in the EU-15 and the US 4. A h ig h self-employment ratio in dicat es tha t en tr epre ne urial s piri t is hi ghl y de vel op ed. The m oti ves f or s tartin g up a b us i nes s c an, ho wever, be c om pletel y d ifferent. 5. Ac c es s to financing is es s e ntia l f or SM Es of al l s i zes . I n th is r es pec t the r aisi ng of eq uit y c apit al is a p artic u larl y im portant iss ue. Legal form fr equen tl y d eterm ines not onl y t he a c c es s to s ourc es of f unding, but also the t ax burd en a nd thus t h e ab il it y to f orm equit y. 6. Innovation means ec onom ic growth via pro gres s . But not a ll SM Es in ves t in t he s am e wa y. H o w wel l S MEs are eq u ipp ed f or the f uture t hus a lso d epe nd s on th e ac c es s to f und ing and t he ( intern ati ona l) en v ironm ent. 7. SM Es uti lise an d p artic i pat e in gl oba lisa ti on via internationalisation b y be in g ex port orie nted , en teri ng i nto f oreig n partners h ips or f orm ing j oin t ve ntures . 8. Both the a vai la bi lit y as wel l as the c os ts a nd t he s k ills o f personnel wil l p la y a bi gg er r ole f or S MEs. T he las t thre e f ac tors are p artic ul arl y im po rtant f or S M Es to e nj o y f uture s uc c es s . 4.1 Sectors of the economy and industries – where is “small” the strongest? O ne f ac tor that det erm ines c om pan y s i ze an d em plo ym ent s tr uc ture is the s ec t oral s tr uc tur e of the ec o nom y. The c ountr ies f r equentl y r ef err e d to as i ndus tr i al nat i ons ha ve lo ng s i nc e trans f o rm ed them s elves i nto s er vice nat ions . I nde ed, it is the s erv ice s ec tor in which m os t SM Es oper ate i n bot h th e E U an d t he U S. T here are, ho wever, a lso v ario us in du s tr ial s egm ents to which s m all c om panies gravitat e. T he s ec toral s tr uc ture of U S an d EU -15 SM Es is a lm os t ide ntica l. T his is a c ons eq uenc e of a paral le l s ec tora l d ev elo pm ent o ver th e las t f if t y years . In al l th es e c ountries m ore tha n ha lf of SM Es oper ate in t he g ener al s er vice s ec t o r. In m an y C EE c ountr ies , b y c ontr as t, it is the tr ade s ec t or which is m ore devel ope d, a nd a rel a tivel y larger num ber of SMEs pro duc e g oods i n th e m anuf ac turing s ec tor. This differenc e is o ne c o ns equ e nc e of CE E c oun tr ies n ot yet ha v ing c om plete l y c onc lu ded the tr ans it ion proc es s and at t he s am e tim e r ef lec ts the i nv es tm ent pref erenc es of f oreign in ves tor s there d urin g pas t dec a des . Country Distribu- tive trade Manu- facturing Construc- tion Business services Other services AT 17% 12% 8% 16% 48% DE 22% 9% 10% 22% 38% EL 60% 4% 14% 5% 18% ES 31% 10% 11% 18% 30% FI 23% 9% 13% 21% 34% IT 28% 15% 12% 20% 26% GB 13% 10% 22% 21% 33% Sources: OECD, Eurostat 2005 Sectoral affiliation of SMEs 12 Current Issues 10 April 15, 2009 Nearly 75% of German SMEs operate in the service sector If we look s pec if icall y at m icr o enterpr ises in EU m ember s tates , we f ind tha t th e y are p artic u larl y h ea vil y c o nc entr a ted in th e c ons tr uc tion, r ea l es tat e a n d hos p ita lit y s ec tors as wel l as in whol es al ing an d reta il in g. I n thes e c ountr ies m ore tha n on e -third of all c om panies ha ve f ewer t han t en em plo yee s and at l eas t t wo - thirds of f irm s have f e wer t han 50 em plo yees . In a ll c o untr ies t here are s ec tors which are dom inate d b y S MEs, as s ho wn b y data f r om the U S where t he c ons tr uc t ion s ec t or is l arge l y m ade u p of SM Es . Sinc e in m an y s erv ice s ec t ors onl y m inor synerg y effec ts or f ew ec onom ies of s c ale c an b e ex plo ite d as c om panies g et big ger, a s taff of fewer th an 5 0 em pl o yees f r equent l y r epres e nt s the i dea l c om pan y s i ze. In G erm an y ne arl y thre e -qu arters of SMEs are s erv ice c om panies . In 20 07 t here wer e s e ve n ti m es as m an y ne w c om pani es r egistere d in t he r ea l es t ate and ho us i ng s ec tor ( 18 6,0 00) a nd r et ail trade ( 176,0 00) as in m anuf ac turi ng ( 24, 00 0). 9 Ho wev er, t he f luc tua tio n i n the n um ber of c om panies in the s ervice s ec tor is a lso m uch hig her than in m anuf ac turing , whe r e the c om pani es are of ten big ger. Jus t lik e in Ger m an y, in Fr anc e , too, t he num ber of s tartups in t he propert y, b us ines s s erv ices and c o ns tr uc tio n s ec tors h as r isen i n r ec ent years . 10 A clas s ic s ervice -SM E s ec t or is tour ism , as a look at Aus tr ia s ho ws. T here, abo ve-avera ge num bers of SM Es oper ate in t h e tour ism s ec tor, an d o vera ll tour ist f irm s are the l ead in g em plo yers am ong SM Es . O ne of the m os t im portant s er vice s ec t ors is the distr ib u ti v e tr ade. I n th e U S th e whol es ale s e gm ent is dom inate d b y s m all an d m edium -sized c om panies , but t he r et ai l trad e is larg el y m ade up of big c om pani es tha t i nc r eas i ngl y d ictat e th e Am eric an m ark et via chain stores. Small ―Mom -and -Pop stores‖ have been incr eas ing l y been s que e zed o ut of the m ark et b y b ig nat ion al or i n ternat ion al bus in es s es . Des pit e th e o ver whelm ing num ber of s ervice c om pani es , in dus tr y r em ains an im portant ec o n om ic s ec tor for the Mittelstand . Manuf ac turi ng c o ns titu tes t he b igg es t s hare (8 0%) . Ar ound 94% of ind us tr ia l f irm s are SM Es a nd m ore than half of thes e f irm s have f ewer th an 20 em plo yees . 11 Nevertheless, Germany’s manufacturing s ec tor SM Es are larger tha n the EU av erag e: t wic e as m an y SM Es ( 40%) as i n Fr anc e, I ta l y or Po lan d (les s th an 2 0%) h a ve m ore than ten em plo yees . If we t hen ab and on t he n arr o w def in it ion us ed b y the E urope an Com m ission, it bec om es c lear tha t no oth er m aj or indus tr ial nat io n has s uc h bro ad, int ernat ion all y orie nted s m all and m edium -sized enterpr ises as G erm an y. 9 Germ an Federal St atistical Offic e (2008). 10 Instit ut national de la st atistique et des ét udes économiques (INSEE) (2006): Les grandes évolut ions – La demographie des PME. 11 If M B onn/B DI: Mitt elst andspanel 2007. 1 to 9: 7% 10 to 19: 8% 20 to 49: 7% 50 to 249: 25% > 250: 53% Manufact ur i ng Ge rm any, em ploym ent shares by c om pany size clas s S ou r ce : Eur o sta t 20 0 6 13 An international assessment of SMEs April 15, 2009 11 The Lightness of Being … Doing Business 2009 In its regular ―Doing Business‖ report the World Bank’s International Bank for Reconstruction and Developm ent (IBRD) has s ynthes is ed indicators into an ‖Ease of Doing Business― index, in whic h S ingapore ranks the highes t. The index aggregat es regulat ory indic at ors like regulat ory c osts, int ernat ional t rade, t he t ime and effort t aken to pay taxes and ot her adm inistrat ive factors. The E uropean c ount ries t hat made it into the Top Ten are Denm ark, t he UK and Ireland. At t he bott om of the E U league t able come the Czec h Republi c, Pola nd and Greec e. Germany occupies 25t h plac e out of 181 c ount ries, bec ause tax haven s or li ght ly regulat ed c ount ries are rank ed higher in t his index. Sinc e the index gives equal weighting t o t he indicat ors and excludes m acroec onomic f actors , st abil ity, inf ra structure and s imi lar c rit eria it has only limi t ed inf ormative value. 4.2 Regulation and the operating environment determine structure and success Cr iteri a s uc h as b urea uc r ac y, tax es , c os ts of r egu lat io n or educa tio n offerings are am ong th e f ac tors that determ ine h o w d ifficult or e as y it is to s et up a c om pan y or h o w m an y s killed pers on nel are a vai la bl e. T his in turn has a n im pac t on th e l ev el of c om pan y f lu c tuati on ( i. e. m ark et entr ies and ex its ) or ho w of ten c om panies ex p a nd. Regulatory framework T he c ountr y ind ex of St if tun g Fam ilien unt ernehm en 12 provi des an outl in e of the r egu lat or y f r am ework in s elec ted c o untr i es . While th e US, S wit zerla nd a nd t he U K ha ve the m os t bus ines s -fr i end l y r egul ator y r eg im es and als o oc c up y l ead ing pos iti ons i n the o veral l ind ex , Po la nd has th e m os t attr ac ti ve tax pro vis ions . D es pite diss atisf ac tion am ong Ger m an c om panies this in dex s ugges ts th at the f ina nc ia l e nv ironm ent is not nearl y as ne gat ive as o cc as ional l y s ugges te d b y th e res po ns e s given in c om pan y s urve ys ( s ee Financing chapter). Furthermore, Germany’s tax environment earns an almost identical rating to Switzerland’s, while France’s tax regime is deem ed to be r e lat ivel y a nti -bus ines s . Company size and costs of regulation T he sm aller the c om pan y, t he m ore onerous r e gu lator y r es tr icti ons bec om e. The burde n weigh s les s on b ig c om pani es as it is s houl dered b y a larg er num ber of peo pl e. The m arginal c os ts of ac c es s to f inanc in g, t he o v erc om i ng of adm inistr ative obs tac les or the f ulf ilm ent of le gal r equ ir em ents dec lin e as th e c om pan y s i ze inc r eas es . Stat istics c onf irm that sm aller c om panies s uffer m ore from financ in g r es tr ictions , re gu lat ion, r ed tape or e ven c orr upti on t ha n do larg e f irm s . 