Select Committee on European Union Thirty-Fourth Report

CHAPTER 2 Small business policy in the eu and the uk

EU Policy: thinking small in an enlarging Europe

19. The publication in January 2003 of the Green Paper was associated with the release of a number of other communications and reports which set the background to the Green Paper. For example, the European Commission published a communication to the Council and the European Parliament entitled 'Thinking Small in an Enlarging Europe'[17]. This document rehearses the objective set at the Lisbon European Council in 2000 to make Europe the leading knowledge based economy in the world by 2010. It also reasserts the 'think small first principle', affirmed at the Feira European Council in 2001, as one important way to meet the Lisbon objective by building on the contribution of smaller[18] firms to investment, innovation, jobs and growth.

20. The 'Thinking Small' communication emphasises:

  • the need for Member States to promote effective communication with smaller businesses;
  • the benefits of exchanging good practice between Member States in supporting the small enterprise sector;
  • the potential for increasing the propensity to entrepreneurial business formation through education and training;
  • the promotion of an 'entrepreneurial' culture in candidate countries;
  • the need to put Small and Medium Enterprises (SMEs) 'at the forefront' of all Community policies.

21. The 'Thinking Small' communication has three substantial addenda dealing, respectively, with the implementation of the European Charter for Small Enterprises in the candidate countries[19]; an overview of EU activities in support of small and medium sized enterprises[20]; and an analysis of the role of the SME Envoy in developing a watchdog role in monitoring policy development affecting smaller enterprises and in providing effective information about, and access to, EU programmes[21].

The European charter for small enterprises

22. The Charter for Small Enterprises was adopted by the Feira Council in June 2001. It calls upon Member States to take a range of actions to support small enterprises under ten broad headings:

The Charter also provides for the monitoring and evaluation of progress on Charter issues. The latest of these progress reports was published in January 2003[22].

23. This report claims progress under most of the headings. It notes that the European Parliament has stated that

"responsibility for implementing nearly all the action points in the Charter lies with the Member States";

that the Commission's most important role under the Charter is:

"to work in close co-operation with the Member States to help them improve the business environment for small businesses. For this purpose, the Commission has a range of policy measures including the Multi-annual Programme for Enterprise and entrepreneurship (MAP) and its financial instruments which are very closely linked to the Charter objective";

and that

"……building on the results of these efforts a wider debate is being launched by the Commission Green Paper on Entrepreneurship."[23]

The existing EU framework of support for smaller enterprises

24. It is clear from the summaries of policy support outlined in the batch of documents published in January 2003 that the Green Paper proposals would build on a wide policy framework which encompasses a very broad spectrum of issues. This is reflected in Appendix 5 of this Report.

25. The support policy is grouped in six broad areas:

26. For each area, the table in Appendix 5 shows the amount in euros allocated to SME support, the number of SMEs estimated to be involved in the relevant scheme, the proportion of the scheme involving SME participation and their estimated share of the total budget.

Financial Support

27. The data reveal that overall sums involved are very large[24]. For instance, total European Investment Bank (EIB) indirect lending under the global loans programme amounted to 22.5 billion euros over the period 1997-2001 and rose from 6 billion euros in 1997 to 10.5 billion euros per annum in 2001. The amounts budgeted for loan guarantees totalled around 435 million euros over a variety of budgetary periods, and are estimated to be running at around 50 million euros per annum in 2001-5. In addition SMEs received around 1.7 billion euros of support under the structural funds, and a further 1 billion euros were committed in the period 1998-2002, or will be committed in the period 2002-6 under Research and Development.

28. The Green Paper is a document for discussion and therefore does not contain any indication of whether these substantial commitments would increase as a result of its suggestions. Budgetary implications will only emerge when an action plan is produced following the consultation period. However, Mr Heinz Zourek, the Deputy Director General of Enterprise at the European Commission stated in his oral evidence that even allowing for the accession of the candidate countries:

"We do not suggest a marked increase in the amount of money to be spent. We found that the financial instruments were taken up very well and they seem to be very helpful. We try to continue that but we have no intention of asking for an incredible amount of money, because we have learned our lesson, that protection from the Commission is not at all appropriate in this area. These are Member States' activities. What we should like to do is go for savings by reducing complexity in the support networks"[25].

The Role of the European Community in support of entrepreneurship

29. We agree with the sentiments expressed by Mr Zourek and we are pleased that the Commission recognises that support for entrepreneurship is primarily a responsibility of Member States. We started from the position of asking why there should be Community level support for entrepreneurship at all when enterprise and entrepreneurship appear to develop, or not, largely at the level of Member States. This was a view echoed by another witness—Mr van der Horst of the Brussels based SME Observatory and EIM Business and Policy Research[26]. However, Mr Zourek argued that there was a case for some support at Community level because there were big differences in Member States. Not all had access to sophisticated financial institutions or had the same extent of entrepreneurial activity. The Commission believed that in order to support entrepreneurship across the European Union, it was necessary for the Community to operate union-wide support schemes. However, the Committee believes that the Government should pay special attention to the views of the Commission noting in particular its view that the support of entrepreneurship is primarily a Member State activity. The Government should also support the Commission in its desire "to go for savings by reducing complexity in the support of networks".

UK entrepreneurship policy: the enterprise challenge

30. In the UK a recent major report on enterprise policy defines entrepreneurship in much the same way as the Green Paper on Entrepreneurship:

"Entrepreneurship is the mindset and process by which an individual or group identifies and successfully exploits a new idea or opportunity. It requires creativity, ambition, independence and the willingness to bear the inevitable risks involved. Enterprising behaviour may be found in organisations of all sizes in both private and public sectors; indeed it is critical to the task of modernising public services"[27].

