Select Committee on European Communities Twentieth Report


Policies - general principles

87. Most of EU industry and commerce consists of SMEs. To ensure that their contribution is fully realised, well-directed policies are needed to promote general competitiveness while giving appropriate support to SMEs so that, as far as possible, they can operate on a like for like basis with LSEs.

88. All EU Member States have policies to support SMEs. The EU has initiatives which are specifically targeted at SMEs - in the framework of its third MAP[23] - and also policies in various areas which affect SMEs. Policies at EU level have a significant role in facilitating the participation of SMEs in the European Single Market, through dissemination of best practice, promotion of co-operation between enterprises, and support for infrastructure development. The activities of the EU should, in accordance with the subsidiarity principle, be complementary to action at national level.

89. SMEs thrive on self-help and, at the level of both the EU and Member States, care needs to be taken that this is not stifled. SMEs should be subject to the minimum necessary regulatory burdens. There is a balance to be struck between the interests of individual SMEs and the wider interests of the economy and society.

90. Policies need not be only regulatory. SMEs seem particularly likely to benefit from imaginative schemes for providing information or other non-financial assistance.


91. Over 99 per cent of EU enterprises come within the current definition of SMEs. Although the definition includes sub-categories of micro, small and medium enterprises, we found little evidence that such differentiation was observed by policy makers. We accept that there is some argument against such differentiation in that it may create barriers to growth: for example, an SME might decide against taking on an additional employee if this took it into the next category with additional burdens. However, the same arguments do not apply in respect of non-regulatory matters such as non-financial assistance.

92. In any case, SMEs do not vary only in size. A "lifestyle" micro business not geared to expansion is very different from a dynamic growth-oriented one. A service enterprise may have very different needs from one involved in manufacturing. The concerns of new SMEs (the failure rate of which is high) will not be the same as those of established ones. We found minimal evidence that policy makers took account of these variations in developing their policies.

The impact of legislation

93. The Commission consults representative business organisations (although not normally with SMEs themselves) when formulating legislative proposals. Various efforts have been made to ease the regulatory burden. The Commission has a procedure for screening legislative proposals for their impact on SMEs, although doubts are expressed about its effectiveness. The US has a free-standing Advocate for Small Business, who advises the President directly on the effects of proposed legislation. The Committee endorses the UK Government's strong support for a "European Better Regulation Unit" to help assess the likely burden of initiatives for SMEs against the expected benefits.

94. Although the EU is often blamed for the effects of regulation, part of the blame attaches to the governments of Member States through the practice of "gold plating", where measures ostensibly implementing EC Directives go beyond the requirements. Employment legislation and Health and Safety measures are often cited as areas where this has happened. Member States should generally resist the temptation to extend or "gold plate" EC requirements in domestic legislation. Where such extension is intended, they should consult carefully and, if and when proposals are pursued further, distinguish more clearly between EC requirements and national supplementary provisions.

95. There are few instances where legislation explicitly exempts SMEs, although in some cases (for example, environmental legislation) impact thresholds effectively exclude many smaller enterprises. There are possibilities for substituting regulatory enforcement with a system of self appraisal, and for achievement of policy objectives through voluntary measures. While these may not necessarily ease the overall burden on SMEs, there may be a case for further examination of voluntary measures which substitute for, or supplement, regulation.

Access to finance

96. SMEs in the EU face difficulties in raising finance due to risk aversion on the part of banks, fragmentation of the capital markets and general shortage of venture capital. While the EU's capital markets are likely to become more unified as the European Single Market develops, there is a place for greater EU and Member State pro-activity in eliminating the remaining obstacles to free movement of capital within the Single Market. The Commission's effort to diversify SMEs' access to finance are welcome.

Structural funds

97. Structural funds account for a large proportion of the EU budget and offer the prospect of significant support for SMEs. The UK (apart from Northern Ireland) has not been a big recipient of these funds to date. While the Committee welcomes the Government's emphasis on synergies between European funding and the activities of UK Regional Development Agencies, more work should be done on developing individual SMEs' awareness of the availability of European Funding and refining the targeting to provide best value for money in supporting SMEs.

Trading within the European Single Market

98. SMEs should have unfettered access to the markets in other EU Member States. Under European law, many standards for products and services are harmonised. Where there is no such harmonisation, the doctrine of mutual recognition applies so that a product meeting the standards of one Member State can be sold throughout the EU. In practice, SMEs face considerable difficulties: for example, compliance with the UK BSI standard does not guarantee acceptance in other EU markets. This problem may be most acute in the case of "intermediate" goods which are used in further stages of production. The Single Market cannot be effectively completed while SMEs are disadvantaged in this way[24].