13 In Germ an y adm inistr atio n -rela ted c os ts p er em plo yee at sm all f irm s are up to f our t i m es as high as at larg e f irm s . 14 A r ep ort on S MEs in t he U S 15 com es to a s im ilar c onc l us io n. Alth ough the US in g ener al has a goo d, f lour ishin g reg ul ator y c lim ate f or c om pan ies , sm aller S MEs t here are a lso wors e off whe n it c om es to c om pl yin g 12 Lä nderinde x S t iftung Fami li enunt ernehm en, http:// www.f am il ienunt ernehm en.de , Maxim um number of points 100: the higher t he score, the better t he condit ions. 13 W orld B ank (2008): Doing B usiness 2009 14 If M (2004). Bürok rat iekost en kleiner und m itt lerer Unt ernehmen; IHK Schwaben (2004 ). Init iative gegen Bürok rat ie. 15 SB A (2005). The Impact of Regulatory Cos ts on Small Firms . 0 50 100 ES FI PT EL AT UK FR EU -27 PL BG IT DE CEE SI SK CZ HU S ou r ce : Eur o b a r o mete r 20 0 6 A dmi nis tr ati v e obstacles % of com panies wit h problem s 15 0 20 40 60 80 100 GB CH US DE FR ES PL IT Total index 2008 Taxes Labour cos t s , produc t ivit y, hum an res ourc es Regulat ion Financ ing P ubli c inf ras t ruc t ure C ountr y i ndex 2008 S ou r ce : Sti ft u n g Fa mil i e n u n te r n e h men 20 0 8 14 Current Issues 12 April 15, 2009 wi th re gu lat or y pr ov isio ns t han big ger SM Es or l arge f i rm s . Com pl yin g with re gu lator y r ules c os ts s m all f irm s with f e wer th an 2 0 em plo yees up t o 45% per e m plo yee m ore than lar ge f irm s wi th o ver 500 em plo yees . The d ifferenc e is p artic u larl y s tark if one c om pares the c os ts of c om pl yin g with env ironm ental r egu lat io ns . 4.3 Growth and change  dynamic SMEs show flexibility Numerous company startups despite bureaucracy To s et up a c om pan y, the m ain thi ngs n eed ed bes id es a brig ht ide a are c api ta l an d t im e. Turning a b us in es s ide a i nto r e al it y c an tak e an ywhere f r om s even d a ys to 50 on av erag e, d epe ndi n g on the country. The process goes faster in some of Germany’s EU nei ghb ours an d th e U S ( 6 d a ys) tha n i t do es i n Ger m any ( 1 8 da ys) . 16 Moreo ver, th ere are differenc es in t he out la ys r e quire d to set up a new business. Measured as a percentage of a country’s per c apita inc om e, s tartups ar e r elat ivel y c os t -intens ive i n I tal y, S pa in and Po lan d. I n Ger m any, e x pend itures o n s tartu ps r un to r ou ghl y 5% of per c ap ita inc om e. It is d ifficult n onet he les s to as c ertain j us t ho w s eri ous l y burea uc r ac y hin ders entr e pren eurs in th e v arious c o untr i es on a ver age, f or nati ons with a h igh s t artup r ate d o n ot f ac e a d em o ns trabl y s m aller am ount of r ed tap e. Ap pare ntl y, n eit her s tartu p c os ts n or the f ear of failure have a major influence on an entrepreneur’s decision to set up a c om pan y. The n egat i v e c orr elat io n be t ween t he s tartup ra te and t he c os ts of inc or porat i on or t h e f ear of f ailur e 17 doe s not c om e unex pec t edl y. This r elat io n s hip is not ver y pro nou nc ed , tho ugh. Adm inistr ati ve r egu lat io n is c ons idere d m ore of a probl em for ex istin g c om panies th an as an o bs tac le f or s tartups . On the oth er hand , th e s tartup r ate m ight pres um abl y b e h ig her i n s om e c ountries if there wer e l es s burea uc r ac y. Fluctuation – life cycles of SMEs are often too short F luc tuat io n l ook s not on l y a t the s tart ups e nteri ng t he m ark et but also a t th e num ber of c om pani es ex it ing the m ark et – wheth er du e to i ns ol venc y or s im pl y c los ing do wn. H igh er f luc tuat io n in the c ours e of the b us in es s c ycl e c an b e c aus e d b y a m ore f lex ibl e m ark et, but also b y an u nc ertain or vol ati le en viro nm ent. Ne t gro wth r ates are us u al l y l ink ed wit h the bus i nes s c lim ate or pr edic at ed on s tr uc tural c ha nge. The r el at ions h ip bet ween m ark et entr ies and m ark et ex its f luc tuates m uch les s i n Ger m an y th an in c ountri es s uc h as the U S, t he N eth erla nds or an arr a y of c ountries f r o m Eas tern Europ e. N onet he les s , G er m an y s ti ll has a pos i ti ve s t ar tup ba la nc e, f or bes ides th e s tartu p rate the ins ol ve nc y r a te is also r elat i vel y lo w. Entr y r ates ex c ee d ex it rate s b y a part icul arl y wi de m argin in Slo vak ia, f or ex am ple, with its gro wth rea din g of o ver 5 %. The C zec h Rep ubl ic a nd H ung a r y r eg istered a d e cli ne in t h e num ber of SM Es duri ng t he pas t f e w years , as the num ber of ins o lvenc ies ex c eeded tha t of ne w c om pani es ent erin g th e m ark et. In Hun gar y and t he U S, where eit her t h e tim e and m one y or th e c o s ts inv ol ved in s tart ing up a b us ines s ar e rela ti ve l y l ow, t he hig h f lu c tuati on m a y be p artl y ex p la ine d b y th e r elat i ve s im plicit y of proc edu r es f or s etting up a c om pan y. In c o untr i es where t here is a gr eater f ea r of f ailure, s uc h as G erm an y, s tart up e ntrepren eurs are pres um abl y m ore 16 Am ong the EU -15 it t akes a particularly long whil e t o overc ome adminis t rativ e hurdles in Spain, Aust ria and Luxem bourg; nearly 50 days are nec essary in B ulgaria. OECD (2005). 17 Glo bal E ntrepreneurs hip Monit or (GEM). Fear of Fail ure. 0 20 40 60 NL US BE HU SI SE FI CZ PT IE IT DE UK FR ES S t art-up rat e Fear of fail ure F ear of fail ure S ou r ce s: GEM, OECD 2 0 0 5 % 16 -5 0 5 10 15 CZ HU NL US IT SI SE FI DE UK ES BE IE PT FR SK Net fluc t uat ion E xit rat e S t art-up rat e F luctuati on i n SME l i fe S ou r ce : OECD 2 0 0 5 % c ycles 17 An international assessment of SMEs April 15, 2009 13 r eticent. Ho wev er, it is n ot pos s ibl e to le nd em pirical u nderp inn in g to this p laus ibl e ex p la nat ion. Survival rates for the first year of a startup’s existence tend to differ litt le f r om c ountr y to c o untr y. More t ha n 80% of al l S ME s ex ist f or m ore than one year. In Spa in, f or ex am ple, m ore than 80% of the f irm s survive th eir f irs t year, 75% of th em their s ec ond yea r, a nd m ore than 50% are s ti ll aro und af ter their f if th year. Co m panies in the s erv ice s ec tor t end to f alter m ore tha n c om panies in t he m anuf ac turing s ec tor. O n a verag e, abo ut h alf of all S M Es s urvi ve the f irs t f ive years of their e x istenc e. Company growth is one indicator of success Besides survival, another factor determining a company’s success is gro wth. F as t -gro wing c om pani es that s urv ive f or at l ea s t f ive years are referred to as ―gazelles‖. Most of Europe’s ―gazelles‖, both in term s of headc ount an d s al es turno ver, are t o b e f ound in t he Ba ltic s tates an d B ul garia . This is partl y at tr ib utab le to t he ec onom ic m odernis ation proc es s es in thes e c o untr i es . If ne w s tar tup s – which us ual l y disp la y f airl y s tr o ng f luc tuati ons an d f as ter gr o wth th an es tabl ishe d f irm s – are f ac tored i n, t he s h are of SM Es with a rap id l y gro wing h eadc o unt r ang es f r om 5% to 9% i n parts of Centr al an d Eas tern Euro pe. This c om pares with arou nd 5% i n th e Unit ed Stat es . 