PART 4: OPINION
OF THE COMMITTEE|
- 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
- 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.
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.
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
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.
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.
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
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?
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
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.
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
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.
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.
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.
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.
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
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.
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
(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".
(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
(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
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
23 Multiannual Programme - see paragraph 24. Back
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.
House of Lords Select Committee on the European Communities, 15th
Report, 1998-99, HL Paper 92. Back
See footnote 11. Back