-by Sergio Arzeni
On November 18 2020, under the chairmanship of Martin Godel, Chair of the OECD Working Party on SME and Entrepreneurship (WPSMEE), OECD and INSME held an important webinar to celebrate the 20th Anniversary of the OECD Bologna Charter on SMEs that sowed the seeds from which emerged the International Network for SME (INSME).
Enrico Letta, former Italian Prime Minister, reminded that the decision to address the issue of entrepreneurship and SME at international level was somehow a response to the anti-globalization’s movement and Yves Leterme, former Prime Minister of Belgium, pointed to the difference between the financial crisis of 2008-9 and the Coronavirus crisis highlighting that today in Europe there is a political space for common recovery and support for SMEs that was missing ten years ago.
Markus Jerger, CEO of BVMW, the German Mittelstand, honoured the figure of Mario Ohoven, the outstanding champion of German and European SMEs, vice President of INSME, who shockingly died in a car accident producing an immense loss for the Entrepreneurship and SME community worldwide.
Gian Paolo Manzella, the Italian State Secretary in charge of SME, confirmed that SME and entrepreneurship will be high on the agenda of the Italian Presidency of the G20 in 2021.
Patrick Meinhardt, vice president of CEA-PME, European Entrepreneurs, proposed to host in Berlin a world conference with OECD and INSME on SME and Entrepreneurship to follow-up and extol the legacy of Mario Ohoven in 2022.
Ulrik Vestergaard Knudsen, Deputy Secretary General of the OECD and Lamia Kamal-Chaoui, Director, OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE), underlined the complementary and dovetailing role that OECD and INSME are playing in advancing the cause of SME and entrepreneurship.
The rich discussion inspired me a few reflections that I would like to share with members and friends of INSME.
The Covid-19 pandemic represents a deep watershed in the people’s way of life and in the world’s economy and is poised to accelerate the transition to a digital society and a cleaner, greener, more sustainable and equitable development.
In the wake of the virus crisis, governments in OECD countries have devoted an unprecedented amount of relief money in the first place to start-ups and SMEs and not too big business, with the notable exception of airline carriers. This is due to the recognition that SMEs represent the backbone of the formal economy in OECD countries, contributing well over 50% of GDP and up to 80% of employment, whereas in developing countries they represent around 90 per cent of mostly informal employment.
Key policy and multilateral agencies and governments are united in their recognition of the importance of SMEs, and in their mix of fiscal and monetary response to the havoc the pandemic is causing. However, it is not at all clear whether their actions are predicated on the need for structural or systemic change necessary for the renewal of the implicit compact with the essential engines of most economies – the SMEs. That change demands new economic arrangements that are based on social objectives, with the four Ps of People, Place, Purpose, and Process, as guiding principles of that change.
Foremost is the understanding of the social and political implications that SMEs, start-ups and self-employed are a fundamental component of the middle class, the shrinking middle class that is weakening the electoral foundations of liberal democracies and fracturing the checks and balances on the executive, namely governments.
In retrospect, it is quite surprising to note that the “Middle Class Task Force” created in 2009 by President Obama and chaired by the then Vice President Joe Biden failed to address the issue of SMEs and the new creative class. 10 Government Departments and 5 White House Offices have been involved, but not the US Small Business Administration. The task force had the purpose to empower the American middle class and to explore the vision and possibilities of green jobs. Joe Biden stated its mission with these words: “Quite simply, a strong middle class equals a strong America. We can’t have one without the other. This Task Force will be an important vehicle to assess new and existing policies across the board and determine if they are helping or hurting the middle class. It is our charge to get the middle class—the backbone of this country—up and running again”.
The entrepreneurial capability of the middle classes is enhanced by the entrepreneurial capability of immigrants in OECD countries. It is no surprise that the first major breakthrough in our monumental COVID-19 crisis is being led by a Turkish immigrant family firm in Germany, BioNTech, working in partnership with the large industry leader Pfizer. The sustainable growth capabilities of immigrant-led SMEs should be harnessed at the local level together with the value added of their other unique capability for developing transnational ventures, i.e. ventures in both their country of destination and in their country of origin. This unique internationalization capability enables people-focused networking and cooperation at the international level, potentially in a less ‘beggar thy international competitor’ attitude of many multinational firms. We just have to see how economic prosperity in the big metros of Berlin, Paris, London, New York, Phoenix, Los Angeles, and elsewhere, have been forged by the creative and inclusive presence of migrants.
One of the fastest cohorts of sustainable entrepreneurship activists are women who have demonstrated their unique capabilities for marrying well-being and productive entrepreneurial management of SMEs. Their approach to sustainable, human-centred approach could be a model for SME development in the future.
By definition, SMEs have a unique attachment to their place that provides for economic and social context. They do not move when the going gets tight and, in that sense, they are connected to the local ecosystem and especially their citizens. Making that citizen/SME compact work could be a major policy pivot that the OECD could enable. Here the idea is to engage citizens with the SMEs to identify and address the major issues of times and their relevance at the local level.
The objective is to use citizen-science techniques and processes to develop place-based governance systems for generating and managing local solutions to global problems through technology development, skills enhancement and management capabilities of both SMEs and citizens. The process inevitably includes the participation of local government and other local stakeholders. A major outcome of such an approach could be the empowerment of disenfranchised citizens to determine their own futures.
In 2020, two relief packages amounting to 560 billion dollars have not been sufficient to compensate US small businesses from the impact of Coronavirus with the Paycheck Protection Program and the Congress has been struggling on another package for Big and small businesses ranging between 2 and 3 trillion dollars.
