Fostering High Growth SMEs: Some Policy Considerations

Fostering High Growth SMEs: Some Policy Considerations
2 July 2012 John Moore

Governments & Enterprise Agency Stakeholders Around the World have been Concerned for many years about how to Foster the High Growth Potential of Small & Medium-Sized Enterprises.

There is of course no single answer and an effective strategy requires  a comprehensive approach promoting certified coaching, access to equity finance, and internationalisation – and removing incentives to stay small. Policies should aim at providing a fertile breeding ground for SMEs to grow, rather than at trying to “pick winners” and foster them.

High-growth enterprises have attracted considerable attention from policy makers in recent years – “for good reason”, says study author Stefan Lilischkis from empirica, “because research has widely substantiated the importance of high-growth new companies for job creation.” The number and share of high-growth enterprises is small, but the number and share of jobs they create is disproportionally large.

There are so many questions that need to be answered such as: What role can the European Union play in supporting high-growth enterprises? How are policies in support of high-growth SMEs distinct from general SME policy? What examples of such effective policies exist in Europe and beyond?

This paper is based upon the INNO-Grips Policy Brief.

Key Definitions & Statistical Evidence

The Organisation Economic Co-operation & Development (OECD) defines high-growth enterprises as firms with average annualised growth in employees or in turnover greater than 20% a year over a three-year period, and with ten or more employees at the beginning of the observation period. If these firms are not older than five years, they are named ‘gazelles’, symbolising the fast movement of these firms – one of the definitions that have become accepted in publications on this subject. The parallel notion of ‘gorillas’ – which denotes ‘large international players’ – may however be more what many policymakers desire: the European Microsofts, Googles and Amazons.

Comparable international data about high-growth SMEs does not exist, so a consistent picture of the prevalence of these firms cannot yet be drawn. The OECD-Eurostat Entrepreneurship Indicators Programme found that in 2006, the US were ahead of most European countries for which data were available. A Eurobarometer study found that in the three years before 2009 in several European countries the share of high-growth firms among all firms was larger than 20%. Another recent study found that the share of young enterprises among large innovative companies was much greater in the US and in other countries than in the EU. The US, it seems, might be a better breeding ground for high-growth enterprises than Europe. But the importance of such “big young global leaders” for overall economic wealth is open to question, given the existence of “hidden champions” in Europe. These are smaller global leaders, some in niche markets; they are enterprises that may be long-established, although little known to the public because of the highly specific nature of their products and services, but they are nevertheless very innovative and very important for jobs and wealth.

Growth Determinants & Related Policies

A crucial question for evidence-based and effective policies to foster enterprise growth is: why do enterprises grow? Or rather: why do some enterprises grow while others do not? Answers to such questions are complex. Many factors can trigger enterprise growth and, vice versa, possible barriers to growth are manifold. The recent IW Future Panel, a survey of several thousand German enterprises, asked companies about the main reasons and driving forces of their growth. The single most important reason stated by high-growth companies was that management actually targeted growth. Further reasons considered important were that “the company supplies to a growing market” and “successful introduction of new products or services”. Thus, company growth is apparently mainly the consequence of entrepreneurs actively taking advantage of business opportunities.

From a business functional point of view, companies that successfully access resources that have and use incentives determining their performance, and that successfully enter markets will innovate and grow. In particular, findings for the INNO-Grips study suggest that networks of certified high-growth coaches, facilitated access to venture capital, and facilitated internationalisation of marketing and sales may support high growth of companies. However, the number of studies about policies to support high-growth enterprises is still small. Research for the related INNO-Grips Policy Brief found hardly any focused analyses. Cost-benefit analyses of specific instruments or longitudinal studies with control groups of companies not receiving specific types of support would be required for adequate assessments of policies.

Examples of Policies in Support of High-Growth Enterprises

In Europe, policy attention to high-growth SMEs is intense at European Commission level, but limited in Member States. Related EU-wide programmes include Eurostars and the growth facilitator of the European Investment Fund. Targeted national policies for high growth SMEs were mainly found in the Nordic countries of Denmark, Finland and Norway. Other countries with such policies include Estonia, France, Ireland, Netherlands, and Spain. Beyond Europe, relevant policies were found in Australia, the US, China, Singapore and Korea. Case studies conducted for the INNO-Grips Policy Brief show how some countries support high-growth SMEs, while others focus on general SME policies from which high-growth SMEs may also benefit.

South Korea: In Korea there have recently been noticeable changes in the direction of SME policies. The policy concept for SMEs has been directed towards competitive SMEs, and away from protection of the weak. Transforming traditional SMEs to high-growth SMEs is a new policy focus, in particular in the “inno-biz” and “Global Stars” programmes. It is still too early to assess the impacts of these programmes.

Singapore: The government is seeking to diversify the country’s high-growth sectors. Two agencies are directly involved in supporting high-growth SMEs: SPRING collaborates with trade development agencies to assist promising local businesses with funding, management development, technology and innovation enhancement, and internationalisation. GET-Up supports long-term pre-competitive R&D. As there are no evaluation studies that could substantiate the impact of the government’s SME policy, lessons for Europe are difficult to draw.

