Report assesses role of SMEs in employment creation

The 1997 annual report by the European Observatory for small and medium-sized enterprises (SMEs) outlines trends in the formation of SMEs. It finds that such firms create more jobs than larger enterprises, though the rate of liquidation of SMEs is also high.

The European Commission has long emphasised the importance of small and medium-sized enterprises (SME s) in job creation. The recently published 1997 annual report by theEuropean Observatory for SMEs shows a complex picture in terms of the employment impact of SMEs. According to the report, there are over 19 million enterprises active in the non-primary private sector in Europe (including Iceland, Liechtenstein, Norway and Switzerland). Of these, around 99.8% fall into the EU classification of SMEs. Based on the analysis of trends between 1988 and 1997, the report suggests that during the 1990-3 recession, the decline in employment was greater in large or medium-sized companies than in SMEs, thus suggesting that larger enterprises are more vulnerable to fluctuations in the business cycle. However, employment figures in SMEs nevertheless declined to 110 million persons. The report shows that while employment remains more stable in SMEs during periods of recession, in times of economic recovery, employment growth tends to be concentrated in the larger enterprises. SMEs were found to create more jobs than large enterprises, but they equally destroy more jobs. Significantly, the net rate of employment growth tends to be the same for enterprises of different sizes.

The average size of SMEs in terms of employment is slanted towards the very small enterprises, with an average of six workers only. SMEs tend to be more labour intensive than larger enterprises, although the relationship between output growth and employment growth is practically the same, irrespective of company size. A growth of 1% tends in output tends to give rise to a growth of 0.8% in employment.

One part of the report looks specifically at the failure or closure rate of SMEs. It argues that because of difficulties with available statistics, only general trends can be pinpointed here. Liquidations were found to account for 15%-20% of closures and the closure rate varies between 13% in Germany and 1% in Portugal, Spain and Luxembourg. Interestingly, a high closure rate was found to go hand in hand with a high level of small-business creation. The report contains further information on the role and structure of SMEs in Europe with specific sections looking at the problems facing SMEs and the development of the legislative and regulatory environment applicable to SMEs. The latter summarises the policies used to support SME creation under the following headings: simplification of administrative procedure; advice and guidance for business start-ups; reform and modifications of the tax system to favour SMEs; and financial support in relation to subsidised loans and dealing with late payment, as well as reduction in social security contributions and the payment of specific grants (ie for investment in information technology or research and development). Most European countries have also implemented measures to stimulate job creation in SMEs. Such instruments focus on flexibility options in labour market regulations, tax incentives on recruitment, reduced social security contributions and training courses for special groups.

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