4.4 The self-employed as SME initiators E v en t hou gh it is difficult to differentia te s tat istica ll y bet ween s e lf - em plo yment, s o le propr i eto r s hips an d S MEs, t he s e lf -em plo yment r atio pla ys a s pec ia l r o le. A hig h rati o of s elf -em plo yed pers ons ind icates s e lf -starter s and e ntrepren eurs prep ared to p ut th eir i deas into ac ti on. Moreo ve r, th e s elf -em plo yment rat io c orr e l ates pos iti ve l y with the em plo yment r ate a nd th e s hare of va lue ad de d. SM Es are in m os t c as es r un b y a f am il y or partn ers or ar e s et u p as s ole pro prie tors hi ps . B ec au s e of this th ere is a nat ural c orr elati on bet ween t he num ber of s elf -em plo yed and of SM Es , b ec aus e neit her vari abl e is s ta tist ical l y in dep end ent. T here are ver y d i vers e m otivat ions f or bec om ing s e lf -em plo yed or starting up one’s own business. Motives for a startup in the EU, for example, include the desire to be one’s own boss, to earn more m one y or to m as ter the c ha lle nges c o nnec te d with s e lf -em plo yment. Bes id es , a virt ue is of ten m ade out of nec es s it y: m an y pe op le bec om e s elf-em plo yed to a vo id u nem plo yme nt. Ac c ordin g to the EU def in iti on, s e lf -em plo yed p ers ons are s ole or j oint pro prie tors of an e nter pris e i n which t he y work . 18 Si nc e s ev eral pers ons , e. g. a lso f am il y m em bers , m a y be r eg istered as s elf - em plo yed , th e num ber of s elf -em plo yed is hi gh er tha n the num ber of SM Es . O ver 4 m illi on peo pl e are s e lf -em plo yed in Ger m an y, whil e the f igure f or the EU is near l y 33 m ill ion ( in bot h c as es i nc lud ing f arm ers) . There are ab out 1 6 m illio n s elf -em plo yed i n t he bro ader def init io n i n th e U S, whil e s l ight l y o ver 5 m ill io n are inc orpor ate d. Moreo ver, G erm an y also diff erentiates s ta tistic al l y bet ween s e lf - em plo yed wit h em plo yees and s e lf -em plo yed with out em plo yees . 18 In the US, statisticians differentiate more precisely between the ―self -employed‖ and ―business owners‖. Owners do not necessaril y have to get involved in t he day - to-day operat ions of their business, but as partners t hey may do so. By c ontrast, it is essent ial t hat t he s elf -employed cont rol the operat ions and m anage t he bus iness thems elves in order to generat e t heir i ncome. In Germany, t he self - em ployment ratio is capt ured in an annual m icro -census and expres sed as the perc ent age of s elf -employed persons in relat ion to the tot al labour f orc e. 0 20 40 60 80 IE US FI FR BG AT DE PL PT IT ES EL CZ UK HU Cos t s as a perc ent age of per c apit a inc om e Num ber of days Num ber of adm inis t rat ive proc edures F ounding a company - S ou r ce : W o r l d Ban k 20 0 7 /0 8 Ea se of s tarti ng busi ness 18 0 20 40 60 80 100 FI IT NL ES SE UK HU SK 1 year 2 years 4 years 5 years Su rv i v al rate for SMEs S ou r ce : OECD 2 0 0 5 % 19 Current Issues 14 April 15, 2009 Banks finance SMEs worldwide A study c onduct ed under t he auspices of t he W orld B ank compares t he pat t erns of bank lending t o SMEs in 45 count ries. A lack of inf ormation on performance or credit his t ory as well as inadequat e amount s of collateral at startups lead banks’ loan officers m ost often to harbour doubts about company c redit worthiness. Established older f irms , by c ont rast, buil d up a relationship wit h t heir bank over t im e or have a good enough credit s t anding or c ollat eral to be classif ied as c redit worthy and low-ris k borrower s , and t hus obt ain access t o loans wit h m ore favourable c ondit ions. Over 80% of t he banks in developing and indus t rial c ountries c onsider SME bus iness to be a prof it able undertaking. The SME m ark et t ends to be c overed by domest ic bank s as oppos ed t o f oreign banks. Banks view m acroec onomi c inst abilit y (developing c ount ries ) and/ or competit ion (indus t rial c ount ries ) as t he k ey obst acles to SME f unding. The m ost important c riteria f or credit decisions are: the assessment of a company’s f inanc ial healt h, credit standing, pers onali t y of t he owner, purpos e of the loan and c oll ateral (m ore im portant f or smaller banks ). The m ost im portant f orms of coll ateral, usually, are m ortgages , equit y c apital and personal s ec urities. Banks of t en demand higher f ees and int erest rat es from SMEs than f rom large c ompanies, but also have more overdue loans t o S MEs in their portf oli os. The result of t he s t udy is that t he f inancing of SMEs is not s o m uch a f act or of their size as of the overall f inanc ing environm ent in t heir c ount ry. S ou r ce : Beck/De mir g ü c -Kun t/ Peria ( 2 008 ) : Banki n g SMEs a r o u n d th e Wo rl d – Le nding pra ctice s, b u siness mod e l s, d r i ver s a nd o b sta cles. Wo rl d Ban k. T hus , about 56% of the s elf -em plo yed opera te as s o le propr ie tors , whi le 4 4% h av e s taff work ing f or them 19 . T he introd uc tio n of the int er net im m ens el y boos t ed t he pos s ibi li ties f or the s elf -em plo yed to t urn a b us in es s ide a i nto r e al it y o n a ver y sm all s c ale. F or o ver te n years the s elf -em plo yment r at io c l im bed c ontin ua ll y i n Ger m an y b ef ore pe ak ing, a nd it h as dec l ine d s li ght l y s inc e 20 06. This is p artl y at tr ibut abl e to th e bo om ing e c onom y o ver the p as t f ew years which re s ulted in c om panies up pi ng the ir headc o unts whi le re duc i ng the n um ber of peopl e c om pell ed t o bec o m e s elf-em plo yed f or l ac k of alternat i ves , a nd par tl y to c h ang es to the incentives for forming an ―Ich -AG‖, i.e. a ―Me plc‖. 20 In th e EU , th e M edi terr ane an c ou ntries ha ve t he h ig h es t s elf - em plo yment rat ios . O ver 2 0% of the lab our f orc e is s e lf -em plo yed i n G r eec e, Ita l y, P ortuga l a nd Rom ania, a nd t hus th e s elf -em plo yed hav e a ver y im portant – an d hi gher – mac r oec onom ic signif icanc e than in G erm an y, f or ins t an c e, where the s e lf -em plo yment rat io ( around 10%) is lo wer th an the EU a vera ge ( EU -27: r o ugh l y 17%) . In an in ternat io na l c om parison there is n ot o nl y a hi gh em plo yment effec t thank s to a hi gh s e lf -em plo yment rat io but m oreover a pos iti ve c r os s-countr y c orr e lat ion b et wee n th e c ontr ibu tio n of SM Es to em plo yment, t he s h are of m icro enterpris es , the s e lf -em pl o yment r atio and the c ontr i but ion to va lue ad ded, as a lread y in dicate d earli er. 4.5 Access to funding is essential for an SME’s survival Ac c es s to ex terna l f und ing i s es s entia l f or the s ur viva l of sm all and m edium -sized e nterpris es s inc e t he y are us ua ll y u nab l e to pros per on e qui t y c a pit al al one . Var i ous t ypes of f inanc i ng are a va ila bl e, alth oug h n ot a ll of them are equ al l y r ec om m endable f o r all c as es . F urtherm ore, there is a part icular f oc us on the eq uit y b as e. The l ega l f orm of a bus in es s is of s ig nif icanc e ins of ar as it pl a ys a part in dec isio ns r egard in g th e a va ilm ent of vari ous t ypes of f inanc i ng ins tr um ents . Legal form – the relationship between ownership and risk T he particul ar r el ati ons h ip bet ween o wners h ip and pe r f orm anc e, or lia bi lit y and risk , is perhaps the c r uc ia l d ifferenc e bet we en S MEs and larg e c orpor at io ns . 21 For this inter li nk age is a lso ref l ec ted in c om pan y po lic y dec is ions a nd th us s hap es f undin g req uirem ents . W hether a c om pan y is r isk avers e or r isk tolerant hi ng es in m an y c as es on th e pers o nal it y of the o wner or o wners  and of c ours e on its eq uit y c us h ion. In G erm an y, an SM E is t ypi c all y s et up in t he leg al f or m of the s ole propietorship, and its owner is in most cases also the company’s c hief ex ec uti ve. O f the ne ar l y 700 ,00 0 ne w f irm s r egistered i n 2 007 , s om e 81% wer e s ol e pro pri etors hips , 12% wer e lau nc hed as a priv ate lim ited -lia bi lit y c om pan y ( G m bH) and 5% c ons ti tuted a C ivil - c ode c om pan y ( G bR) . 22 While c om panies s et u p as p art ners hips do not n eed to ha ve a m inim um capital s to ck in view of the owners’ 19 OECD, Eurostat, IfM B onn. 20 Germany’s unemployed may apply for a government subsidy to set up an ―Ich - AG‖. This funding is designed to pave the way to becoming self -employed and es t ablishing a bus iness. 21 Gric hnik, Dietm ar (2003). Finanzierungs verhalt en m itt elst ändischer Unt ernehm en im intern at ionalen Vergleich. In K ienbaum/ B örner. Neue Finanzierungs wege f ür den Mit t elst and. Dusseldorf. 