Select Committee on European Communities Twentieth Report



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 (Q 271).

Policies for SMEs

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" (Q 250).

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[19] (Q 251).

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).

The impact of legislation

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[20] 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" (Q 189).

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" (Q 287).

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).

Access to finance

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).

Structural funds

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[21], 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).

Trading 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[22], which the Government were "treating ... as a matter of priority within the Internal Market Council" (p 54).

Public procurement

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 (Q 96).

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).

Availability 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 accessible—not 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" (Q 56).

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).

Late payments

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).

The Euro

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).

Cultural 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 (p 44).

Intellectual property

82. The Commission was seeking to improve SMEs' access to information and advice on defence of their intellectual property (Q 237).

Institutional structures

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

20   ENSR - see footnote 4. Back

21   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 decline. Back

22   See paragraph 23. Back

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