Public procurement

99. SMEs are disadvantaged in public procurement by invitations to tender which specify volumes which are beyond their capacity. In addition, the relatively high turnover rate of SMEs can make it harder for them to meet requirements for an established track record. While these restrictions may have administrative convenience, the effective exclusion of SMEs from major procurement exercises may mean that procurers deny themselves the possibility of innovative solutions. We welcome the efforts of the Commission to increase SMEs' awareness of the possibilities for collaborative participation in procurement tenders and to encourage dissemination of information by electronic means. While we share the reservations in some quarters about the suggestion of quotas for SMEs in procurement, we consider that general tendering procedures should be reviewed to ensure that they do not unnecessarily preclude SMEs. In particular, the scope for unbundling and, as appropriate, decentralising large contracts should be examined.

100. Consideration should also be given to the more explicit use of government research contracts to promote the growth of high technology SMEs.


101. Given the obvious need for SMEs to keep up to date - particularly those involved in innovation - we were concerned to learn that public funding for current training initiatives in the SME sector may not represent good value for money. The way training support is provided to the sector should be re-examined to ensure that public resources are used to best effect in benefiting SMEs.

Availability of information and communication networks

102. Much of the present support for SMEs takes the form of information and advice. It was disappointing to hear widespread doubts as to its effectiveness given the limited capacity of many proprietors of small businesses, in the midst of all their preoccupations, to take up and absorb what is available. The Committee believes that advice should be more closely geared to the specific requirements of individual businesses, and we welcome the Minister's willingness to consider alternative ways to deliver information and advice to SMEs. We also look forward to the Commission's forthcoming initiative on improving SMEs' access to support programmes. Careful consideration should be given to identifying the varying information needs of SMEs and the most effective means of drawing up and delivering the necessary advice and information. We welcome the suggestion that Euro Info Centres should provide advisory and counselling services to SMEs.


103. E-commerce, where transactions are not constrained by the distance between the parties, allows businesses to overcome the geographical limitations of their local markets. There is a general perception that this affords great opportunities for SMEs, but they must be in a position to take advantage - and the costs of telecommunications must not be excessive.


104. Our recent report Taxes in the EU: can co-ordination and competition co-exist?[25] looked at the ideas floated by the Commission for fundamental changes to the VAT regime. We noted (in paragraph 245) that the canvassed "single place of taxation system":

    "is presented as having significant advantages for business - in particular for small firms wishing to export, which would have to grapple with the bureaucracy on only one Member States. We were initially attracted to it for this reason, but then found that in fact small firms would benefit only in rare circumstances, and the proposed system for redistributing revenue might well lead to more rather than less bureaucracy."

105. Some EU Member States (but not the UK) require exporters based in other EU countries to appoint a tax representative and give financial guarantees to the tax authorities. The Committee is concerned at the burden that this imposes on SMEs, and urges that initiatives be taken at EU level to promote liberalisation and thus increase SMEs' market access.

Late payments

106. The EC is planning legislation on late payments. The Committee awaits this with interest, and hopes to see monitoring arrangements built in to ensure that it is effective in achieving its objective.


107. Inevitably, a number of SMEs will fail. The consequences of failure influence the willingness of entrepreneurs to take risks. While creditors need some protection in the case of bankruptcy, and society needs appropriate protection from reckless or duplicitous businessmen, it is possible that bankruptcy arrangements are too harsh, particularly in the case of "fault-free" failures, such as those resulting from changes in the market. Consideration might be given to whether the current bankruptcy and insolvency laws strike the right balance between safeguarding creditors and promoting entrepreneurship among the SME sector.

The Euro

108. The merits of UK participation in the single currency are outside this Committee's terms of reference. Nevertheless, it is clear that the Euro affects UK businesses, including SMEs. Some of them compete in Euro-zone markets and may have to quote prices in Euros (which may affect pricing structures and manufacturing/packaging options). Furthermore, even with the UK outside the Euro-zone, there will be increasing use of the Euro within the UK. The Government should give particular attention to the position of SMEs in its assessments of the impact of the Euro and, whether or not the UK decides to join the Euro, ensure that SMEs receive adequate support in Euro matters.

Cultural and psychological aspects

109. In doing business in the European Single Market, some SMEs appear to be constrained by linguistic, cultural and psychological barriers. They have difficulty in understanding EU institutions and legislation. The Committee supports the Government's efforts to overcome these problems, and to make use of varied channels of communication to get the message across to SMEs.

Intellectual property

110. The Committee shares the Commission's concern that SMEs are not well placed to defend their intellectual property rights, and supports the Commission's efforts to strengthen the position of SMEs in this respect.

Institutional structures

111. Both in the UK and at EU level, changes are being made in responsibilities for formulation and implementation of SME policy. It remains to be seen what the effects will be. There appears to be no support for an EU counterpart to the US SBA, which provides assistance to SMEs in the context of a nation-wide capital market. At present, the capital markets in the EU, particularly for the financing of SMEs, are extremely fragmented. Nevertheless, as the European Single Market develops, they are likely to become more unified; and arrangements for SME support may also need to change. In the light of the various other points made throughout this Part of our report, the need and scope for institutional structures at EU level to support SMEs should be reviewed.