Canada/USA: There are no specific policies for grants to industry in either Canada or the USA that focus on high-growth SMEs. Typically in Canada and the USA, only 4-6% of all firms are gazelles; but among those firms that access venture capital, the proportion of gazelles was found to increase to 12%. Furthermore, when combined with certain government R&D assistance programmes, this figure rises to more than 20%.

In Israel, the main relevant body is the Office of the Chief Scientist in the Ministry of Industry, Trade and Labour (OSC). The OSC operates no policy tools aimed explicitly or exclusively at high growth SMEs. However, a new programme named “The Relative Advantageous” will address the whole value chain of strongly growing sectors.

Policy Implications

The INNO-Grips policy brief concludes that generic recommendations for specific policy instruments cannot be made at this point. “Unfortunately, there is still a lack of evaluation studies that could substantiate certain measures to support high-growth SMEs as being particularly effective or ineffective”, says study author Stefan Lilischkis. “However, our research found evidence that policy measures should rather be indirect – they should fertilise the ground for future high growth of SMEs, but not support SMEs that do already perform high growth.” The policy brief suggests 10 points to be considered when taking decisions about such policies. The first five points apply to policy at the European, national or even regional level; point 6 applies mainly to national policy; points 7-10 concern European policy.

  1. Policies in support of high-growth SMEs are worthwhile: Since there is empirical evidence of the importance of high-growth SMEs for employment, it appears worthwhile to support enterprises of this type to leverage their positive impact on employment and growth.
  2. Seeking sustainable (high) growth: As high growth can also lead to high failure, the policy objective should be to generate sustainable growth, and not to set incentives for simply growing or growing strongly.
  3. Policies for general SMEs and for high-growth SMEs may coexist: Arguments from market failure theory and a theoretical welfare model assuming that both types of policy generate positive returns for society suggest that policies for general SMEs and for high-growth SMEs should co-exist.
  4. No need to focus on specific industries: Since high-growth firms can be found in any industry and since business ecosystems, which are important for companies’ sustainability and growth, often cut across different industries, policies in support of high-growth SMEs should not necessarily target specific industries.
  5. Broader approach to support high growth of SMEs: Policies in support of high growth of SMEs should take a comprehensive approach, not exclusively focusing on specific aspects (e.g. finance).
  6. Creating right framework conditions: There are ample examples of framework conditions unfavourable for high growth of SMEs. They may for example relate to investment regulation, start-up regulation, market entry barriers, labour law, bankruptcy law, taxation, and also to SME policies that offer rewards for staying small. Hence, rather than trying to “pick winners”, policy makers should first of all create framework conditions that provide fertile ground for winners to pick themselves. Second, policies could be designed for “hampered winners”, i.e. those that would not grow substantially without support – see implications 7-9.
  7. Specific roles of the European Commission: The Commission can take on specific roles in supporting high-growth SMEs. Its main role could be to drive the further expansion and improvement of the Single Market, e.g. for venture capital, rather than launching specific measures for high-growth SMEs.
  8. Enhance coaching opportunities: Qualified and certified coaching may help SMEs to grow, and cross the ‘chasm’ between pilot markets and mass markets. Since many SMEs do not take advantage of coaching opportunities, an infrastructure to encourage the replication of existing successful coaching networks throughout EU Member States could be set up.
  9. Improve access to growth finance: Since access to finance is a problem for many growth-oriented SMEs in Europe, improving access to growth finance should be a priority for policymakers seeking to support high-growth SMEs. From a European perspective, this means e.g. to realise a single market for venture capital.
  10. Improve internationalisation opportunities: Since high growth requires tapping larger markets, and national markets may be too small, internationalisation of SMEs should be facilitated. This may include further work on creating single markets in Europe, as well as enhancing the Enterprise Europe Network.

Many policymakers may find it tempting to support high-growth SMEs directly. However, some entrepreneurs are sceptical about such interventions, even if it might get them some money. “I never took advantage of any public support”, said serial entrepreneur Brian O’Connor at the INNO-Grips workshop on policies in support of high-growth SMEs in February 2011. “It would have been too expensive”. He argued that he would have had to spend too much time on administrative procedures in order to benefit (such as writing applications), and he felt he should better spend that time with what ultimately makes a successful business: with customers.

References & Further Information

The INNO-Grips policy brief on policies in support of high-growth innovative SMEs is available here!

Contact person: Dr Stefan Lilischkis, empirica GmbH (stefan.lilischkis@empirica.com).

John Moore has over 20 years experience of training and developing Managers, Coaches, Consultants and businesses. As Managing Director of Exponential Training, John researches, speaks, blogs and writes about how to improve performance. He also designs and delivers engaging, fun and interactive learning programmes. John is a Fellow Chartered Manager and has worked with managers and organisations in over 20 different countries.

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