PART 3: VIEWS
35. The Commission's 1996 definition of SMEs as having
fewer than 250 employees (with certain caveats about turnover
and financial independence - see paragraph 0) appeared to be generally
accepted (QQ 5, 34). Deutscher Industrie- und Handelstag
(DIHT - the organisation representing German SMEs) had sought
to persuade the Commission to revert to the higher cut off point
of 500 employees, on the grounds that it led to unjustified exclusion
of some companies from EU programmes (QQ 271, 276). Even
under the more restrictive definition, the vast majority (99.8
per cent) of enterprises in the EU were categorised as SMEs (Q 224).
36. Professor Blackburn emphasised the extreme heterogeneity
of SMEs, with variation by business sector, location, age, size
and owner-managers' characteristics (p 72). DIHT favoured the
use of qualitative criteria, to "differentiate between entrepreneur
and mere manager". Distinctions could also be made between
"growth oriented" and "lifestyle" businesses,
and between "start-ups" and established enterprises
37. The Minister for Small Firms observed that "small
firms are critical to the health of the economy" (Q 182).
However, Professor Blackburn warned against looking to SMEs as
"a panacea for the cure of the ills in the economy and society"
(p 72). As the CBI acknowledged, new businesses have a high mortality
rate (Q 71).
38. Professor Storey stated that "most of the
businesses which start do not want to grow" (Q 27).
The Minister agreed that many enterprises - for example so-called
"lifestyle" businesses - were consciously averse to
expansion (Q 189). Moreover, successful enterprises do not
necessarily increase employment proportionately as the business
expands: we were told by the Federation of Small Businesses (FSB)
that "most small businesses want to improve their profits",
which may actually reduce employment (Q 22).
39. According to the Department of Trade and Industry
(DTI), "statistics on job creation speak for themselves:
between 1970 and 1995, the EU added 8.5 million jobs or 6 per
cent of its workforce. In the same period the US increased its
workforce by 46 million or 65 per cent" (p 43). The Commission
representative said that "we need a culture of enterprise"
40. If job creation were the main objective of SME
policy, then Professor Storey felt that "only a few firms
matter": about half the new jobs in the SME sector were created
by a very small minority (approximately 4 per cent) of firms (Q 13).
The focus should be "on comparatively rapid growth businesses
which are seeking to grow, and not upon lifestyle or start-up
businesses" (Q 28).
41. Policy measures intended specifically to assist
SMEs are very common across the EU. Policies and practice with
respect to SMEs vary between Member States: Denmark, Ireland,
the Netherlands and Germany were cited by the Commission as providing
examples of good practice in aspects of SME policies (Q 244).
The various schemes in EU Member States were summarised in the
evidence from Professor Scobie (p 95).
42. The objectives of EU SME policy were summarised
by Professor Blackburn as: "reduction of red tape; better
involvement of SME organisations in the decision making process;
help with finance; [reduction of] market distortions and inefficiencies;
action to promote research, innovation and training; and [enhancement
of] competitiveness and internationalisation". However, inadequate
performance measurement was "a major weakness in UK and EU
SME policy" (p 72).
43. The Commission was seeking, in conjunction with
Member States, to promote an environment favourable to SMEs, by
the "Concerted Actions" Programme - events which bring
together relevant speakers and practitioners, in order to identify
and disseminate best practice in support services for SMEs
44. With respect to subsidiarity, the Minister urged
that "we should be careful that European initiatives ...
are complementary to national initiatives" (Q 186).
The Commission representative stressed that the EU should act
only where this provides "added value at the European level"
(Q 222). DIHT emphasised that "it should only be the
task of the European Community to set the framework", and
EU programmes needed to be both transparent and consistent with
activities at local level (Q283), and should focus on cross border
co-operation (Q 291). Professor Blackburn identified "a
number of gaps in SME policy which may be assisted by EU initiatives
... [specifically] entrepreneurship education; assistance with
business exit and entrepreneurial recycling; and support for middle
layer businesses" (p 73).
