1

What Do SMEs Need to Play their Role in the Lisbon Process

- Answers to Growing Competition

Dr. Klaus-Heiner Röhl

Portoroz/Slovenia, April 23rd 2005

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 2

What Do SMEs Need to Play their Role in the Lisbon Process

5 Years after: the Lisbon Agenda in Crisis

Growing Competition in a Growing EU

Business Financing: Answers to Basel II

A View on Regulation

Strengthening Qualification and Human Capital

Innovation and SMEs

Conclusions

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 3

5 Years after: the Lisbon Agenda in Crisis

the Lisbon goal to make Europe the “most dynamic and

competitive knowledge-based economy in the world“ is stalled

many European Countries stagnate in spite of high growth in

the world economy

the Kok report states the deficits that hinder Europe in

reaching the Lisbon goals, but could be more outspoken

concerning the conclusions

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 4

5 Years after: the Lisbon Agenda in Crisis

By trying to fulfil all goals at the same time – more competition, less regulation for businesses, more R&D, better education, more social and regional equality, and more environmental regulation – the EU in fact wasn’t able to move at all

“more of the same” won’t be enough to bring the Lisbon Agenda back on track

the EU and its member countries must concentrate on competitiveness, better regulation, business financing, qualification, and innovation

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 5

Growing Competition in a Growing EU

the EU enlargement with 10 new member countries in 2004 has led to more competition from eastern Europe

in fear of even stronger competition on the labour market, the Commission’s proposal for a directive on services has been rejected by the public in the “old” member states

but:

often, alleged “wage dumping” is a scapegoat for national failures

the common market for services can’t be postponed indefinitely

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 6

Growing Competition in a Growing EU in Germany, minimum wages as introduced in the construction

sector are discussed for other industries

minimum wages based on collectively agreed wages could lead to even higher unemployment in east Germany

in tradable goods, minimum wages can drive businesses to low wage countries instead of keeping wages up

high growth in the new member states in combination with low birth rates since 1990 might ease the migratory pressure in a few years

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 7

Business Financing: Answers to Basel II

the agreement of the Basel II Committee allows for extensive relief for SMEs

the retail sector for loans to smaller businesses with a volume of up to 1 million € provides relief for 90 percent of SMEs

the possibility to alleviate SMEs from their risk burden must be implemented fully in EU legislation:

the lower weight of risk by SMEs and securities recognized by banks must be taken into account without restrictions

the proposed capping of the bank equity reduction allowed by Basel II will lead to higher interest rates for SMEs and should be abolished

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 8

Portfolio of a Bank with high SME orientation

0

5

10

15

20

25

S&P-Risikoklassen

Ant

eil a

m K

redi

tvol

umen

in P

roze

nt

Standard & Poor’s Risk Classes

Percentage of Credit Volume

Taistra, Krämer-Eis

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 9

Business Financing: Answers to Basel II

with Basel II, equity capital plays a decisive role in financing businesses as the equity ratio defines the rating of a business

without good rating, interest rates for credits are excessively high

SMEs must earn profits to build up equity through internal financing

in addition, the possibilities for external equity financing must be improved

tax and institutional barriers preventing SMEs from access to the capital market must be eliminated

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 10

A View on Regulation Business sector surveys reveal the heavy burden bureaucracy and

excessive regulation impose on companies

Though most burdensome regulation is made by member countries, the EU should avoid additional bureaucratic demands on companies

Our recommendations for reducing bureaucracy:

1. more efficient procedures

2. creation of incentives and competition

3. less detailed regulation

4. benchmarking for better regulation

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 11

Labour Market Regulation – OECD index of barriers

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 12

Lower regulation leads to higher employment

OECD; own calculations.

0 1 2 3 4

Regulation density

40

50

60

70

80

90

100Employment ratio

R2 = 0,3866

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 13

Strengthening Qualification and Human Capital

better education and human capital endowment are important to strengthen competitiveness and earning high wages

in the OECD countries, adults have spent close to 12 years in formal education on average

Countries with highest education levels in the EU are Denmark, the Netherlands and Germany

Portugal, Italy and Spain show the lowest education levels

the new EU members have already higher formal education levels than some old members, but their qualifications might be depreciated in part as they date from socialism

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 14

Strengthening Qualification and Human CapitalYears of formal education in OECD countries

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 15

Strengthening Qualification and Human CapitalLevel of education attained by adult population

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 16

Innovation and SMEs

R&D Expenditures as a percentage of GDP

The Lisbon goal stands at 3 percent of GDP, while the EU average is 1,9 percent

The US, Japan and Korea show higher R&D expenditures than all but 2 EU Countries

Lisbon Goal

OECD 2004

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 17

Innovation and SMEs

the EU recognized the growing importance of R&D and innovation in the Lisbon Agenda and its 6th Framework Program

SMEs “officially” play a growing role in European R&D financing

but at the same time, surveys show a shrinking ratio of SMEs active in innovation

SMEs have problems with conditions for participation in EU projects (number of partners from different countries, complicated applications)

the answer: Make it more simple!

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 18

Innovation and SMEs

million Euros 2003 2004 2005 FP 6

SME-Funds in total1) - not specified - 2.125

SME-specific Programs

185 105 105 430

Collective Research 30 35 35 100

CRAFT 155 70 70 330

1) SME-specific Programs plus 15 percent of funds for 7 thematic areas

ZENIT, Cordis, European Commission

SMEs in the EU’s 6th Framework Program R&D

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 19

Innovation and SMEs

necessary steps to strengthen the European R&D environment are:

adjustment of the EU aid framework to the new circumstances

fast introduction of the Community patent

less segmentation of R&D areas like basic research, applied research and development within large businesses and SMEs

better networking of companies with research institutions and universities, e.g. through research bonuses awarded in a simple procedure

What Do SMEs Need to Play their Role in the Lisbon Process - Answers to Growing Competition 20

Conclusions

in order to bring the Lisbon Agenda back on track, the EU and its members should focus on the central growth-inducing factors

strengthening competitiveness

reducing barriers to startups and simplifying regulation for businesses

strengthening qualification of the workforce and human capital formation

supporting innovation and R&D through simplified programs

avoiding measures detrimental to the stated goals