European Firms in a Global Economy, states that large companies contribute disproportionately more to a country’s economic performance than smaller ones.
Larger enterprises pay higher wages, their turnover and profits are higher and they are more successful international players. The number of large businesses indicates how well a country performs economically.
However, there is surely something fundamentally wrong with this analysis. Large companies constitute only 0.2 per cent of European Union businesses whereas 99.8 per cent of EU businesses are small and medium-sized enterprises: 92.1 per cent are in fact micro businesses, with less than 10 employees. Other studies show that 85 per cent of all new employment in the EU is being created by SMEs. Should the main focus then be on large businesses when the EU legislates or should Europe focus on creating a healthier legislative environment for its smallest businesses to reap the benefits of their vast, but untapped potential?
The phrase ‘SMEs are the backbone of the European economy‘ has become one of the most popular pieces of political rhetoric, but if this is true, why are we not taking better care of this backbone? It is exactly this failure by the European Institutions as well as the member states to ‘think small first’ that causes the continuous struggle of the smallest businesses and their inability to innovate, grow and employ.
An Organisation for Economic Cooperation and Development (OECD) study showed that the financial crisis has hit entrepreneurs and small business hardest: the interest rates on loans are higher for SMEs as compared to the rates for large companies and SMEs have to provide more collateral in order to obtain loans. This has contributed to a sharp fall in the number of loans provided to SMEs since 2007.
Now, SMEs appear to be being hit by a double whammy. In addition to a lack of access to finance, policies makers and governments appear to be increasing the regulatory and administrative burdens that entrepreneurs have to manage creating even more obstacles to the development of small companies.
Is it not time for the powers that be in the EU to cut down on the regulatory and administrative burden for SMEs, improve access to and the cost of finance. The one-size-fits-all approach has not worked, will not work and needs to be removed. Small businesses cannot manage with the same rules and regulations as their larger counterparts. Where a large company will have the resources and perhaps dedicated staff to deal with a piece of European legislation, small companies often lack the resources to properly comply with the same laws.
What is the cumulative effect of this spiral of bureaucracy and attention to regulation? It has proven to be detrimental to many European SMEs. Imagine if a systematic SME-test was applied to every European Commission law prior to its implementation and the saving of time, resources and money that it would create for SMEs everywhere analysed.
Another important challenge that is stiffling SME growth is the European aversion to risk. Maybe too much emphasis has been placed by the EU on the need for small companies to be innovative, because with innovation comes risk-taking. Unlike the United States, where failure in business is accepted and a legitimate bankruptcy is seen as being part of the learning curve of a successful entrepreneur, a bankrupt entrepreneur in the EU is stigmatised and will find it virtually impossible to receive another bank loan – or to start a new business. Second chances for entrepreneurs are vital to the innovation process.
So let us start by thinking small first by creating a regulatory environment where small firms can focus on their business. Then we can design a landscape where SMEs feel confident to take risks and to innovate and then we can create the conditions where SMEs can find the financial support they need to flourish. It is only then that European SMEs will have a realistic chance of growing organically into successful larger enterprises.