22 Germ an Federal St atistical Offic e (2008). Neugründungen im J ahr 2007, ht t p:// www.des t at is.de 0 10 20 30 40 LU US FR DE HU AT FI UK EU -27 CZ ES PL PT IT EL Se lf -employment rati o S ou r ce : OECD 2 0 0 6 /2 0 0 7 % * EL = Greec e 20 An international assessment of SMEs April 15, 2009 15 Small Business Act for Europe (SBAE) S MEs have t opped the E uropean Commission’s list of priorities for several years. The E U is striving to creat e more unif orm, m ore c omparable c onditions f or sm all c ompanies in E urope in order t o im prove the adm inistrat ive and legal enviro nment. The t en bas ic principles c ontained in t he SBAE are headlined by the maxim ―Think small first‖: — More f avourable c ondit ions f or c ompanies and f amil y bus iness es — S ec ond chanc e f or ent repreneurs who have f ac ed bankrupt c y — Implement ―think small first‖ principle — Mak e publi c administ rations res pons ive t o SMEs’ needs — Fac il itat e S MEs' participation in publi c proc urem ent and bett er use stat e aid pos s ibili ties f or SMEs — Facilitate SME’s access to finance — Help S MEs t o benef it more f rom t he s ingle m arket — P romot e the upgrading of skil ls and all f orms of innovat ion — E nable S MEs t o turn environmental c hall enges int o opportunit ies — E nc ourage and support SMEs t o benef it f rom the growth of markets outside t he EU B es ides, a new regulat ion on the European privat e c ompany wil l all ow s ubsidiaries t o be s et up ac ross borders in all E U m ember stat es as privat e companies, unlike the current prac t ice wit h a different legal f orm in every m ember st at e. Further ref orms provide f or a reduc ed VAT rate for labour -int ensive s ervic es pe rform ed loc ally and payment deadli nes lim ited t o 30 days. The E U als o offers promot ion programm es f or S MEs. These inc lude f unding options whic h are direct ly avail able t o S MEs and partic ularly prom ot e t he areas of environment, res earc h and educ at ion, st ruc tural funds t o prom ot e s t ruct urall y weak areas and regions and various f inancing inst ruments. These ins t ruments are usuall y offered via f inancial int ermediaries in order to expand t he lending volum e f or SMEs as a whole. The European I nves tment Fund (EIF), the E uropean I nves tment Bank (EIB ) and t he E uropean B ank f or Rec onst ruction and Development m ake avail able loan guarant ees, st artup capit al f ac ilit ies and f inancing fac ili t ies f or this purpos e. SMEs typically choose legal form of sole proprietorship personal liability, companies formed as a ―GmbH‖ or an ―AG‖ ( private a nd pub lic lim ited c om pan y, r es pec ti ve l y) are r equ ired b y la w t o h av e a m inim um lev el of eq uit y pai d i n. This m eans tha t th e lia bi lit y r isk is higher f or o wners of partners h ips . For c r edi tors , the equ it y le ve l is of m ajor s igni f icanc e s inc e a c om pan y is lia bl e f or its debts t o th e ex te nt c o vered b y its as s ets . The lo wer th e de gree of c apita l a deq uac y, the lar ger is the prob ab il it y of a c om pan y def ault ing on its d ebts . In th e US , 44 % of SM Es ar e s ole propr ietors h ips , 4 7% c orpo rati ons , and 9% p artners hi ps . The k e y differenc e b et ween pr op r ietors hi ps and c orp orati ons is t hat wit h propr ietors h ips a nd p artn ers hips th e o wners are li ab le t o th e am ount of their pri vate as s ets , whi le t his is us ual l y not the c as e with c o r porati ons . Inc or porat ion offers tax adv ant ages , and c or porat e s c an us e a pl ethor a of f ina nc ing ins tr um ents . An argum ent f avo urin g pro priet ors hips is that t he y enc oun ter l itt le re d ta pe wh en b ein g s et up. 23 In m os t of the EU m em ber s tates , to o, m ore than half of all SM Es are in the ha nds of pers on a ll y l ia ble o wners . Then t her e are m ixed f orms , depen di ng o n th e c o untr y, which s tip ul ate lim ite d l iab il it y f or c om pan y o wners . Bes i des , the EU h as ins t itut ed Euro p ean tr ans nat ion al le gal f orm s aim ed at m ak ing l if e eas i er f or c om pan ies operat in g ac r os s nat ion al b order s . Suc h an arr ang em ent is a lso prov ide d f or SM Es i n th e S m all Bus in es s Ac t f or E urop e (s ee box ) , which offers c om panies op eratin g i n Europ e th e p os s ibilit y of s etti ng up s ubs i di aries o uts id e th ei r nati ona l b order s us i ng a s ing le leg al s tr uc ture. EU: Financing customs differ Sm all c om panies t ypica ll y f i nanc e t he ir ac ti vities differentl y th an large c om pani es do . S inc e ac c es s to f undin g is es s en ti al f or c om pan y ex pans ion, ne w j obs an d gro wth, it is an im portant le ver f or ec onom ic polic ymak ers in s eek ing to c r eat e a bett e r c lim ate f or inn ov ati on a nd gro wth . Int e r natio na ll y, th e b ank ing s yst em is the m ost im portant ins t itut ion al prov ider of f inanc in g an d l o ans f or SM Es . The c r itica l f ac tor th at is of ten the k e y to f und in g is ho w m uc h inf orm ation is a va il abl e to t he b ank pertai nin g to the c om pan y an d the c o lla tera l at han d. In bo th t he U S a nd Euro pe, bank s pla y th e b igg es t rol e in prov id ing f unding f or SM Es . Som e 65 % of Am eric an SM Es r e l y o n ba nk s for c apita l, whi le t he s h are in E urope is 79% . Le as in g f irm s ( 24%) and pub lic i ns tit uti ons ( 11%) f ol l o w i n s ec ond an d th ird p lac e in the EU. But t here, too , th e na tio na l differenc es lo om large: whil e on l y ha lf of F inn ish S MEs appro ac h th eir ba nk s for f unding, the s hare i n, s a y, Ir eland or Aus tr ia is o ver 90 %. O ther t ypes of f inanc in g s uc h as leas i ng are wides pre ad in G erm an y ( 71%) , but c ons id erabl y les s s o in Fi nl and ( 27%) . O verdr af t loa ns are t he pref err ed opt ion f or Da nish and Ir ish f irm s . Anot her wor th while opt io n f or pr oduc er s of i ndus tr ia l goods is s upp li er c r edit , a t ype of f inanc in g th at us u al l y m ak es s ens e ei ther f or a s hort peri od ( s inc e t he int eres t rates f or longer - term s upplier c r edi t are hi g her tha n n orm al borr o win g r ates ) or f or SM Es wit hout ac c es s to ot her s ourc es of f und in g. A lo wer le ve l of bank f inanc ing is n ot n ec es s aril y attr ibut ab le t o s up pl y, thou gh. It c an also be due to dem and. T he c om pan y f ina nc in g s tr uc tures and th eir d ifferenc es ac r os s Europ e are m ore the prod u c t of c ountr y -spec if ic f inanc ing s ystem s and c us tom s as well as of s tr uc tures that ha ve gro wn o ver t im e than 23 Federal Res erve B oard (2006). Financ ial Servic es Used by Sm all Bus inesses: E videnc e from the 2003 Survey of Sm all B usiness Finance. Current Issues 16 April 15, 2009 High rate of company card use among American SMEs of c om pan y s i ze, r es pec ti v e s ec tor or years of ex iste n c e. The tax s yst em , financ ia l s yst em ( bank -bas ed, m ark et-bas ed), leg al f r am ework ( s uc h as c apital adeq uac y r ul es ) as wel l as c ultura l r eas ons and f am il y o wners hip pl a y a p art. Germany: Relationship with ―house bank‖ still valued highly T he Europe an Com m iss ion has att es ted that G erm an y has th e bes t prom otion c onc ep t f or SM E s , inc lu di ng f ina nc in g as p ec ts , with in the EU. N ev erthe les s , e ven bef ore t he ons et of the ec ono m ic and f inanc ia l c r isis, G erm an c om panies them s elves h ad in dicate d th at the y were diss at isf ied with f ina nc ing c ond it ions . 