45. However, according to the DIHT, "the typical
entrepreneur says 'the best policy would be if the State leaves
me alone'" (Q 289). Similarly, Professor Blackburn reported
that "UK business owners are sceptical of Government initiatives",
seeing the Government very much as "a regulator and 'taxer'
of their activities" (p 72).
46. Both the CBI and the FSB expressed concern at
the cumulative burden of legislation (Q 89, 49). With respect
to the implementation of EC measures, there can be a tendency
- as in the UK - to 'gold plate' the transposing legislation,
and to include extra measures not required by EC Directives: as
an example of this, the CBI cited the UK legislation implementing
the Working Time Directive (QQ 92, 93).
47. There were few instances of SMEs being explicitly
exempted from regulatory compliance (Q 201), although there
were many legislative provisions (for example in the environmental
field) where thresholds effectively removed SMEs from the scope
of the regulation (Q 241). The Environment Agency stated
that, in implementing the Integrated Pollution Prevention and
Control Directive, the Agency would "regulate industry in
proportion to the risks involved, and will therefore take account
of the smaller businesses" (p 80).
48. The Minister considered that regulations should
be designed for ease of compliance by all enterprises, irrespective
of their size. He also expressed concern that exemptions for SMEs
might inhibit enterprise growth (Q 202). The Commission representative
suggested that exemptions could be justified at levels where the
burden of the regulation outweighed its benefit (Q 242).
The CBI urged that any exemptions should be on a "case by
case" basis, emphasising flexibility (Q 89). The TUC
observed that "allowing too many exceptions and exemptions
adds to the complications involved in applying regulations"
(p 98). The US had few regulatory exemptions, although there was
strong support for them in the small business community (Q 114).
49. In some instances, SMEs wrongly believed that
they were exempt from regulations: a study
of the implementation of the 1989 Health and Safety Directive
found that many SMEs were under a misapprehension "that the
Directive was not applicable to them or that they were not obliged
to undertake an assessment [of risk]". In similar vein, the
Environment Agency reported that "many [UK] SMEs are unaware
of their environmental responsibilities, but are apprehensive
about contacting regulators for advice in case they are found
to be in breach of ... legislation" (p 80).
50. The DTI expressed strong support in principle
for measures to ease the regulatory burden. However, support for
deregulation was not unqualified: thus "we need to make sure
that regulation impacts in the right way on small business ...
some [regulations] are very helpful in opening up competition"
51. The Commission representative said that, in the
formulation of legislative proposals, the Commission consulted
widely with business organisations (QQ 237, 246); he also
expressed a preference for informal consultative procedures (Q 237).
He cited social legislation as an area in which DGXXIII (the then
Directorate General for Enterprise Policy) had influenced the
policy process to take account of the interests of SMEs (Q 241).
The CBI felt that DG XXIII had not been "powerful or authoritative
enough and therefore could not influence other Directorates who
were putting forward proposals for legislation" (Q 92).
Similarly, DIHT judged that DGXXIII had been "a reliable
partner" for SME organisations "but not a strong partner",
since its position in relation to other DGs was "very weak"
52. Commission legislative proposals generally included
a statement of the regulatory impact on SMEs, although the DTI
claimed that this procedure "has not really worked"
(Q 184); DIHT characterised it as a "paper tiger"
(Q 289). The US had both procedural and institutional mechanisms
(in the form of the Advocate for Small Business, who could advise
the President to veto legislation) to assess the prospective impact
of proposed legislation on small businesses (Q 113). The
UK Government have supported the establishment of a "European
Better Regulation Unit", as proposed by the EU Business Environment
Simplification Task Force (BEST) (p 42), although the Commission
representative judged that almost all the other Member States
were resisting (Q 233).
53. The Commission representative drew attention
to the danger that amendments put forward by the European Parliament
could make legislation more complex (Q 237).
54. The FSB drew attention to the difficulty for
the non-expert in understanding and implementing complex regulations
concerning - for example - environmental protection, employment,
and health and safety (Q 49). They pressed for the business
community to be given sufficient time to acquaint itself with
new regulations, and for even enforcement of EC regulations, to
ensure that there was a "level playing field" (Q 55).