112. SMEs make a substantial contribution to wealth creation, employment, and the provision of goods and services across a very wide range. The nature of SMEs means that they can react quickly to exploit new opportunities. As a result of revolutionary changes to the general business environment and the development of the European Single Market, opportunities (and challenges) for SMEs are greater than ever before. While large national and multinational enterprises in the EU may be seen as the major players in modern economies, we are clear that the vital and sometimes unique roles of SMEs need also to be clearly acknowledged and appropriately fostered.

113. Such support is not an optional extra. The development of the international marketplace that offers opportunities to EU-based SMEs also offers opportunities to other businesses in the EU and elsewhere. We believe that future EU prosperity will, in large measure, rely on entrepreneurs in SMEs being helped to make the most of those opportunities.

Issues for further study

114. Previous paragraphs have discussed and commented on the various themes emerging from the evidence received. None of that is the last word. As indicated in the introduction, the main purpose of this short enquiry was to identify issues that merit more detailed study. In our view, those key aspects of promoting SMEs in the EU are as below.

    (a)  The nature of the modern business environment. The environment for business is being revolutionised by a fresh wave of rapid technological change, the development of globalisation and, within the EU, the gradual implementation of the Single Market. The traditional methods of and geographical limitations on doing business are being swept away. The culture of entrepreneurship has been transformed. Only if this context is well understood will it be possible to frame effective policies to support SMEs.

    (b)  The role of e-commerce. One of the most exciting components of the transformed business environment is e-commerce: in many cases, distance is now absolutely no object. E-commerce is in its infancy in the EU. It is growing very rapidly, but with little regulation. To ensure that it can continue to develop, measures may be needed to promote confidence and to ensure the proper functioning of markets. It will be important to understand more about the growth of e-commerce so that its further development can be appropriately fostered.

    (c)  An improved classification of SMEs. SMEs vary in ways other than size as measured under the present EU definition - not least in their capacity and appetite for growth. Unless SMEs are classified meaningfully, policies affecting them can be neither appropriately tailored to their circumstances nor framed to accommodate the various types. This means wasted time and effort by the EU and Member States, as well as frustration for SMEs for which certain policies may be inappropriate. Might different ways of classifying SMEs do better justice to their diversity?

    (d)  Operation of the European Single Market. As far as SMEs are concerned, the Single Market seems still far from complete. What changes are needed to ensure that SMEs play a full part in the operation of the Single Market?

    (e)  Harmonisation and mutual recognition of standards. Standard-setting is one of the key components of the Single Market. SMEs are obviously disadvantaged by unfair conditions on standards. What more could be done to ensure that the principle of mutual recognition is respected? When things go wrong, SMEs can be deterred from pursuing legitimate complaints by both cost and the slow pace of the available remedies. Could the remedial procedures be improved?

    (f)  Access to finance. Finance is a key issue for SMEs, particularly if they wish to expand. What further steps are needed to simplify and extend SMEs' access to sources of finance? Is there a need for an EU equivalent to the loan guarantee portfolio system of the US SBA?

    (g)  The regulatory burden on SMEs. The balance between the interests of SMEs and the wider interests of the economy and society needs careful thought. In each case, there must be a clear test of necessity (rather than administrative desirability) and an assessment of the financial and opportunity costs of compliance. It might be useful to consider whether there would be merit in developing clearer general guidelines for policy makers and, more generally, a stronger culture within government of compliance cost assessment. Furthermore, it might be useful to examine the concept of "life cycle management of regulations"[26].

    (h)  Information for SMEs. Accurate and timely information is essential for sustained business success. SMEs seem swamped with well-intentioned but often unhelpful material. What should be the main components of an SME information policy in terms of value for money, role, quality, targeting and general availability?

    (i)  Institutional structures. What structures at European level are needed to provide the best support for the development of SMEs? For example, is there a case for a European Small Business Agency? Should there be a dedicated advocate for SMEs?

115. In pursuing any of those points further, it would be important to take fuller account of non-UK perceptions than was possible during the present short enquiry.

116. The Committee considers that the promotion of SMEs in the EU raises important questions to which the attention of the House should be drawn, and makes this report to the House for information.

23   Multiannual Programme - see paragraph 24. Back

24   According to The Single Market Scoreboard (European Commission, No 3, October 1998), 41 per cent of LSEs thought that the Single Market had benefited them over the last two years, compared to 28 and 23 per cent respectively for medium and small companies.  Back

25   House of Lords Select Committee on the European Communities, 15th Report, 1998-99, HL Paper 92.  Back

26   See footnote 11. Back

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