24 It is n o t pos s ib le t o f ind the k e y to t heir diss at isf ac tion at the m ac r oec ono m ic level. The r elat ions h ips b et we en SMEs and their local ―house banks‖ continue to be v alu ed hig hl y in Ger m an y. Rou gh l y 80% of the S MEs o bta in f unding f r om bank s , with ov er 70% of the c om panies d oin g th e bu lk of their b ank ing with the ir l o c al s av in gs bank , m utual b ank or c r edit c ooperat ive. But near l y on e -third of th e c om panies a lso lo ok to gov ernm ent prom otion pro gram m es f or funding. Sm all c om panies in particu lar c ons i der t his as s i s tanc e es s ent ia l f or the ir in ves tm ent dec isio ns . United States: Credit cards used for financing SMEs An yon e who s tarts up a s m all bus i nes s in the US or o wns a r elat ivel y u nprof ita bl e c om pan y us ua ll y r e li es on c r ed it c ards ( privat e or c orpor ate) or on m ortgag e lo ans . As s oo n as s uc h c om panies gai n a f oot hol d or ex peri en c e a gro wth p has e, the ir o wners inc r eas i ngl y s tart to a pp l y f or r egu lar b ank loans or s m all bus i nes s loa ns that offer m ore f avour abl e borr o win g c on dit ions b ut ha ve m ore dem anding s tand ards an d r equ ire a bett er c r edit s tand i ng. Ev en thou gh t he US h as a m ark et-bas ed f ina nc ia l s yst em ( arm’s length lending) compared with Germany’s bank -bas ed s yst e m (relationship lending ) , s m aller US bus i ne s s es in part icul ar do pref er to ob tai n their f und in g f r om bank s ( 65% of SM Es ) and r el y o n tr adit io nal lo ans su c h as c r edit li nes , loa ns and leas ing. Mos t of the Am eric an SMEs are loc a ted in urba n reg ion s . This gi ves th em greater ac c es s to large ba nk s . The s hare of large b ank s f oc us ing on s m all bus i nes s len din g a nd m icr o -bus ines s len di ng h as thus gro wn ac c ording l y over the p as t f ew years . No nde p os itor y ins t itut io ns ( m ortgage f irm s , leas i ng f irm s , c r edit c ard c om panies , f am ilies , s up pl ier s and ven ture c apita l f irm s) have also ex p erienc e d a s tr o ng inc r eas e. O ne pec ul iari t y of the Am eric an SM E is t he h ig h rate of c om pa ny c r ed it c ard us e (48% at s m all f irm s , up to 71% at larger c om pani es ) . The adv ant age of c r edit c ards f or m an y entr e prene urs is th eir be in g a c om binat ion ins tr um ent f or pa ymen t trans ac t ions as well as pre - f inanc in g which e nab les a s im ple, f lex ib le wa y f or micro f irm s in particu lar to ac qu ire liq ui dit y r ap id l y an d at s h ort no tice . Ma inl y you nger and s m aller c om pani es which are us ual l y c la s s if ied b y c r editors as r isk ier enter pri s es with onl y lim ited ac c es s to r egu lar SM E l oans us e c r edit c ards as a s ubs t itut e for other t ypes of c r edit. Stat istics c onf irm that as a c om pan y gro ws, i ts dem and f or loans inc r eas es . There is hard l y a n y c orr e lat ion bet wee n th e age of a c om pan y and its t ype of f inanc in g. On t he one han d, young er f irm s 24 Flas h Eurobaromet er 2005. Ot her European c ount ries score better t han Germany in t erms of satisfaction wit h acc ess to bank financ ing. For roughly 25% of the Germ an S MEs surveyed in 2005 said t hat t hey were not sat isfied wit h access to f inanc ing f acil ities or the financ ial underpinning of t he projec ts in quest ion; over 80% said that access to bank loans had become m ore diffic ult compared t o one year earli er; t his is one of t he highes t rat es of dissatisfaction among the E U m embers. 0 10 20 30 40 DE FR ES EU -15 IT GR UK FI Sh are of SMEs usi ng external financing % S ou r ce : Eur o b a r o mete r 20 0 5 21 0% 50% 100% Ot her Credit li ne Loan Leasing Owner loan P ersonal credit card Com pany credit card S uppli er credit S om e k ind of credit Ty pes of SME financing i n the US S ou r ce s: SBA, F e d e r a l Rese r ve 20 0 3 /2 0 0 6 22 0 50 100 FI CZ UK P L GR IT EU -15 DE ES FR IE AT Leas ing B ank M ost common ty pes of financing S ou r ce : Eur o b a r o mete r 20 0 5 , 20 0 6 % 23 An international assessment of SMEs April 15, 2009 17 Equity ratio tends to increase as the company expands No clear correlation between age of company and type of financing ( in ex iste nc e f or les s th an f i ve years ) tend t o o bta in, an d dem and, f ewer l oa ns , which m a y be attrib utab le to t he f ac t th at t he y ha ve not yet es tab lish ed t heir c r e dit s tandi ng or pers on al r e lat io ns hip wit h their bank . On the oth er ha nd, lon ger -es tab lish ed c om pan ies no lon ger h av e to pa y b ac k s tartup c os ts and ha ve am as sed m ore equ it y, m eaning that the y d o not ha ve to f al l bac k on a l ternat ive t ypes of f inanc in g as of ten. Al l i n a ll, SM Es are f r equen tl y de pen dent on pri vat e rel atio ns hi ps and f und in g s ourc es an d/or the pers ona l c r ed it wort hin es s of the c om pan y o wner. It is im portant f or al l SM Es that the y h ave a bal anc ed f in anc i ng m ix and bolst er the ir eq uit y c a pit al s o the y are better abl e to de al wit h th e ups an d do wns of t he bus i n es s c ycl e. Focus on the equity ratio – cushion and springboard In G erm an y, the s pot lig ht is r epeat ed l y tr ai ned on c om pan y e qui t y r atios . Ev en t hou gh t he y ar e trend in g u p, e qui t y r a ti os at S M Es s ti ll f all f ar s hort of thos e at l arg e c om panies . Sm all bus i ne s s es wit h annu al r ev enu es of les s tha n EUR 2 m have a m ean e quit y r at io of nearl y 1 9%. The prob lem here is th at SM Es in the lo w es t quart il e hav e a n eq uit y r a tio of m erel y 3%, wh ile the r ead in g i n the t op quarti le is n earl y 4 0%. Mor eov er, t he equ it y r at io inc r e as es as the c om pan y ex pan ds . Lar ge c om panies in G erm an y ha ve an a vera ge equ it y r ati o of 30%; the differenc es bet wee n th e q uarti les i n th is group are n ot th at pr ono un c ed. The tre nd t o wards risi ng e qui t y le vels was un brok en also in 200 8. At end -2008 arou nd 27% of Germany’s SMEs showed an equity ratio of over 30%. Furthermore, 32% of the S MEs r em ained und erc apit al ised with les s t han 10% equ it y. 25 Bes ides , it is also ne c es s ar y t o d ifferentia te ac c ordin g to s ec tor and not on l y c om pan y s i ze . Mos t of the a de qua tel y c apita lise d c om panies ar e f ound in the m anuf ac turing s ec tor. In c ertain s e gm ents of this s ec tor 26 nearl y half ( 48%) of the c om panies hav e m ore than 30% li abl e c apita l a t th eir d ispos a l. 27 O n av erage , th e e qui t y c us hio n of SM Es is t hick er in m ost Europe an c ountries t ha n i n Ger m an y. Data on t he e qu it y bas e of Europ ean SM Es as c las s if ied b y c om pan y s i ze s h o ws, f irs tl y, t ha t in G erm an y the e qu it y r ati o ac r os s bot h s ec tors and s i ze c ateg orie s i s m uc h lo wer t ha n it is i n, s a y, P ort uga l, S pa in or F r anc e a nd, s ec ondl y, t hat in o ther Euro pea n c oun tr ie s there are les s pro nou nc e d differenc es bet ween t he equ it y r at ios of sm aller a nd larger c om pan ies . 28 Pos s ib le ex pla nat ions are t hat it us e d to be eas ie r to b orr ow m one y in Ger m an y, which re quir ed les s eq uit y t o be he ld, and the tra dit ion al financing patterns of the SME sector. The strongly developed ―house bank‖ principle in Germany along with certain insolvency and tax gui del in es ob viate d th e ne e d f or a n ab un danc e of equ it y. S tud ies 29 s ho w, m oreov er, th at t he ac tual l iab le c a pit al of G erm an S MEs is f r equentl y a grea t de al hi gh er than the eq uit y le ve l pos t ed i n th e bal anc e s he et. This c onc ur s with t he perc ept ion of ent r eprene urs who, b y a l arge m aj orit y ( 8 0%) , us ed to reg ard t heir e quit y r at io as adeq uat e. 25 Deut s c he B undesbank 2006, Credit ref orm 2008. W irtschaftslage und Finanzierung im Mittelst and 2008. 26 Manuf ac t uring of iron products, sheet m etal and met al goods, furnit ure, m usic ins t ruments, sport equipment, games and jewell ery. 27 Credit ref orm 2008. W irtschaf tslage und Finanzierung im Mit t elstand 2008. 28 Gric hnik, Dietm ar (2003). Finanzierungs verhalt en m itt elst ändischer Unt ernehm en im internat ionalen Vergleich. In K ienbaum/ B örner: Neue Finanzierun gs wege f ür den Mit t elst and, Dusseldorf. Observat ory of E uropean S MEs, SMEs and Access to Financ e, 2003. BA CH Dat enbank 2007. Deut sche Bundes bank 2006. 29 K fW Mitt elst andsm onitor (2003). Mit t elstandsfinanzierung im Umbruc h. 18. 9 24 28. 