15 Lessons Learned on SME Support to “Build back better” in the Post Covid Era

 – by Giovanni Zazzerini –

SMEs have been particularly impacted by the pandemic, and one year later they stand in an even more perilous condition: in the US, between January 1st and April 1st 2020, the drop in revenue for SMEs averaged at between 40% and 50%; in Australia, small business sales declined by 15% between March and September 2020; Worldwide, 70-80% of SMEs experienced a serious drop in revenue or sales. Governments around the world quickly acted to put in place different policies aimed at containing the catastrophic effects of the pandemic on SMEs and entrepreneurs. Such instruments were diverse in nature, varying from emergency measures to avoid short term liquidity concerns and job losses (such as job retention schemes, tax deferrals, debt payment moratoria, financial support etc., to structural measures able to support SMEs adapting to the changing business environment and build resilience: policies in support for innovation, sustainability, re and up-skilling of workers, etc.

The OECD Centre for Entrepreneurship, SMEs, Regions and Cities has identified in the paper 15 lessons learned1 to help governments address ongoing challenges.

  1. Ensure rapid delivery of SME and entrepreneurship policy support by simplifying access to support and ensuring effective digital delivery systems

Governments that have successfully delivered support measures to SMEs, have done so by lowering administrative thresholds for accessing aid in order to ensure their fast delivery, and could generally rely on a well-developed digital infrastructure. Transparency, fairness, together with the “need for speed”, are the most crucial factors for effective policies.

  1. Policy interventions should strive to target viable enterprises that need them the most

Offering policy support with limited checks and broad criteria may have side effects, such as keeping unproductive and loss-making firms afloat. Providing aid to “zombie firms” hampers the process of creative destruction, and has negative effects on competition in the medium and long run.

  1. Boost start-up rates, especially for innovative new ventures

Young firms have been heavily impacted by the pandemic and the start-up rate dropped on average in OECD countries. Recovery plans should focus on policies to boost innovative entrepreneurship and nurturing the start-up ecosystem. Measures should further stimulate early-stage equity finance and governments should reduce regulatory uncertainty simplifying administrative procedures, and adopting e-government processes thus reducing transaction costs for startups.

  1. Ensure that support reaches vulnerable segments of SMEs and entrepreneurs

Female-led SMEs were seven percentage points more likely to close compared to male-led SMEs, and also minority business owners were hit by the crisis disproportionally: introducing specific schemes with a view to gender and racial disparities would ensure equal opportunities in recovering.

  1. Rethink institutional arrangements regarding the self-employed

Typically, support measures do not take circumstances of self-employed into account: with the rise of the gig economy and the role of self-employment, measures enforcing their social security, health and taxation should be foreseen in the future.

  1. Avoid SME over-indebtedness and an SME solvency crisis

Governments should avoid the over-indebtedness and solvency crisis of SMEs, which may struggle to repay debts: using equity and quasi-equity measures offers better prospects for beneficiaries to invest and grow. Grants, convertible loans, convertible bonds, equity crowdfunding are only some of the means to ease SMEs’ cash constraints other than debt.

  1. Prepare responsible exit strategies

With new waves of the pandemic and lockdowns in the fall, countries have typically extended and expanded their emergency support, and placed on hold discussions on exit strategies. Liquidity support measures should be accompanied by structural support instruments which help SMEs in the green and digital post-covid transition, and the progressive phasing out of support measures should be provided.

  1. Allow processes of creative destruction to take their course again while ensuring a just transition and possibilities for second chance entrepreneurship

The deviations from bankruptcy laws and the provision of liquidity support that governments around the globe have put in a place may also have side effects. It becomes increasingly important for processes of creative destruction, which provide important drivers of productivity growth, to take their course again. At the same time, support for ‘second chance’ entrepreneurship, allowing bona fide entrepreneurs a restart.

  1. Ensure that recovery programs to “build back better” take the circumstances and perspectives of SMEs and entrepreneurs well into account

The twin “digital and clean” transition is often at the core of support policies that many governments put in place to help SMEs, in the spirit of “not let a good crisis go to waste”: it is crucial that such measures keep their specific focus on SMEs, as the needs of SMEs in dealing with the challenges and opportunities brought forward by digitalization and sustainability may differ from those of larger entities.

  1. Digitalization of SMEs and entrepreneurs will need to be an even more important feature for the policy mix

As part of recovery support, measures helping SMEs to make the most from digitalisation should be intensified and be inclusive, taking into account the capacities and requirements of different types of SMEs.

  1. The resilience of SMEs and entrepreneurs as an objective for policy

Building resilience in the SME population is one of the toughest challenges, because of factors such as the tendency to have low cash reserves, acting in thin markets, or being unfamiliar with public policy support systems. Countries need to assess these factors and enhance them by updating policies in this sense.

  1. Forward-looking capacity, resilience, and responsiveness of SME and entrepreneurship policy frameworks

The pandemic can be seen as a stress-test for policy frameworks and their ability to deliver under a massive shock. Policies should be flexible, agile to respond to dynamic circumstances, and measurable.

  1. Ensure effective and inclusive governance mechanisms across government levels

Policy mixes should be designed through inclusive governance mechanisms across all government levels, while considering regionally specific ecosystems. Fragmented approaches should be avoided, aiming at coherent measures for recovery both vertically -region and state, and horizontally -ministries and agencies.

  1. Ensure that SMEs and entrepreneurs, and the organizations that represent them, are consulted and included in government decision-making processes regarding policy responses to the pandemic and in the development of recovery plans

It is crucial to take the perspective of SMEs into account during the decision-making of support policies: this can be done using tests and consultations and including SMEs representatives in existing stakeholder groups of consultation.

  1. New challenges and opportunities for monitoring and evaluation

Governments have put in place 1600 policy support initiatives for SMEs around the world, succeeding in reaching large numbers of entrepreneurs, some of which had never used public support measures before the pandemic. This could be the right time to strengthen monitoring and evaluation systems which today are found to be lacking.

Read the full OECD report here for a more detailed analysis of the lessons learned and of the evidence the report provides.

This publication has been presented and discussed during the joint OECD-INSME roundtable discussion with INSME members and delegates from the OECD Committee on SMEs, held on May 20th 2021, which, among others, saw the participation of Sergio Arzeni, President INSME, Martin Godel, Chair of the OECD CSMEE and INSME Member, Lamia Kamal-Chaoui, Director, OECD Centre for Entrepreneurship, SMEs, Regions and Cities.

Kris Boschmans, Maria Camila Jiménez and Stephan Raes, 2021, One year of SME and entrepreneurship policy responses to COVID-19: Lessons learned to build back better, CFE, OECD

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