The promotion of small and medium-sized enterprises in the EU

by Elisabeth Herrle

Study Paper

Faculty of Economics – Academic Year 2005-2006

Preface

This essay provides basic information on the way the EU tries to promote small and medium-sized enterprises (SMEs). This policy field is very complex as SMEs are affected by Community legislation on a host of issues. As a result, over the years, the institutions of the EU introduced a kaleidoscope of programmes targeted at SMEs to enhance their situation on the market.

To examine the most important ones of these programmes, first and foremost, the promotion of SMEs will be integrated into the industrial policy of the EU: I will shed some light on the rationale for an industrial policy and the three different approaches to it. Furthermore, I will elaborate on the evolution of the industrial policy within the EU. In the second part, I will have a closer look at SMEs in Europe, how they are defined and what their role is in the European economy.

After having given this background information, I will examine how the EU promotes SMEs. First of all, I will dwell on the European Charter for Small Enterprises followed by some information on the Multiannual Programme for Enterprise and Entrepreneurship. In addition, I will give some details on programmes to promote conditions conducive for entrepreneurial activity; The Entrepreneurship Action Plan and the eEurope 2005 Action Plan respectively Go Digital.

Finally, I will establish a connection between the EU industrial policy and the Lisbon Strategy.

Contents

Part 1 The Promotion of SMEs as a Part of the Industrial Policy 1

Chapter 1 Rationale for Industrial Policy 1
Market-based Industrial Policy 2
Interventionist Industrial Policy 3
Strategic Industrial Policy 5

Chapter 2 The Evolution of EU Industrial Policy. 6

Part 2 The Nature of SMEs 9

Chapter 3 The Definition of SMEs 9

Chapter 4 Statistics on SMEs 9

Chapter 5 Conclusion 12

Part 3 The Promotion of SMEs in the EU 13

Chapter 6 The European Charter for Small Enterprises 13
Adoption of the Charter 13

Contents of the Charter 13
Implementation of the Charter 15

Chapter 7 The Multiannual Programme for Enterprises and Entrepreneurship 16
Contents of the Programme 16
The Euro Info Centres Network 17
The Financial Instruments 18
Policy Development 18
Evaluation of the Programme 19

Chapter 8 Programmes to Promote Conditions Conducive to Entrepreneurial Activity 19
The Entrepreneurship Action Plan 19
eEurope 2005 Action Plan and Go Digital 21

Part 4 EU Industrial Policy and the Lisbon Strategy 23

Part 1 The Promotion of SMEs as a Part of the Industrial Policy

The 21st Report on Competition Policy of the EC entails a definition of industrial policy:
“Industrial Policy concerns the effective and coherent implementation of all those policies which impinge on the structural adjustment of industry with a view to promoting competitiveness. The provision of a horizontal framework in which industry can develop and prosper by remedying structural deficiencies and addressing areas where the market mechanism alone fails to provide the conditions necessary for success in the principal means by which the Community applies its industrial policy.”

This definition comprises
- general measures for the further development of the internal market (in this sense, industrial policy forms part of the general economic policy),
- external commercial policy (anti-dumping policy, bilateral and multilateral trade agreements with implications for individual industrial sectors),
- social and regional policy (when the industrial reconversion process has unacceptable social and regional consequences),
- competition policy (legal instruments for intervention in market mechanisms that are not functioning well and for monitoring state aid),
- R&D policy, and
- the strengthening of cooperation among European enterprises.

In general, the aim of industrial policy is to improve competitiveness. The EU has been active in all these areas and has developed a variety of programmes that influence a wide range of industries. The emphasise in the EU industrial policy is especially on helping SMEs to develop, improving competitiveness in European companies, and promoting innovation and R&D among them.¹

Chapter 1 The Rationale for Industrial Policy

Mainly, there are three different approaches to industrial policy:
- market-based industrial policy,
- interventionist industrial policy, and
- strategic industrial policy.