5 30 0 5 10 15 20 25 30 35 < 2 m 2 -10 m 10 -50 m > 50 m Eq uity rati o i n Germany b y turnover c at egory (% ) S ou r ce : Deu tsch e Bun d e sb a n k 20 0 6 24 Current Issues 18 April 15, 2009 Innovations: also important for SMEs High equity ratio serves as cushion in crisis Chan ges i n f inanc ia l m ark et s tr uc tures inc l ud ing int egr ated gl oba l m ark ets and i ntens if ied c o m petitive pres s ures ha ve r es ulte d i n G erm an SM Es no w a lso s t arting to boos t t he ir eq uit y. Mos t of the c om panie s sur ve yed s aid b ac k in 2005 that eq uit y f ina nc ing wou ld gai n im portanc e f or them goin g f orw ard. A he alt h y c a pi tal ade quac y pol ic y is urge ntl y r e qu ired f or ne w s tart ups , inn ov ati ve c om panies and c r isis s e ctors i n p artic u lar s o th e y c an b e b etter prepare d f or c hanges in f in anc i ng c on dit ions . I n l ig ht of the c urr ent f ina nc ia l an d ec onom ic c r isis the eq ui t y bas e a nd t he d i vers if icati on of f inanc ing hav e b ec om e m ore im portant f or SM Es to e na ble them to r id e o u t the d o wnt urn a nd r a pi dl y r e gai n th eir f oot ing f or th e c o m ing ups win g. 5. Where will the journey lead? Future determinants for SMEs T ec hnologica l progr es s is t he u ltim ate e ngi ne of ec on om ic growth. Ec onom ist J os eph Sc hum peter s ai d th at th e d isti ngu ishin g f eature of entr epren eurs is t heir de s ire to c on tin ua ll y im prove t heir ec o nom ic pos it ion throu gh inn ov ati on s . Entre prene uria l s pir it c r e ates inn ov ati ons an d h enc e ec o nom ic growth an d s tr uc tura l c han ge. W hether inn ov ati ons b ec o m e es tablishe d i n th e m arket de pen ds s tr ongl y o n h o w c om panies go a bou t it , bu t th is also de pends on t he degre e of c ultura l ac c e ptan c e and dem and f or inn ov ati ve produc ts , with out which f e wer in no vat ions woul d b e c r eate d. Bot h the inn ov ati on cl im ate in t he r e s pec tive c ou ntries as wel l a s the s i ze of the c om pan y and its s ec tor affiliat ion det erm ine the int e ns it y of inn ov ati on. I n th e tra ns port and c o ns tr uc tio n s ec tors , in nov ati ons are les s prob abl e or n ec es s ar y a f ac tor f or a f irm to be ab le t o h old its o wn t han the y ar e i n d istr ib uti ve tra de or the m anuf ac turing s ec t or, which t hri ve on n e w pr oduc ts . 30 5.1 Innovation – economic growth driven by progress The EU’s Lisbon Strategy is an attempt to use a variety of political m eas ures to boos t pr oduc ti vit y and the pac e of inno va t ion in order to m atc h the ec on om ic perform anc e of J apan and the US. The target s et b y th e E U i n 20 0 0 to inc r eas e R&D s p en din g to 3% of G DP ( f r om 1.9%) b y th e year 201 0 was r et ai ned whe n the Lisbo n Str ate g y was r e vise d. M or eove r, th e a im was f or the s h are of the priv ate s ec tor in R&D in ves tm ent to r ise. In th e EU , ab out three out of ever y ten f irm s have ne w produc ts i n their portf olio or are ge nera ting inc om e f r om them . There are m ore of thes e S MEs g en erati ng i nc om e fr om in nov ati ons i n t he n e w m em ber states tha n i n th e old ones . In a nuts h el l: t he big ger a f irm , the m ore lik el y it is to be in nov ati ve . W hile 62% of all m icro f irm s gener ate inc om e f r om new or im proved produc ts , t he f i gure f or larg e c om panies is o ver 75 %. Ac r oss all s i ze c ateg ories t her e is o nl y a sm all differenc e in t he s h are of r eve nues gen erate d th r ough c om pan y in no vat ions ( r ou g hl y 12%) , while the s hare o f inno vat ive f irm s its elf grows as f irm s inc r eas e in s i ze. This r es u lts i n s m aller, inn ov ati ve f irm s gener ati ng a c om parative l y l arge s h are of the ir r even ues f r om innova tio ns . 31 T he c hief obs tac les t o i nno vat ions in t he EU are c ite d as bei ng f inanc in g pro blem s , a s c arcit y of sk ille d l abo ur, a l ac k of dem and 30 On t he other hand, there is al so an int erpret at ion problem in dist ributive t rade, s inc e ret ail ers who m ark et innovat ive produc t s aut omaticall y generate t urnover t hrough innovat ive produc ts wit hout being innovat ive thems elves. 31 Flas h Eurobaromet er Survey 2007. 0 20 40 60 80 1 to 9 10 to 49 50 to 249 250+ EU -27: SMEs generati ng S ou r ce : Eur o b a r o mete r 20 0 6 i ncome from i nnovati ons H eadc ount % 25 An international assessment of SMEs April 15, 2009 19 German SMEs more willing to embrace innovations than their French competitors and pers onn el c os ts . O n th e pos i ti ve s i de, it oug ht t o b e not ed t hat hardl y a n y c om panies c ons ider t he ( a bs enc e of ) protec tion of propert y r i ghts or a lac k of sk ills to us e n e w tec h no log i es as obs tac les . All in al l, t hou gh, there are s ubs ta nti al l y m ore c om panies that do n ot e ve n p lan to en gage in in no vat ive ac t ivit ies than on es that dec id e a gai ns t i nno va ti on b ec aus e of th e d ifficulti e s inv ol ve d. Bes id es , it was f oun d th at t he C EE c o untr ies narr o wed the perf orm anc e gap s l ig htl y f u r ther ag ain in 20 06. W hile t he n e wer EU m em ber states c ons id ered them s elves to be more hin dered in t he ir inn ov ati on dr ive b y lim ited ac c es s to f undin g an d a de arth of qua lif ied pers on ne l th an t h e EU -15, t he y ha d th e a dv a ntag e of lo wer pers onn el c os ts a nd s tr on g er dem and f or inn ov ati ons . Com pared with the ir pe ers in nei gh bou r ing Po lan d an d Fr anc e , G erm an SMEs are im pac ted m ore on th e i nno vat ion s c ore b y pers o n nel c os ts , but les s b y r es tr icti ve ac c es s to f undin g. Furth erm ore, the s hare of c om panies ope n to in no vat i on is hig her t han in Fr a nc e, f or ins tanc e. In i ndus tr i al s ec t ors , rough l y t wo -thirds of Germany’s SMEs and nearl y 9 0% of its larg e c om pan ies are bi g on in no vat io n. 32 Al l i n a ll, abou t 12 % of tota l R &D s p end ing in G erm an y is do ne b y SM Es . Abo ut 2 0% of R& D pers on nel is em plo yed at S MEs. W hile ex am ining the inf lu en c e of inno va tio n o n GD P, Am eric an r es earc hers disc ov ered a c orr elat ion bet wee n i nno va ti on a nd entr epre neurs h ip as dri ving f ac tors behin d reg ion al ec onom ic gro wth. Sm all e nterpr ises d eve lo p m ore patents per e m plo yee t han large on es do; the s m alles t f irm s have the hi ghes t pat e nt -to- em plo yee r ati o. H ight ec h a nd gro wth ind us tr ies s uc h a s biot ec hno lo g y or ph arm ac eutica ls ten d to be s er ved be s t b y inn ov ati ve SM Es . Ev en t ho ugh SM Es ac c oun t f or m e rel y 6. 5% of al l pate nts in the dat abas e ex am ined, the y pl a y a k e y r ol e f or tec hno log ical ad va nc em ent s inc e i nno va tio ns of sm all f irm s are of ten ad opte d b y large f irm s where th e y are us ed or r e f ined f urther. 33 5.2 Internationalisation of SMEs – seizing the benefits of globalisation and focusing on inherent strengths As the gl oba lisa tio n tre nd s preads , SM Es are also inc r eas in gl y geari ng t hem s elves f or the wor ld m ark et, both to t ap n e w s al es m ark ets as well as ne w s ou r c ing arr an gem ents and j o i nt v ent ures . Ex port tra de offers s i zeab le m ark et opportun iti es and g r owth pote nti al. Ma n y SM Es , a nu m ber of them in Germ an y, are worl d leaders in their segments (―hidden champions‖) and can market their s tr engths g lo bal l y. Exports chiefly aimed at the single European market It is d ifficult to c om pare Eur opea n d ata bec aus e in m any c as es t he y inc lu de intra-Euro pea n trad e. W hen beer is s hi ppe d ac r os s the G erm an -Fr enc h border f r o m Fr eiburg t o Str as bourg , it is r ec orded differentl y i n th e s tat istics th an th e whisk e y s h ip ped fr om Tennes s ee to Flor ida in the US or tex t il es f r om G uang zhou t o B eiji ng i n Ch in a. If the e uro are a or al l th e EU m em ber states were c l as s if ied as a s ingl e E urop ean m ark et, up to 6 2% of ex terna l tra de woul d disap pear f r om the s tatistic s ; rough l y 40% of G erm an ex ports go t o the e uro are a. On the oth er han d, th e e uro are a as a s i ngl e m ark et c annot be r e garde d as equ al t o th e US dom es tic m arket. In s p it e of hav in g a s i ng le c urr enc y i n the 1 6 m em ber c ountries , l angu age 32 Euros t at 2004, IfM 20 06. 