SMEs and their strategies for coping with the recession

Newsletter articles

1 Sep 2011

Employment Studies Issue 14

Andrea Broughton, Principal Resarch Fellow

The economic recession of the past two years has hit businesses hard across the European Union. However, it is arguably small and medium-sized enterprises (SMEs) that are more exposed to the effects of recession, due to the fact that they have fewer resources to enable them to bridge difficult times and may find it harder to gain access to credit to help them weather temporary difficulties. IES has recently carried out a comparative study looking at the sorts of coping strategies that SMEs across Europe have put into place to help them to cope with the recession.

SMEs make an invaluable contribution to the EU economy: in most Member States, SMEs make up a significant majority of the number of firms operating in the economy and specifically in the private sector. In some countries they account for almost all companies. SMEs also employ a significant proportion of the workforce, although the percentage varies from country to country.

The economic crisis has affected the economies of the majority of EU Member States to varying degrees. The impact on SMEs has been mixed, and largely dependent on issues such as the sector in which they operate.

On a sector basis, in some countries the crisis has had a particularly negative effect on SMEs in export-oriented sectors such as manufacturing and the automotive industry. The construction sector has also suffered badly, particularly in countries such as Ireland and Slovenia.

Government measures to help SMEs

As the economic crisis of recent years has been so severe, governments throughout the EU have introduced policies to support enterprises as much as they can. Aware that SMEs have fewer defences against economic downturn, due to size and limited access to financial aid, governments in many countries have put in place specific policies and measures aimed at helping SMEs to survive the crisis. These cover a range of issues, including:

• financial measures, such as reductions in tax, provision of loans, and measures to improve access to credit;

• helping SMEs to access new markets and to invest in research, development and innovation;

• providing specific advice and consultancy to SMEs, usually on themes such as how to set up operations or financial advice;

• simplification of administrative procedures, on the basis that red tape is seen as a particularly difficult barrier to business development for SMEs;

• support for job creation, which usually takes the form of providing financial incentives, such as reduced employer social security contributions, for employers hiring unemployed people;

• enabling temporary reductions in the workforce, primarily through the provision of short-time working. This measure has been used widely throughout the EU during the recent crisis;

• supporting training. Training is recognised as a key instrument in ensuring employability, not just during an economic crisis, but throughout an employee’s working life. SMEs often find it difficult to release employees for training and to fund training in general. Targeted measures can therefore help; and

• some very targeted sectoral measures, which are in place in some countries, in addition to measures specifically targeting entrepreneurship.

SME networks and partnerships One way in which SMEs can take action themselves to help weather difficult economic times is to build partnerships and networks. Our research found a range of SME networks in EU Member States, with a variety of purposes: some are designed to help SMEs gain access to commercial markets, while others are aimed at improving information-sharing or developing systems to allow companies to share employees in some circumstances. These networks can also help SMEs deal with the impact of the crisis in terms of maintaining employment, productivity and market share, and providing other ways of pooling resources.

In some countries, SME networks take the form of business associations that provide shared services for SMEs. In Luxembourg, for example, several SME networks provide help and services to SMEs in areas such as research and innovation.

There are also some examples of individual SMEs grouping together, usually to recruit or train workers jointly. In France and Belgium, for example, companies may group together in an association to hire out staff between them as the need arises.

Employment pacts are another type of SME network, usually taking the form of agreements between parties such as employers, social partners and public authorities (government and labour market services) to enable them to act together to increase employment in a particular area or sector. Employment pacts at local or regional level are quite common in a minority of countries, such as Hungary, where they have been operating since 2002. At present, it is estimated that 47 such pacts exist at local, county or regional level in Hungary, aimed at activating the economy and increasing employment levels. Interest in these types of pacts has increased during the crisis. Territorial employment pacts also exist in Austria, and are the predominant form of employment-related partnerships today.

Some partnerships revolve around specific issues, with training often featuring highly, with active involvement of SMEs. In France, for example, there are local partnerships, usually at regional level, that concentrate on training and skills development, usually aimed at employees in firms that are experiencing difficulties, those on short-time work, or those who have been made redundant. The idea is that training will increase the employability of the individual and the competitiveness of the region.

Conclusions

The economic crisis has hit SMEs harder than larger companies in most countries. This is evidenced by the large numbers of SMEs that have been forced into bankruptcy in the majority of EU Member States over the past couple of years. As a response to this, governments in many EU Member States have tried to put into place measures to help SMEs.

As SMEs suffer from particular difficulties that make it harder for them to weather temporary downturns in the economic cycle, let alone a major crisis such as the current one, the development of networks and local partnerships are extremely important to SMEs as a way of helping maintain employment and offer training to their workforce.

The incidence of these types of networks varies across the EU – in some countries, there are established SME networks and local partnerships, while in others the tradition is not as well established. Where networks and local partnerships are well established, they appear to be working well and have not been changed particularly with the advent of the crisis, although it could be argued that the fact that they belong to a local partnership has enabled the SMEs to cope better with the crisis and enable them to move forward in the postrecession economy.