The US had sought to convert regulations into "plain American
English" (Q 113), and also made limited use of self
appraisal (accompanied by spot checks) as a means of easing the
burden of enforcement (Q 114).
55. The CBI had little evidence that "voluntary"
standards disadvantaged SMEs (QQ 91, 94). CEN, the European
Committee for Standardisation, acknowledged that "ISO 9000
for quality systems has been seen by some as a burden, by others
as a benefit to exploit claims for quality ... ISO 14001 for environmental
auditing has a similar image" (p 75). The British Standards
Institution (BSI) acknowledged that SMEs "have historically
been under-represented within the standard-setting process",
a problem which it was seeking to address through improved mechanisms
for consultation with SMEs (p 74).
56. The CBI said that British SMEs' relationships
with banks were "much improved" (Q 73), and that
the UK had "a much better developed ... small firms finance
and capital market ... than in other parts of Europe" (Q 69).
However, KPMG said that there remained "gaps ... in the provision
of finance", particularly for smaller firms and high risk
ventures (p 88). The Inland Revenue stated that "Member States
are encouraged to tackle the problems that SMEs face in obtaining
finance [and] incorporation of businesses" (p 85).
57. The CBI called for faster progress towards a
single financial capital market for Europe, and the liberalisation
of national restrictions on cross border pension fund investments.
There were 33 stock exchanges in the EU, and there was no European
equivalent of the US NASDAQ where high risk start-up ventures
obtain equity finance (Q 86). Some SMEs in the US also received
support from the SBA, which had leveraged a commitment of $200m
to generate a loan guarantee portfolio of US$ 38 billion (Q 107).
58. Professor Blackburn found low awareness of EU
funding in the UK, due in part to a lack of take-up and promotion
by the UK Government (p 72). Nevertheless, Professor Storey said
that "much European money is focused in the SMEs area on
Objective 1 and occasionally Objective 2 regions,
particularly in southern Europe and Ireland" (Q 17).
DIHT said that the EU structural funds were important for SMEs
in eastern Germany (Q 289). The Department of Economic Development
for Northern Ireland outlined the benefits for SMEs in the Province
from EU structural funds and Community Initiatives (p 78). The
DTI emphasised that UK Regional Development Agencies should exploit
synergies with the new round of ESF programmes "to have the
maximum impact on eligible areas" (p 44).
within the European Single Market
59. The Minister said that "the Single Market
is a fantastic opportunity for our small companies" (QQ 204,
205). The Commission representative outlined EU action to promote
contacts between SMEs in different Member States (QQ 263,
264). German SMEs saw great opportunities in the prospective enlargement
of the EU and the Single Market (Q 296).
60. CEN stated that standards provided "a common
passport throughout Europe" (p 76). Nevertheless, SMEs could
face difficulties in getting their products accepted elsewhere
in the EU. The CBI saw this as "the biggest single barrier
that we face in terms of the Single Market" (Q 97),
and evidence from the BSI acknowledged that "SMEs can suffer
if the results of an accredited test body, for instance the BSI
in the UK, are not accepted in other countries" (p 74).
61. For example, UK suppliers of pressure vessels
found that "virtually all" European countries did not
recognise the BSI standard as sufficient, and required imports
to meet their own procedural requirements for standardisation
(QQ 77-79), the costs of which could be very onerous for
SMEs (Q 84). The Commission representative's response was:
"where there is no [EC] legislation, mutual recognition applies.
That is the law as it stands. In all cases where a problem arises
because of non-conformity with the law then you have to make a
complaint so that the law can be implemented" (Q 232).
The Minister noted that the recent Commission Communication on
mutual recognition contained suggestions for improvement,
which the Government were "treating ... as a matter of priority
within the Internal Market Council" (p 54).
62. The CBI said that many of its members, large
and small, "feel that markets in other Member States are
often difficult to penetrate" (Q 96). On the other hand,
the Commission representative felt that SMEs were too often disadvantaged
by their own attitudes that "it is too complicated"
or "it is too big for me" (QQ 255, 256).
63. The CBI suggested "unbundling" of calls
for tender would make contracts more manageable for SMEs. Electronic
invitations to tender could also ease market access (Q 96).