33 S B A (2005). The I nnovat ion-Entrepreneurs hip Nexus . SBA (2008). An Analysis of Sm all B usiness P atents by Industry and Firm S ize. 0 20 40 60 S k il led labour/P ers onnel t oo expens ive Lac k of s k il led labour Financ ing problem s P rot ec t ion of int ell ec t ual property Lac k of dem and for innovat ions Not planned PL FR DE M ain constr aints on S ou r ce : Eur o b a r o mete r Sur ve y 2 0 0 6 % i nnovati on acti v i ti es 26 0 10 20 30 40 US FR UK EU -15 DE NL BE SE Ex port rati o of SMEs S ou r ce : KfW 20 0 4 % 27 0 20 40 60 80 100 A verage: 11% Ex port er rati o by turnover category % S m all  large c om panies S ou r ce : If M Bon n 2 0 0 5 28 Current Issues 20 April 15, 2009 When the little dragons awake – China’s SMEs I t is a complex job t o def ine and different iate S MEs in China, sinc e Chinese statis tics in s ome cases include firms t hat are very large als o by Western standards wit h up t o 2,000 work ers . B esides, not all S MEs are in privat e hands , whic h mak es it even m ore difficult to def ine t he t erm. Up to the 1980s m ost SMEs were still referred to as ―town and village enterprises‖. A ccording t o dat a f rom t he c ensus of 2004 t here are roughly 40 m privat e SMEs operat ing in China. This cont rasts wit h t he roughly 19 m S MEs in the EU and around 6 m in t he US. To ac hieve t he same densit y of SMEs t o tot al ent erpris es like in ot her count ries the number would have t o ris e to about 60 m. Only s lowly inc reasing domest ic dem and is c ompell ing m any companies to enter t he int ernat iona l market – a step which is enc ouraged by new t ec hnologies. Unli k e in t he OECD count ries m ost of China's expo rts come f rom sm all and medium-sized ent erpris es . Frequent ly, it is returned emigrants who were educ at ed abroad t hat are now s etting up s uccessful, int ernationall y operat ing Chinese companies. A low wage level gives China’s S MEs a large cost advant age. S ou r ce : CESi fo Fo r u m, Chr i s Hall Macq uari e Sch o o l Sy dn e y, 2007. barr iers , d ifferent le gisl at ion and s a le s m ark ets as well as trade barr iers c aus ed b y d iffering r egul ator y r eg im es ham per goo ds and s ervices f lo ws to a gre ater degre e th an in t he U S. The Sm all Bus in es s Ac t f or E urope is m eant to dism antle t he r em ain ing barr iers i n i ntra -Eur ope an tr ade and he lp to l ig hten the loa d on SM Es . F ewer th an 1 0% of E urope an S MEs are ex p orter s , whereas 28% of large c om pani es ge nerat e r eve nues t his wa y. 34 Ac c ord in g to s urve ys, m os t Euro pea n S MEs s ee the m ain tra de ba r r iers as a lac k of k nowled ge abo ut th e f oreig n m ark et (1 3%) , im port duti es ( 9%) and c a pit al c o ns tr ain ts ( 9% ) . Nonet he les s , i n s om e c ountries ov er 20% of the S MEs are en ga ged in ex port tra de. I n s m all dom es tic m ark ets s uc h as Lux em bourg m ore than e lse wher e, c o m panies look m ore intentl y f or op portu nit i es abroa d. F urtherm ore, in ord er to re duc e th e g eogra ph ical dista nc e f r om their c us tom ers, 5% of Europ ea n S MEs o pt to f orm j oint ve ntures or m aintain s u bs id iari es abro a d. Co ntrar y to f r eque ntl y he ard worr i es , thes e f oreig n link s us ual l y hav e e ith er no im pac t on d om e stic em plo yment f igur es or e ve n ha ve a p os iti ve im pac t. 35 Ev en t hou gh t he C entr a l a n d Eas t ern E urop ean c o untr i es are inc r eas i ngl y gro wing in s ta t ure as trad e p artners , Euro pean S MEs are in s om e c as es s till s c ep tical abo ut t he e nl arged EU . Ho weve r, the h ig h er their export ratio becomes, the more positive the SMEs’ attit ude . German SMEs: Foreign business is worthwhile T he pas t f ew years ha ve s e en G erm an SM Es pos t an i nc r eas e i n both the ir ex port r ati os and in t he n um ber of ex porters am ong their small firms. According to Germany’s KfW, over 20% of the SMEs hav e rep orted f ore ign turno ver ( 21% of the SM Es with five or f e wer em plo yees ) . B y c ontr as t, in the t urno ver t ax s tatist ics it em erges that onl y a bou t 11% of al l S MEs ex port g oods or s ervices . Ho wever, it is as s um ed that the ex port ing ac ti vit y of m icr o f irm s is hig her tha n r eported in the c om pan y ta x s tatist ics . 36 In 200 4, aro un d 250, 000 SM Es and 5,0 00 larg e c om pan ies ex port ed goo ds to c ountri es outs id e th e E U. 37 Tak en toge ther, a c le ar tr en d em erges s ho win g that t he ex port rat io inc r eas es in li ne with c om pan y s i z e – up to an d inc lu di ng large c om panies , of whic h 8 1% are in vo l ved i n ex port tr ade. E ven tho ugh m os t of the int ernat ion al l y op erati n g f irm s foc us s olel y on ex p orts f r om the hom e m ark et, around 50% also m ainta in c ooperat i ve ven tures a nd/o r direc t i nv es tm ents abroad . 38 T he m ain ex port er is m anufac turing i n dus tr y, which is r es pons i ble f or two -th irds of al l ex p orts . Ho wever, th e b igg es t gro wth o ver th e pas t f ew years was r eg ister ed b y d istr ib uti ve trade an d s ervices . Manuf ac turi ng ind us tr y is al s o the c h ief c us tom er in ter m s of 34 European Comm ission (2007). The Observat ory of E uropean S MEs. 35 I f M B onn – Bedeut ung der außenwirts c haf tli c hen Akt ivität en für den deut schen Mit t elstand. 36 K fW Mitt elst andsm onitor (2008). Mit t elstand – auch kleine Unt ernehm en – erfolgreic h im Aus land. KfW (2008). Wie int ernat ional ist der deut sche Mit t elst and? W irtschafts observer Onli ne, No. 34. Besides, newer dat a evaluations suggest that 15 -25% of m icro firms export t heir produc t , s ince many m icro firms are not c apt ured by company tax s t at istics. 37 IfM Bonn’s calculations from turnover tax statistics. Wallau, Frank (2007). I nt ernat ionalisierung der mi ttelst ändi sc hen W irtschaf t – Chanc en und Ris iken. A report issued by the KfW (Wirtschaf tsobs erver No. 34) att ributes differenc es in t he dat a f rom t he t urnover t ax s t atistics and surveys to t he f act t hat exporting activit y is overes t im at ed in surveys yet underes t im at ed in official stat istics. 38 I f M B onn (2007). SMEs wit h t urnover of m ore than EUR 125, 000. No problem s : 36 % I m port dut ies : 9 % Capit al c ons t raint s : 9% Ot her reas ons : 33% Lac k of k nowledge of f oreign mark et s : 13% Ex port obstacles for SMEs (EU -27) S ou r ce : Eur o p e a n Commissi o n 2 0 0 7 29 An international assessment of SMEs April 15, 2009 21 Less export orientation in the US  among companies large and small Demographic trend leading to lack of skilled labour not only in Germany im ports , abs orbin g rou ghl y 50% of the tot al. In 2 00 6, F r anc e, th e U S and num erous EU c ou ntrie s were the m os t im portant ex port des tin ati ons of G erm an c om panies . 39 T he m os t im portant re as on s b y a wide m argin f or SM E s to en gag e in b us in es s abroa d are ac c es s to ne w s ales m ark ets ( 78%) an d th e s horing up of ex istin g m arkets , f ollo wed b y prox im it y t o c li ents ( 34%) , ac c es s to proc urem ent m ark ets ( 34%) and per s onne l an d non -pers onne l c os ts ( 26%) . T he f ac t that f oreign bus i ne s s is wort h whil e c an be s ee n b y th e f ac t that nearl y t wo -th irds of the c om panies ha ve ex pan ded the ir ac tivit ies abr oad ov er th e p as t f ew years . Moreo v er, th e c om panies operat in g abro ad ha ve a m ore pos i ti ve ev al uat ion of th eir ear nin gs and em plo yment s i tuat io n t han t he c om pani es that op erate o nl y in G erm an y. H igh er gr o wth rat es in the exporting countries, the EU’s eas tern e nl argem ent an d th e ex pa ns ion of the euro are a pa ve the wa y abro ad. 40 The ex tent to which t his tre nd wil l c on tin u e un brok en in t he f ac e of the c urr e nt g l oba l ec on om ic problem s r em ains to be s een. US goes China (and back) In th e US , c los e to 5 % of th e s m aller f irm s ex port good s and services; they account for 96% of the country’s exporters. Roughly 25% of the ex port turno ver c om es f r om SMEs whil e th e oth er 75% is gener ated b y l arge c om pan ies , of which ab out 40% are ac ti ve in f oreign tra de. I n th e U S, th e top 20 ex porters i n 2 006 ac c ounte d f or no l es s than 20% of tota l e x ports . The c hief ex port de s tinat ions ( 25%) are C ana da and Me x ico o wing t o th eir geo grap hical prox im it y and int egrat ion in NAFTA. O ver th e pas t f e w y ears the s hare of SM E ex ports to C hi na h as ex pa n ded at a n ab ov e -averag e p ac e. S inc e 1992 the num ber of Am eric an S MEs ex porti ng t o Ch in a has inc r eas ed m ore than s ix -fol d. Not e th at a c om parative l y s m all num ber of SMEs g enerat e ex port re ven ues i n Ch in a, s ugg es t ing that prim aril y larger SM Es v enture ac r os s the Pac if ic while s m aller ones te nd t o f oc us on t he Am eric an c ontine nt. 41 The r ea s ons are th e s i zeabl e o bs tac les t o trad in g in Ch ina c a us ed b y r egu l ator y, lan gua ge, ac c es s and c u ltu r al barr i ers . O n th e ot her si de of the Pacific, China’s SMEs are strongly represented in exporting industry (see box: China’s SMEs). 