Effect of policy decisions on the employment dynamics of SMEs

Author: Patrice Muller, Cecillia Caliandro, Viktoriya Peycheva, Dimitri Gagliardi, Chiara Marzocchi, Ronald
Institution: London Economics
Type of case study: Research

About the research

London Economics was commissioned by The European Commission to contribute to a report into the performance of SMEs (Small and Medium-sized Enterprises) in the EU-28. The report was delivered by a team of research institutes and consultancies working alongside London Economics. 

In addition to reviewing recent and future developments in the SME sector in EU-28 Member States and selected non-EU countries, each year, the Annual Report focuses on a special topic. A Working Paper focusing on this special topic is published alongside the report. In 2014/15, the special topic was the ‘employment dynamics of the SMEs’. 

The report is part of a wider annual study, the "SME Performance Review" which is a qualitative and quantitative study to outline trends in SME performance and guide policy making. It includes, amongst other things, an interactive web-portal and a set of country factsheets providing information about the implementation of The Small Business Act (SBA). The SBA is an overarching framework for the European Union policy on SMEs. It aims to improve the approach to entrepreneurship in Europe, simplify the regulatory and policy environment for SMEs, and remove the remaining barriers to their development. 

The aim of the study is to measure the effects of policy decisions taken, and to inform future policy making decisions. The research had three main aims:

  • To monitor and assess countries’ progress in the introduction of The Small Business Act (SBA) 
  • To measure actual versus expected performance of SMEs
  • To assess the contribution of SMEs to Job Creation 

This respected and readily available annual report is utilised throughout the EU-28. Whilst its primary purpose is to monitor and assess performance to deliver the SBA, it is also a valuable resource for demonstrating the prevailing environment for SMEs across EU-28 Member States. The annual report provides a synopsis of the size, structure and importance of SMEs to the European economy and an overview of the past and forecast performance of SMEs from 2008 to 2016. Data from all EU-28 Member States are used to compare performance, evaluate policies and identify best practice. Comparisons with countries outside the EU-28 and with the large enterprise sector are also included.

 The findings present a positive performance for SMEs in the EU-28 countries reporting that:

  • Between 2012 and 2013: value added grew by 1.6% and employment declined by 0.5%
  • Between 2013 and 2014: value added grew by 3.3%. and employment grew by 1.2% 

The special study analysed in depth the behavior of SME’s as job creators in the years following the global financial crisis in 2007 - 2008. Several data sources, such as ORBIS (data on over 200 million companies across the globe, administered by Bureau van Dijk) and National Statistical Offices Micro-data were used to provide an in-depth analysis of the drivers and patterns in job creation across countries and over time.

Methodology

The report assesses SMEs across the EU-28. For the micro-data analysis in the special study, available datasets differ between Member States due to differences in data collection and sampling designs across countries. The approach was therefore to define the statistical data needed, to investigate the available datasets and develop a bespoke methodology for each Member State. 

The Office for National Statistics (ONS) data is the sole source used to compile all the statistical data in the United Kingdom. Access to the data was gained via the Statistical Research Service within ONS. The analysis focused on SMEs from the non-financial business economy using the IDBR (Inter-Departmental Business Register). The IDBR is the key sampling frame for UK business statistics and is maintained and developed by the Business Registers Unit (BRU) within ONS. The Business Structure Database (BSD), also held by the BRU, creates a longitudinal version of the IDBR for research use, taking full account of changes in ownership and restructuring of businesses. 

Further information on the data is available on the ONS website. 

The analysis considered firms that were either SMEs (fewer than 250 employees) in 2007 or in 2012.  All state owned companies, subsidiaries of foreign companies and public institutions were excluded. Additionally, all firms in the financial business economy sector as classified in the European Business Classification System, Nomenclature Generale des Activities Economiques dans les Communuates Europennes (NACE Rev 2), were not considered. 

Research Findings

The major findings for EU-28 non-financial business sector in 2014 included:

 Importance of SMEs 

  • SMEs accounted for 99.8% of all enterprises in the non-financial business sector in the EU-28. Out of which, 93% were micro SMEs employing fewer than 10 people. The remaining 0.2% were large enterprises
  •  SMEs account for 89.98 million people are employed in SMEs (66.9% of all employment) across Member States
  • For every km2 of land surface, the EU-28 has an average of 5 SMEs

 Growth and Employment 

  • SMEs accounted for 71.4% of the increase in employment in 2014 in the non-financial business sector throughout the EU-28.
  • SME performance improved in 2014. Value added grew by 3.3% and employment by 1.2% against the 2013 figures of 1.6 % and 0.5% respectively. However, performance was heterogeneous between EU-28 countries.
  • The UK was among the 3 best performing Member States with Romania and Malta in 2014, with  UK value added and employment growing by 11.6% and just under 3% respectively. 