31. The report then goes on to emphasise two particular forms of enterprise. These are the creation of new businesses, and enterprising behaviour within existing small and medium sized firms (SMEs)[28]. These are seen as central to Government strategy to improve UK economic performance because of their role in the competitive process through new entry and innovative growth, and their potential for promoting diversity and employment opportunities at local community level (HM Treasury/SBS (2000b) p.1-2).

The business environment and market failures

32. In the UK, enterprise policy to promote new business formation and growth is defined by HM Treasury as having two principal components and we agree with this approach. The first component is creating the right environment for business. It consists of policies to promote a positive attitude to enterprise in schools; policies to produce a stable macroeconomic environment and (through competition policy) an open competitive system; policies to adjust the risk/reward balance in the returns to enterprise by tax changes, and by changes in insolvency procedures to reduce the cost and stigma of 'honest failure'; and finally policies designed to reduce the regulatory burden on smaller businesses.

33. The second component is aimed at tackling specific problems caused when the normal operation of market forces does not produce the most efficient outcome, that is to say, where market failures occur. Market failures can arise from many sources. In the capital market, for instance, it is well known that there may be problems for banks in assessing the riskiness of individual small firms. A market failure can arise here because if banks use the 'average' riskiness of small firms in deciding the interest to charge they will discourage 'good' firms who will believe that their below average riskiness should get a below average interest rate. If those firms withdraw from the loans market, the average riskiness of those remaining goes up, so banks will have to raise interest rates again, and so on. The market will not work and instead banks may resort to seeking collateral to protect against risk instead of using the interest rate. However, that will ration lending only to those with collateral and not necessarily to those with the best opportunities. Problems of risk and uncertainty are thought to apply particularly strongly to funding for innovation and R&D. Market failures are also said to arise because of fixed costs or access to, or lack of awareness of, business information and advice in general, and the benefits of training in particular. In the latter case, firms will be unlikely to invest as much as they should in training because of the threat of "poaching" by non-trainers. Finally, market failures are thought to apply in the areas of the commercialization of science which inhibit the rate of "spin-out" activity, i.e. commercial applications of scientific research. Specific policies are therefore targeted at these areas of market failure.[29]

The departmental range and cost of enterprise policy

34. The breadth of these concerns means that enterprise policy spans the activities of the Treasury, the DTI, the DFES, DEFRA[30], the Inland Revenue and other Departments, with substantial enterprise-related resources at the disposal of the Regional Development Agencies as well as the devolved authorities in Scotland, Wales, and Northern Ireland. The role of the Small Business Service (SBS) has been enhanced to become a centre of expertise for Government on small business issues, to develop the quality of business support services and to measure service progress against market outcomes at regional local and national levels (HM Treasury/SBS (2000b) p.2).

35. The range of policies to support enterprise on the grounds set out above (para 32 and 33) spans the entire range of business experience from starting a business, through the trading and planning environment, investment activity, employment and training, and growth of the enterprise. The estimated total cost of this support within the UK was just under £8 billion in 2002. Appendix 6 provides a broad breakdown of this sum by Department. A detailed listing of this support by programme and administering department is set out in Appendix 7, whilst Appendix 8 provides a breakdown by the purpose of the programmes in terms, for instance of start-up, growth, the trading environment and access to finance.

36. Appendix 6 reveals the full range of departmental involvement. The total annual sum of just under £8 billion includes around £2.6 billion of tax relief associated with the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme and the range of tax changes associated with setting lower rates of small firm corporation tax, and changes in capital gains tax. Around £3 billion is shown as agricultural support activities which derive from the receipts under the Common Agricultural Policy (CAP). This money goes to support farming activity and therefore ranges from small holdings to large corporate firms. It is not focussed on either SMEs or entrepreneurship as such but does constitute financial support for companies (farms). It is worth noting that the UK obtains less than £250 million a year in EU non-agricultural support funding.

17   (CEC 2003b) Back

18   Commission Recommendation 96/280/EC of 3 April 1996 defines a small and medium sized enterprise as a business with fewer than 250 employees and an annual turnover of less than 40 million euros, or a total balance sheet value of less than 27 million euros. Within that group micro enterprises are defined as those with fewer than 10 employees, and small enterprises as those with fewer than 50 employees, and fewer than 7 million euros of turnover or 5 million euros of total balance sheet value. The remainder are classified as medium sized enterprises. The medium and small sized groups must also have no more than 25% of their voting rights held by non-SMEs. These definitions are currently under review (CEC 2003d p.14).  Back

19   (CEC 2003c) Back

20   (CEC 2003d) Back

21   (CEC 2003e) Back

22   Report on the Implementation of the European Charter for Small Enterprises (CEC (2003a))Back

23   (CEC (2003a p.5) Back

24   Full details of the schemes and levels of support are contained in CEC 2003d. Back

25   Q236 Back

26   Q145 Back

27   HM Treasury/SBS (2000b) p.11 Back

28   SMEs are defined in the Treasury report, following EU convention, as businesses with fewer than 250 employees, and either annual turnover not exceeding $40 million, or a balance sheet below $27 million. Back

29   (HM Treasury/SBS (2000b) pp.4-5). Back

30   Principally through the administration of EU related agricultural schemes. Back

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