64. The CBI was cautious about quotas for SME participation
in public procurement contracts, fearing that it might compromise
value for money, although it was extremely interested in the US
Small Business Information and Research scheme (SBIR) - which
sets quotas for SME participation in research contracts - because
of its impact on development of new technologies and hi-tech enterprises
65. A freelance consultant drew attention to the
bureaucratic nature of the Commission's own procedures for the
award of contracts, and called for their simplification to increase
accessibility for small enterprises (p 89).
66. Professor Blackburn pointed out that "many
training initiatives have been qualifications driven (eg NVQs)
despite the absence of a market for qualifications driven training
in SMEs" (p 72). Professor Storey commented that there was
no clear evidence that publicly subsidised management training
enhanced the performance of small firms (Q 21). Similarly,
KPMG commented that most SMEs "are not well served by current
publicly provided courses" (p 89). The FSB pointed out that
the available training, which sells skills, was often unsuited
to the requirements of SMEs who needed to buy tasks. Training
geared to the "plan, manage, monitor" model of large
enterprises was not appropriate for SMEs which "buy, produce,
sell" (Q 54).
of information and communication networks
67. Provision of information and advice, by various
means including electronic media, constitutes a major component
of the EU programme of support for SMEs. According to Professor
Scobie, UK Government assistance had frequently been "in
the form of consultancy or advice which often SMEs do not find
very useful" (p 95). The FSB said that "getting
information in a usable form that [small businesses] understand
is the single biggest problem" (Q 41). Mr Bichard of
the Co-operative Bank National Centre for Business and Ecology
noted that, in some instances, EU-funded environmental advice
schemes for SMEs had been discredited by the poor quality and
lack of focus of the advice offered (p 91). Miss Soden of HSBC
noted that banks and accountants were often SMEs' first port of
call for advice (Q 167).
68. The FSB observed that application procedures
for EU support were characterised as exceedingly complicated,
and SMEs often required the assistance of a consultant whose fees
could amount to a considerable proportion of the grant obtained
(Q 42). One possibility was a "one stop shop" for
SMEs to deal with the multiplicity of EU programmes, although
fears were expressed that this could amount to a "one stop
choice" (Q 41).
69. The Minister saw an important role for the EU
in the sharing of best practice among European partners (Q 186).
The Commission has acknowledged that it was difficult for SMEs
to be effective when they were faced with an exploding information
market: it considers that Euro Info Centres should provide
advisory and counselling services to SMEs.
70. Professor Blackburn was highly critical of the
present Business Links network (p 73), while the CBI characterised
its performance as uneven (Q 19). KPMG characterised UK SME
support services as "fragmented ... with Business Links often
existing alongside Enterprise Agencies, Regional Supply Offices
and Innovation programmes" (p 89). The Minister expressed
a concern that "Business Links only reach a very small proportion
of the people they should be reaching and also by definition they
are reaching the wrong people". He was "looking at ways
in which we can make things more accessiblenot just to
give worthy documents out" (Q 195).
71. The Minister saw e-commerce as affording opportunities
for SMEs to go beyond the limits of their local markets (Q 191).
The Commission representative identified three key issues: training,
business confidence, and the cost of telecommunications (which
was "far too high" in Europe). Since e-commerce was
a global issue, there was a need for EU dialogue with the United
States (Q 239). DIHT saw a key role for the EU in disseminating
information on best practice (Q 306).
72. In 1992, the VAT regime was modified to permit
the removal of frontier controls in the Single Market. According
to HM Customs and Excise, this has benefited SMEs to a greater
extent than large businesses (p 82). However, the FSB told us
that "most small businesses do not know if it made a difference"
73. HM Customs and Excise also noted that, while
"the UK has chosen to allow non-established taxable persons
the option to take responsibility for their own VAT affairs ...
some [EU] Member States insist on the appointment of a tax representative
in all circumstances, and take financial guarantees that can be
bureaucratic and burdensome, for SMEs in particular" (p 83).
