SME Development Issues in Europe

Paper to the 7th SMEs in a Global Economy Conference 2010

Professor Robert Blackburn Small Business Research Centre Director of Research Faculty of Business and Law r.blackburn@kingston.ac.uk http://business.kingston.ac.uk

Aims of the presentation

Importance of SMEs in Europe Uneven impacts; resilience; size; start-ups Enterprise, employment and growth of sector

Types of impacts

Impact of recession on SMEs

UK evidence: macro and survey evidence

EU level: macro evidence

Importance of SMEs in EU:

Number of SMEs and Employment (EU 27) estimates

Shows dominance of SMEs across the Union Enterprise numbers Employment

Importance of SMEs in EU: sector estimates 2008

Growth of Number of SMEs in EU 27:

non-financial businesses by size class 2002=100

Year
2007 2008 2009 Source: EIM 2010

EU 27 Change GDP
2.9 0.8 -4.1

Change Employment
1.7 0.9 -2.3

Fed into collapse in confidence and real economy

Reduction in demand for goods and services Global trade particularly hit Some regions affected much more than others Implications for SMEs??

Recession literature shows

There is no single recession effect on SMEs Impact varies by industry, country, region and firm type Causes of the recession shapes the depth & duration of the downturn i.e. 2008 GFC Limits of extrapolating experience of previous recessions to current crisis e.g. 1991 -> 2008 no! Links with globalisation
growing interconnectedness of economic activity shapes business opportunities, but also entails new threats

Need to differentiate between

i. established firms: coping strategies ii. new firm formation: types of start-up

Impact on start-up? % of necessity entrepreneurs in Total Entrepreneurial Activity (GEM 2009)

Suggests no fixed pattern in effect of recession on type of start up across different economies Effects of recession have a time lag? Requires sharper focus of effects on SME population

Risks of starting a business (EU 27)

Perhaps fear of bankruptcy and uncertainty feeding through to TEA?

Business Churn: 2006-2009

Shows a slight reduction in business entry rates in most countries

Increase in exit rates Outcome= Net-entry rates of firms is downwards Hence, recessionary effects feeding through but not dramatic collapse

Need more fine-grain evidence lets look at the UK case

The UK Case
Demonstrate key issues in relation to GFC
Shift towards one-person enterprises Finance remains important issue Established firms adopt variable strategies

UK GDP Change 2007-2009

Six consecutive quarters of decline: from April 2008 -6.2% What of the impact on SMEs and their responses?

Context: broader measures and environment

UK government wide number of schemes Introduces special measures to support SMEs in recession
Predominantly finance instruments

But, new Government expenditure cutbacks

Reduce massive public sector deficit

More is yet to come with Comprehensive Spending Review (end Oct 2010)

UK Evidence: Size of enterprises and dynamics 2008-09

4.8 million private sector enterprises Only 6,000 employed more than 249 people 75% had no employees 2008-09 number of enterprises with employees declined by 17,000 Number of enterprises with no employees increased by 68,000 Hence, rise in oneperson businesses Why?
Source: BIS 2010

UK is a relatively easy place to start a business

WORLD BANK DOING BUSINESS REPORT 2010 Top ten country rankings - Overall ease of doing business 2007 1 2 3 4 5 6 7 8 9 Singapore New Zealand United States Canada Hong Kong UK Denmark Australia Norway 2008 Singapore New Zealand United States Hong Kong Denmark UK Canada Ireland Australia 2009 Singapore New Zealand United States Hong Kong Denmark UK Ireland Canada Australia 2010 Singapore New Zealand Hong Kong United States UK Denmark Ireland Canada Australia

10

Ireland

Iceland

Norway

Norway

(but not as easy as some economies!): see World Bank: The Costs of Doing Business

Why rise in one-person enterprises?

Historically, recession-push Identified in 1930s & 1970s recessions Employees leaving enterprises (large & small) Suggests that the rise may be a blip rather than a structural change? Although there has been a steady trend Data suggests that this has accelerated Maybe a combination of structural (eg. technology) and cyclical effects What of established firms...?

Existing business responses: types of strategic adaptation

retrenchment

Adaptation

investment

ambidextrous

Banks in the firing line

Bank base rate of interest at record low

Hence, rate of interest for SMEs now historically low

Bank lending to SMEs in UK

New lending continues but below previous levels Problem of investment readiness and viable propositions Banks risk averse in lending decisions Bank deposits 56bn; structured lending 45bn; overdrafts 8bn
Source BBA Oct 2010

Impact of recession: UK survey evidence

Two stage design Sample composition
mainly micros (3/4), earning <500k pa, business/finance & information/communication services, range of performance outcomes (survivors only)

online/mail survey of 343 SMEs (March-August 2009); in-depth interviews with 26 (June-August )

What of the speed of the recession on SMEs?

Timing of Recession-related Effects Time % of sample During 2007 2.3 During 2008 34.7 During 2009 29.4 Have not felt the recession 20.1 No data 13.4 N 343 Notes: Percentages do not sum to 100 due to rounding. Source: online/mail survey

How has recession fed through to these SMEs?

Business Performance Changes Between Q1, 2008 and Q1, 2009 Value of sales Profit margins Significantly higher 10.8 6.4 Slightly higher 15.7 14.0 About the same 19.2 27.4 Slightly lower 28.0 28.9 Significantly lower 23.9 20.4 No data 2.3 2.9 N 343 343 Source: online/mail survey

Some firms thrive, even in recession Evidence of slowing down for most firms

Strategies to Increase or Maintain Business Performance Since Start-2008

Actions Taken Recession-affected (%) Not Recession-affected (%)

Changes in sales and marketing:

Increased sales effort 61.2 42.0

Reduced selling prices, or held price rises below inflation

31.3

11.6

Changes in employment:
Reduced numbers employed Introduced wage/salary freeze Introduced new working practices 37.9 22.9 22.9 10.1 7.2 8.7

Increased numbers employed

Changes in products and/or services offered: Reduced the range of products/services offered !

11.9

36.2

9.7

1.4

Changes in finance:
Invested personal savings Reduced investment expenditure 22.5 14.1 10.1 4.3

Changes in owner/manager behaviour:

Personally worked longer hours Cancelled personal holidays N 59.9 26.0 227 43.5 8.7 69

Source: Kitching et al 2009. Only stat sig differences in table.

Existing business responses: types of strategic adaptation

retrenchment

Adaptation

investment

ambidextrous

Conclusion
SMEs important to EU and UK economy UK new firms: shift to oneperson enterprises Effects still ongoing and take time

Represents a shock to the environment

GFC leads to slowdown of economy

Impact on startups: slow down

Impact on UK SMEs: existing firms changes in practices

Future also contingent on Govt interventions

Implications for research and practice

Effects of recession varied: why? Future research needs to be on owner-manager strategies Focus of attention on micro firms Public-policy needs to address cultural barriers to re-starts (honest bankrupts) Implications for Asia-Pacific
Has weathered the GFC, but would same pattern emerge if economic shock?

Thank you
Questions and discussion......
http://business.kingston.ac.uk/robertblackburn http://isb.sagepub.com/ r.blackburn@kingston.ac.uk