In Europe, notwithstanding the massive financial support provided by national governments and the EU, a significant proportion of SME are at risk of becoming illiquid and about three-quarters of the firms identified as encountering liquidity or working capital shortfalls are at risk of exit. They account for 10% to 23% of all firms with employees.
The rapid implementation of policies to support the liquidity of firms has significantly reduced the share of firms under stress due to the lock-downs. One of the most effective policies has been the introduction of part-time working schemes, which allow firms to reduce their wage bill by temporarily transferring part of the labour costs to governments. They also keep workers attached to their firms, preserving the valuable worker-firm link.
Why has the pumping of financial support by governments bypassed SMEs and left them embattled in precarious predicament? Paradoxically, the more the social and political relevance of SME and entrepreneurship is growing, the more a significant economic literature raises objections to public policies targeting SME arguing that the big job creators are young, fast-growing, start-ups and not the bulk of SME population. Others dump SME policies on the grounds that small businesses are by and large ill managed (sic!) and therefore less productive than large firms, that SMEs pay lower average wages and have fewer skilled workers (it depends) and higher instances of bankruptcy (of course, they represent at least 90% of the stock of enterprises!). Add to that the stock of received deficit-model conceptualization of SMEs, namely their fragile liquidity position is legendary. Their insufficient customer base and networking capability is another factor. The stranglehold of contractual relationships by large firms in or out of supply chains allows virtually no room for market manoeuvre. In times of duress, it is prudent to hand over sums to the larger organization which have tried and tested systems and who might be regarded as being too big to fail, or so the argument goes.
The collusion of academic and policy makers in submitting such evidence results in a bias towards a policy favouring big business, the 1 per cent of companies that get most of the public procurement, public research, tax credit and tax cuts. All that in the name of their superior productivity, efficiency and profitability.
Again the 1 per cent versus 99 per cent, with studious academic blessing!
On the other hand, over the last 10 years, there has been a strong political call in most countries that are trying to diversify their economy, from Russia to Saudi Arabia, for expanding the employment and GDP generated by SME. President Putin issued a ukase urging to double in 7 years the weight of SME in the economy. In Saudi Arabia, as in all energy-based countries, have been created agencies with the mission to foster the growth of SMEs and new start-ups.
For them, the typical structure of OECD economies, where SME contribute on average to 55% of national GDP, is taken as a factor of political and social stability, not just a performance indicator.
A digital strategy for SMEs which facilitates local and global networking, through speedier and better-quality access to information about markets, technology cooperation and organizational partnerships, could be the central processing mechanism connecting people, place and purpose. Enabling local SMEs with a strong, citizen-engaged capability to use digital tools and instruments to connect with their counterparts elsewhere in their country and abroad, could create banks of global SMEs to work together to meet the needs of our sustainable, entrepreneurial futures. Here the reciprocal links between OECD member countries with the new powerhouses in Asia and Africa should be well worth cultivating.
There are new forces at play which require a combination of a more calibrated and nuanced approach to sustainable SME development. Such an approach needs to be informed by realities on the ground. It also requires systemic change which allows for entrepreneurship to flourish at all levels of society. This can be implemented not just by way of new business creation per se, but by a localized approach based on a model of engagement with places and people together with a re-purposing of the policies and instruments through processes that can address the critical economic and social priorities of our times and how they affect their work and their lives. That translates as dealing with inequality, eradicating poverty, addressing climate change, and harnessing digitization, to meet the Sustainable Development Goals (SDG) at the local level with global connectivity, by SMEs together with local citizens, government, universities and Non Governmental Organizations (NGO).
The Final Declaration of the Third OECD SME Ministerial Conference held in Mexico in 2018 set out clearly the challenge facing in the years to come this way: “SMEs are often strongly linked to their local economies, contributing to social cohesion and integrating diverse populations into the economy”.
The population of SMEs is very diverse in terms of age, size, business model, performance, and the profile and aspirations of entrepreneurs. These differences, including across sectors, regions and countries, affect their contributions to innovation, productivity, quality job creation and growth. Firm heterogeneity also has important implications for the design of policies across countries and for different types of SMEs.
While not all SMEs aspire to grow, many continue to face challenges related to their size; limited resources (such as skills and finance); or industry and market conditions, including within supply chains and with larger enterprises, which may impact the firm’s ability to fulfil its growth potential, scale-up, and take advantage of regional and global value chains.
Strengthening SMEs and entrepreneurship, including women- and youth-owned businesses, is important for achieving more inclusive societies and growth; particularly at a time when digitalization, the next production revolution, demographic trends and, last but not least, in some cases, the circular economy and the transition to a low-carbon economy are changing the opportunities and challenges for firms to start-up and grow.
We can never stress enough that the large diversity in the SME population is also a large diversity in terms of innovativeness and productivity with small businesses in highly innovative niches. This agility will likely be even more important in the post Covid environment.
However, the digital economy is creating also new barriers to the growth of SMEs and at the same time new threats to democracy. As pointed out by Francis Fukuyama in the last issue of Foreign Affairs: “Unlike traditional firms, companies in the digital space do not compete for market share; they compete for the market itself. First movers can entrench themselves and make further competition impossible. They can swallow up potential rivals, as Facebook did by purchasing Instagram and WhatsApp… Internet platforms cause political harms that are far more alarming than any economic damage they create. Their real danger is not that they distort markets; it is that they threaten democracy”.
This is an additional reason for public policy to design the proper regulatory framework that will enable entrepreneurship and SMEs flourish in digital markets as well in traditional markets, and the OECD has a major role to play in line with its mission to shape better policies for better lives. INSME, for its part, will continue to monitor and share best practices in the implementation of more effective policies at national, regional and local level worldwide for a more inclusive growth, reconciling economy and society, fostering innovation and internationalization of SMEs.