74. The UK annual turnover threshold for VAT registration,
currently £51,000, is among the highest in the EU: discussions
were proceeding on distortions associated with the threshold (p
82). According to the CBI, the level of the threshold was not
a major constraint on the growth of SMEs (Q 87).
75. The EU is concerned with direct taxation insofar
as it affects the smooth functioning of internal market. The Inland
Revenue noted that Member States were encouraged to mitigate the
administrative complexity of taxation systems; and that tax concessions
for SMEs fell within the EU state aid regulations and "are
also potentially within the scope of the Code of Conduct on business
taxation" (p 85).
76. A proposed EC Directive on late payments had
been agreed by the Council of Ministers, and referred to the European
Parliament (Q 235). The FSB was unenthusiastic about such
EC legislation (Q 59). DIHT noted that "the State is
the worst payer" (Q 308): Germany had a system of interest
payments to discourage late payment, and similar regulations should
be considered at EU level (QQ 308, 311).
77. The FSB commented that "if we are to encourage
the entrepreneur ... [we] have to look at the bankruptcy laws"(Q 56).
The CBI observed that "there is a difficult balance ... between
the interests of creditors and of those who fail" (Q 75).
78. Miss Soden said that many UK SMEs wrongly believed
that, because the UK was outside the single currency, their business
would not be affected (Q 136). She expected the Euro to have
the greatest impact on medium sized companies, which did at least
half of the UK's trade with the Euro-zone (Q 139), but were
too small to have a treasury department to manage foreign exchange
and interest rate risk (Q 132). Those SMEs that foresaw an
impact apparently perceived it as negative: the FSB told us that
its members believed the Euro would benefit large companies and
impose additional costs on small enterprises (Q 63).
79. Miss Soden judged that "Euro-creep"
(whereby the use of the single currency gradually increased in
the UK, even in the absence of UK membership of the Euro-zone)
was "very likely to happen", although the rate of change
was uncertain (Q 166). She cited the tourism sector as a
possible instance, suggesting that "companies who are arranging
tours of Europe will say 'most of Europe is in the Euro so we
would like to trade with you in the Euro'" (Q 136).
80. If the UK were to participate in the Euro, there
would be no more movement in interest and exchange rates vis-à-vis
the present Euro-zone countries. According to Professor Scobie,
"SMEs have suffered from ... [recent] appreciation of the
pound" (p 93). Ireland's participation in the single currency
had led to an appreciable lowering of interest rates. If the UK
adopted the Euro, the impact would depend on the relative levels
of sterling and Euro interest rates at the time (Q 163).
and psychological aspects
81. Several witnesses noted the importance of perceptions.
The FSB claimed that "most small businessmen are actually
very positive towards Europe" (Q 49). The DTI noted
that most SMEs perceived EU social legislation as a constraint
82. The Commission was seeking to improve SMEs' access
to information and advice on defence of their intellectual property
83. The FSB expressed strong opposition to mandatory
membership of local chambers of commerce as in Germany (Q 52).
84. The Minister stated that the new Small Business
Service (SBS) should "bring together, streamline and make
more coherent the delivery of business support services"
(Q 181) and also lighten the burden of compliance (Q 189).
85. Within the European Commission, responsibility
for SMEs was being taken over by the Directorate General for Enterprise.
The DIHT representative commented that "we do not know what
the effect will be. We are always asking for a reliable partner
we can keep in contact with" (Q287).
86. The US SBA assisted 200,000-300,000 businesses
per year, mainly through loan guarantees (Q 107), and had
a loan guarantee portfolio of some US$38 billion (Q 105).
When asked whether there might be an EU version of the SBA, both
the Minister and the Commission representative expressed opposition
(QQ 183, 247, 248).
19 The "Concerted Actions" Programme, on
which a report was due in October 1999, is not formally part of
the EC's MAP. Back
ENSR - see footnote 4. Back
Specific priority areas for Structural Fund expenditures are defined
in Council Regulation 2081/93, Article 1: Objective 1 focuses
on the development and structural adjustment of regions whose
development is lagging behind; and Objective 2 focuses on assistance
for regions or parts of regions seriously affected by industrial
See paragraph 23. Back