5.3 Recruiting problems dogging SMEs? Anot her f ac tor which p la ys a k e y r o le in the c apa bi lit y of SMEs t o m aster f uture c hal len ges is the em plo yment o utl ook . G iven the dem ographic tre nd it is part l y a m atter of the q uant it y o f labour ava il ab le a nd partl y a m at ter of their q ual if icati ons a nd c os ts . Qualifications and availability SM Es in var ious c o untr i es c om plai n to differing de gre es abo ut th e s uppl y of s k illed la bour av ai lab le in t he ir area. In t he Ba ltic c ou ntri es and Gr eec e m ore than h alf of the c om panies s urv e yed bem oan the f ac t that the y c a nno t f ind e noug h s k illed l abo ur, wheth er bec aus e of ina deq uate ed uc ati on and t r aini ng at h om e or em igration a broad . T he Balt ics and P ola nd are s uffering part icular l y f r om the em igrati on 39 Germ an Federal St atistical Offic e (2006). 40 KfW (2008). Wie int ernat ional ist der deut sche Mittelstand? Wirtschafts observer Onli ne, No. 34. 41 ht t p:// www.c ens us . gov/foreign-trade/ P ress-Release/edb/ 2006/ edbrel.pdf ; U.S. Departm ent of Comm erc e, E xporter Dat abas e. Excluding servic e exports , only goods . Sm all & Medium -Sized Exporting Companies: Stat istic al Overvie w, 2006. Current Issues 22 April 15, 2009 Employee qualifications are key factor of competition of sk illed la bour. La bo ur s tr eam s wes twards ha ve no s m all inf lue nc e on th e c ou ntries of origi n, a nd c an ev en lea d to a m edi um -term s lo wing of ec on om ic growth. Em plo yers in c ountr ies with a l ac k of sk ille d em plo yees s tat ed t h at th e y h ave a 15-20% j ob vac anc y r ate on a vera ge. G erm an entr eprene urs hav e l es s r eas on to c om plain than oth er Eur ope an n ati on als: o nl y aro und 5% of th e j obs r em ained unf ill ed in 200 6. Ab out ha lf of the S MEs Europ e -wide s a y t hat, alto get her, the y h av e n o pr obl em s in their s earc h f or s uita bl e s taff. Sinc e the un em plo yment n um bers in all the m em ber countri es are hig her th an t he ir nat ural r at e of unem plo yment, it is, in the s hort r un at l eas t, n ot s o m uc h the n um ber of work ers availab le that wil l m ak e the d ifferenc e as th eir q ua lif icati ons an d d istr ib uti on. If c ountries are unab le to d iss uad e th eir s k ille d l abo ur f r om m igrating a broad, c om panies wil l f ac e ga ps in the ir hea dc ou nt. O n t he ot her s ide of the c o in, 5% of the s ur ve yed EU f irm s also s a y th e y ha ve re gistere d a lac k of uns k illed l ab our. F urtherm ore, worr i es f oc us on the s k ill s hortages ex hib ite d b y c om pan y f ound ers and thos e in the ir in ner c irc le, which is ver y m uc h c ons id ered a m ore s erious p r oblem than the m atter of SM E f undi ng. 42 Cost development A f urther p robl em f or SMEs is the c os t of pers onn el. It hol ds at leas t f or G erm an y t hat SM Es h a ve a wage c os t a dv ant age over larg e c om panies . This is part l y at tr ibut abl e to th e f ac t that lar ge c om panies t end to em plo y a great er s hare of hig hl y s k il led wor k ers , and pa r tl y t hat t he anc i ll ar y lab our c os ts at large c om pani es are hig her. Ho weve r, SM E proc es s es are at t he s am e tim e c ons ider abl y m ore labour-int ens i ve , with pers onn el c os ts ac c ou nti ng f or 23.3% of tota l c os ts , or ne arl y 1 0 per c entag e po ints m ore tha n a t larg e c om panies . This puts t he wage c os t ad vant age bac k in to a r eas ona ble pers pec t ive. Ac c ording to a E urobarom eter s urve y 43 particu larl y H ung aria n e ntrepren eurs ( ov er 70%) f ee l t hat ex p ens i ve lab our l im its their c orp orate s uc c es s . In G erm an y, 3 5% of thos e s urve yed agree d with t his s tatem ent. The wage le ve l i n Hung ar y is abou t on e-th ird be lo w th e E U le ve l, b ut it h as r isen s tr o ngl y o ver t he pas t f ew years . S inc e t he in c r eas e in produc t ivit y h as n ot k ept pac e with the r ise i n wages , p ers onne l is r ela ti ve l y ex pens iv e. The g ap bet ween produc t ivit y a nd wage dem ands m a y c ont in u e to c a us e probl em s for all c om panies in f uture, and nat ural l y n ot j us t SM Es . T he as s um ption t hat c om pan y loc a tio n is dec isi ve f or a s ufficient s uppl y of qu al if ied la bour is not borne out in G erm a ny. It is e ve n to be s ee n th at c om panies f r om sm all to wns or r ur al area s hav e f ewer probl em s in rec r uitin g p ers onne l t han SM Es i n urb an agg lom erations . I n l arge c i ti es , the c om petit io n f or sk ill ed l abo ur is toug her: b oth f r om s im ilarl y s i zed p eers an d a lso fr om large c om panies . Add iti ona ll y, t h e s am e s urve y d eterm ined that 62% of the SM Es appr oac he d d o l i ttle s tr at eg ic pl ann in g i n th e area of pers onn el m ark eting, but 9 0% r egar d th e bu il di ng of e m plo yer brand ing as th e m os t prom ising weap on in t he war f or ta le nt. SM Es hav e to s tr ugg le at reg ul ar i nterv als to o verc om e their r eput ati on of being ―wallflowers‖. 42 SUERF Conf erenc e 2008, Von Derwall (ING). 43 Eurobarom eter s urvey of t he E uropean Comm ission 2006/ 2007. -100 0 100 UK LU ES EE FR PL EL EU -27 PT DE FI LT SI CZ IT HU Lac k of s k il led labour S k il led labour/P ers onnel too expens ive Wh ere do firms face re - S ou r ce : Eur o b a r o mete r Sur ve y 2 0 0 6 c ruit i ng problems and why 30 An international assessment of SMEs April 15, 2009 23 S om e of them m ay be ab le to s hak e off this r eput ati on or enh anc e it, ho wever, th ank s to their s t a tus as hi dde n c ham pions or thank s to gro wth opp ortun iti es i n th e s ec tor. 44 The degree to which SM Es are inn ov ati ve and op erate int e r natio na ll y is partl y a f ac tor in determ ining ho w attrac t ive t he y are f or ( hi ghl y) s k ille d l abou r. Conclusion SM Es pl a y a k e y r ol e f or ec onom ic and em plo yment gr o wth in G erm an y a nd in m os t of the c ountr ies u nder r e vie w. This has t o b e borne in m ind in s h api ng t h e regu lat or y f r am ework as wel l as when  in vie w of the ec on om ic and f ina nc ia l c r isis  att ent io n f oc us es on ―bailout packages‖ for large companies that are more in the public e ye. Kath arin a Ho hm ann 44 Supply or demand? According t o a Compamedia survey among German job appli c ants, about 35% think that large em ployers offer the ideal labour environm ent. 50% feel that SMEs offer the best environm ent, 14% are s elf - em ployed or work in t he li beral professions. If t hese figures are s et in relat ion to t he job situat ion, an interesting correlat ion emerges: the condit ions of labour dem and m atch thos e of labour distribution. So the question is: does the s upply of jobs det ermi ne demand or vic e vers a? ******* * ** ISSN 1612 314X All our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by e-mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Main Fax: +49 69 910-31877 E-mail: marketing.dbr@db.com © Copyright 2009. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. 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In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Printed by: HST Offsetdruck Schadt & Tetzlaff GbR, Dieburg Print ISSN 1612-314X / Internet and e-mail ISSN 1612-3158 Economic outlook 2009 German economy in stormy waters ............................................................................................ January 29, 2009 The German pharmacy of the future More systems – more competition – cheaper products ...................................................................... January 20, 2009 German mechanical engineering steeling economy for the post-oil era ................................................................................................... December 16, 2008 Logistics in Germany A growth sector facing turbulent times ......................................................................................... November 27, 2008 German manufacturing in a downswing ................................................................................. November 21, 2008 Building a cleaner planet The construction industry will benefit from climate change ............................................................. November 14, 2008 Taxation of income in the globalisation era Treading the line between fairness and efficiency ............................................................................. October 31, 2008 SWFs and foreign investment policies – an update ................................................................... October 22, 2008 The broad basis of societal progress Freedom, trust, tolerance, education and much more .......................................................................... October 2, 2008