 Assessing SMEs by Sector 

  • About ¾ of SMEs are in the five key sectors: ‘wholesale and retail trade’, ‘manufacturing’, ‘construction’, ‘business services’ and ‘accommodation’.
  • Among the five key sectors “business services” experienced the fastest growth across all 3 performance indicators (employment, value added and number of SMEs).
  • The other four key sectors and the ‘other’ sector also recorded good value added growth ranging from 2.7% to 3.4%, but the employment growth performance of these sectors was much weaker, especially in ‘construction’ where employment continued to fall in 2014 (despite an increase of 3.4% in value added) and ‘manufacturing’ where employment grew by only 0.8%.

 Projections

  • In 2015, the number of entreprises, value added and employment of EU-28 SMEs were projected to grow by 3.3%, 0.8% and 0.5% respectively
  • In 2016, the number of entreprises, value added and employment of EU-28 SMEs were projected to grow  by 3.7%, 0.9% and 0.7% respectively

Employment creation by SMEs 

  • The job creating SMEs were primarily in service-orientated sectors.
  • Net employment creation from 2008 to 2014 was particularly strong in knowledge-intensive service sectors regardless of the size of the SME. In contrast, knowledge-intensive goods producing sectors showed net job losses between 2008 – 2013.
  • Young SME firms of no more than nine years of age were the main net employment creators in the years preceding the study. 

Impact of the research and findings for policy

 The SME Annual Report is produced as part of the annual SME Performance Review which focuses on the implementation of the European Small Business Act (SBA). The focus on the employment dynamics of the SMEs in the 2014/15 report was to draw attention of European and national policy-makers to the contribution SMEs make to the employment recovery in the EU-28. The key country findings were used in the country recommendations issued by the European Commission as part of the European Semester, together with calls for action in specific areas where the performance of SMEs was found to be weak and the implementation of the SBA is far from complete.

 In the foreword of the 2014/15 report, Elzbieta Bienkowska – Member of the Commission for the Internal Market, Industry, Entrepreneurship and SMEs and EU-28 SME Envoy, wrote “For the first time in a number of years, our annual EU-28 SME report presents good news at a time when the EU-28 has 23 million unemployed citizens, many of whom are young and have not yet started their careers.”

 She does however, warn against complacency, and goes on to focus her attention on the policy decisions that have facilitated the results: “All newly initiated EU-28 policy packages are designed with SMEs in mind. The new Single Market Strategy (SMS) is an example. The SMS sees the potential of the EU-28 as a tool, for building a stronger and fairer EU-28 economy, one market place with fewer obstacles to enable the free movement of goods and services.”

 Her foreword ends with her recognition that her role allows her to coordinate policies in response to the annual report “….I am ideally placed to coordinate the SME policies of the Commission and of the Member States. For me, the findings of this report demonstrates that our joint efforts are starting to show positive results as well as a positive and encouraging challenge to ensure that we remain engaged in Pro-SME policy reforms in the EU-28.”

 The research finding have helped to inform policy not only in the EU-28, but in other countries. For instance, a Congressional Research Service Report was published on the subject which highlights the relevance of the report:  “Given their differing political and economic circumstances, what works well for Europe may not work as well in the United States, and vice versa. Nevertheless, as the Europeans have demonstrated, examining what other developed countries are doing to assist smaller enterprises can be useful as each nation considers which policies may work best for them.”

 Read the Report

 https://ec.europa.eu/docsroom/documents/16341/attachments/2/translations

 Read the 2015/2016 and 2016/2017 Reports

 The special topic in the 2015/16 report (published November 2016) was the effect of the various characteristics of a country’s bankruptcy regime on business creation, and in the 2016/17 report (published November 2017) the special topic is self-employment as one route to create new SME businesses

https://ec.europa.eu/growth/smes/business-friendly-environment/performance-review

 Publications and outputs

 Data from the research has been cited in a CRS (Congressional Research Service) Report prepared for Members and Committees of Congress.

The SME peformance review report and special study was launched during SME Week (November 16 – 22) 2015 in Luxembourg. Coordinated by the European Commission, the event is organised every autumn together with the SME Assembly and the European Enterprise Promotion Awards Ceremony.

The SME Policy Institute Association – The Small and Medium Policy Institute Association is a Bulgarian independent, voluntary, nonprofit organisation created in 2016 that operates in the public interest.

The mission of the Institute is to provide specialised expertise, analytical and practical support to SMEs in Bulgaria, thus contributing to their long-term successful development.

http://www.e-sme.eu/en/annual-report-on-european-smes-20142015/

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