Market-based Industrial Policy

If a country pursues a market-based industrial policy, it is believed that the market mechanisms are in general effective in generating an efficient and vibrant industrial structure. Intervention only is necessary in considerable cases of market failure, i.e. when there is an imperfection in the price system that prevents an efficient allocation of resources. Market failure can take the form of externalities², market power³, imperfect competition⁴, and public goods⁵. The most widely accepted rationale for public intervention are externalities that trigger under-provision of R&D expenditures or training for labour (see figure 1.1). With regard to R&D we can observe the so-called free-rider problem: Companies will only invest heavily in R&D if they can appropriate all the benefits of the new knowledge for themselves. Though, some of these accrue to other firms or sectors, there is little incentive for companies to produce new knowledge, as the social return on investment on R&D and knowledge creation is larger than the private return. As a consequence, there is a role for the public sector to organise publicly funded R&D or to enhance the incentives of private companies to invest in knowledge creation, for instance via the patent system.⁶

However, there are some reservations about the ability of governments to correct market failures successfully, and some even argue that government intervention often leads to a worse outcome than that which arises from the imperfect market process. Therefore, in this approach the industrial policy is primarily negative. Consequently, competition policy, the removal of state aids to promote competitive markets, and deregulation programmes are regarded as the basis of industrial policy.⁷


Figure 1.1: Externalities and industrial policy

[Figure 1.1 available in download version]

Interventionist Industrial Policy

This kind of industrial policy is founded on the opinion that market failure in areas like R&D and labour training are important obstacles to the development of a dynamic industrial base. In addition, this approach may be used to favour certain companies and industries. It is sometimes advocated in order to support declining industries and to avoid the loss of jobs. Furthermore, social and regional considerations are deemed to be important factors in formulating a ‘good’ industrial policy. For instance, an industrial policy that enhances the productive capacity of poorer regions or sectors of economies with success can boost employment levels and income (see figure 1.2).

The essential part of this industrial policy are positive action and financial support by governments to guarantee sufficient R&D and training expenditures and to offer aid to poorer groups and regions. In addition, this approach to industrial policy tends to see a need for intervention in a wide range of industries and sectors embracing declining as well as emerging industries.⁸

Figure 1.2: Industrial policy as a means of boosting employment

[Figure 1.2 available in download version]

Strategic Industrial Policy

This approach takes a more strategic view on industrial policy. The core role for industrial policy is to support the growth of emerging industries to replace those that are weakening. The need for such an approach arises form the imperfect nature of the competitive environment. Therefore, selective help by use of state aids can provide competitive advantages to companies. These state aids can also be utilised to help companies to catch up on foreign competitors that are established in the market (see Figure 1.3).

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¹ cp. European Parliament(2006a), McDonald/Potton (2005), p. 174, and Nello (2005), p. 322 1
² Externalities are activities that affect others for better or worse, without those others paying or being compensated for the activity. Externalities exist when private costs or benefits do not equal social costs or benefits. (cp. Samuelson/Nordhaus (2001), pp. 36-37)
³ When a company or a group of companies has a high degree of control over the price and production decisions in an industry.
⁴ Imperfect competition refers to markets in which perfect competition does not hold because at least one seller (or buyer) is large enough to affect the market price and therefore faces a downward sloping demand (or supply) curve. Imperfect competition refers to any kind of imperfection – pure monopoly, oligopoly, or monopolistic competition. (cp. Samuelson/Nordhaus (2001), p. 36)
⁵ Public goods are commodities whose benefits are invisibly spread among the entire community, whether or not particular individuals desire to consume the public good. Private enterprises do not have the incentive to produce these goods.
⁶ cp. Price (2004), p. 214-216, McDonald/Potton (2005), pp. 175-176, Nello (2005), p. 322, and Navarro (2003), p. 3
⁷ cp. McDonald/Potton (2005), pp. 175-176
⁸ cp. McDonald/Potton (2005), p. 176 and Nello (2005), pp. 322-323