International Workshop ‘Skills Development for SMEs and Entrepreneurship’

Upgrading Workforce Skills in Small Businesses: Reviewing International

Policy and Experience

Professor Ian StoneDUBS

i.e.stone@durham.ac.uk

Context for studyLearning/skill levelsWorkplace is where most adults learnMost workplace are small firmsLarge firms contribute less to skills poolAgeing workforce Demographics and pensions - lengthening careers

Economy/firm perspectiveSmall firms and dynamismTraining linked to firm survival and growth

GovernmentFinancial constraint – spend, effectiveness, efficiencyRethinking role, targets etc.

Small firms and training – identikit profile Inverse and disproportionate relationship between firm size

and training investment Significant proportion do no training (formal); even allowing

for formal/informal difference, still a large gap Even more pronounced for education investment vs

vocational training Training typically not measured for effects, incorporated in

strategies, or allocated a budget Most perceive no need for it (‘have all the skills we need’) Absence of appreciation of ‘latent’ skills needs Yet… some small firms have training profiles nearer to medium

and large firms

Objectives of study Consider barriers to expanding small employer

investment in training Review the range/nature of national and local policies

that have addressed the issue Identify effective approaches/mechanisms of potential

interest to policy-makers… Remembering to set the review and its findings in context of

different policy traditions, institutional structures and business cultures, and evolved rather than strategically designed systems

Definitions, scope, sources ‘SME’ category too broad; focus here is on small/micro, <100

employees Management training excluded Focus on demand – but recognition of supply issues as linked CVT rather than initial training (apprentices etc.) Not focused on training of unemployed/vulnerable workers Report based on extant policy reviews, national studies, interviews,

desk search etc; builds on previous work for SSSDA/UKCES in UK, incl. recent Employers Collective Measures programme

Barriers to small firm training(1) Information/ knowledge

(2) Scale/resources

(3) Training supply

(4) Externalities

(5) Capital market imperfections

(6) Dynamic system effects

Lack of HR functions; analytical constraints; limited management capability; training perceived as a ‘cost’

Risk aversion; survival goals; shorter time horizons; higher opportunity costs for formal training; higher notional discount rates for training investments

Access issues; type/quality/scheduling; lack of customisation; very significantly higher fee costs

Spillovers; ‘poaching’; division of benefits from training; patterns of training determined by risk reduction/loss minimisation

High financial costs combined with mobility of direct collateral (the employee); current accounting systems fail to measure skill investment as asset creation

‘Low skills equilibrium’; (sectoral) cumulative process; low spec products/services; path dependency of low skills/unambitious production methods

Contrast of high V-A production strategies (HPW etc.) with positive reinforcement cycles

Areas for policy action

1 Influence… perceptions/culture/ambition

2 Address… outreach/information/employer enactment capacity

3 Achieve… demand-supply system convergence

4 Integrate… different forms of training (formal and informal/OJT)

5 Refocus… the supply-demand relationship

6 Address… cost/affordability issues (tax breaks, subsidies)

7 Develop… collaboration and resource pooling

8 Build… training partnerships, including with large firms

*Development of NVCER (2007)

A. Employer outlook Direct focused approaches (compulsory framework in France vs

voluntary frameworks (UK ‘pledges’; ‘intrusive’ competitions Canada; creation of change agents, Portugal)

Adjuncts to training funding systems (Netherlands Levy system found to encourage a training culture)

Indirect expansive approaches (New Workplace Development Programme, Finland; Competence Reform, Norway)

Problems in reaching smaller/less ambitious firms

Wider system/culture plays significant role e.g. Finland, France formally required worker representation and training consultation/plans

B. Information and guidancePublic funded provision for individual small employers:‘Training conversations’ Sector Council training advisors, Canada Industry Training Officers, New Zealand

As part of more integrated training approaches: S Africa’s national levy allows micro/small firms to claim from funds only if have appointed (internal or external) Skills Development Facilitator (for skills plans, accreditation etc.) Netherlands’ levy scheme incorporates advisory support for identifying training needs

C. Forms of trainingDesign of flexible and ‘bite sized’ units…Belgium (F+W) voucher system – targeted on small/micro firms; eligible for firm specific and general training; encourages course design initiatives by providers; on-line purchase/low costSwedish Lifelong Learning Project integrates CTV within a continuous learning framework – aims to meet skill requirements rather than formal qualification targetsNZ Qualifications Framework - designed to facilitate flexible combinations of course units, tailored to small firms/sectors

D. Tax incentivesGeneral encouragement to investment; potential for targeting (Malta!)… both increasing training and restricting deadweightcan target small firms, e.g. with low previous training spending (Netherlands) tax credits for small firms with >certain level of spending (France) Belgium’s (F) Vlamivorm project - property tax reductions for training spending; targeted low training sectors + firms previously increasing training (73% <10 employees)

Problems: formal rather than informal training; small firms need far higher concessions than large (S Korea); large firms better able to benefit; small firms uncertain in dealing with tax authorities

E. Training subsidies Generally induces increased investment in training Potential for small firm targeting in subsidy schemes – e.g.

restricted to small firms or size-based graduated Targeting potentially reduces deadweight Ireland’s Training Support Scheme (eligibility - business-

related training plan); employers choose training provider; deadweight half the level for large firms

Small firms discouraged if targeting leads to administrative complexity; larger firms have more administrative capacity

Mainly relate to formal training

E. Subsidies (continued)

Large subsidy needed to overcome greater costs (incl. indirect costs) and barriers faced by small firms

Broader support crucial, especially advice and support: e.g. UK piloted Small Firm Development Accounts

(targeted <50 empl.) - funded ‘training champion’, training plan, 6 mths mentorship, training network membership, proportion of external costs of training

UK Employer Training Pilots – subsidies for Level 2 training, information and support, covered indirect costs

F. Training Levies Different types – mainly compulsory (train-or-pay) or

voluntary/collective sectoral Targeting of small firms more feasible where public funds involved

or in compulsory schemes. Netherlands’ scheme finances collective training for employers,

including OTJ training, advisors, influences ‘culture’ among members – but small firms benefit less than large ones

Can be used to encourage cooperative behavior (Spain – joint plans from sector/territorial groups of small firms), organise complementary support (Italy – funds training plans, training via vouchers for micro firms) and improve quality of training supply (Denmark – funding development/testing of training programmes)

Many schemes do not target by firm size; lower rates in France and Quebec compulsory levies allow firms to opt out

G. Rights to training leave Focused not upon firms, but employees – more likely to be

targeted on type of worker than firm Major problem with cost (direct and indirect); public spending

level in support consequently important Compulsory system in France funds replacement staff for firms with

<50 employees; reaches micro/small firms – aided by levy-funded advice and information to allow firms to support the employee training requests

H. Job-rotation schemes Used in Germany + Denmark for replacement workers and ALP Denmark experience suggests mainly relevant to larger SMEs;

Germany local schemes attract small firms - but largely skilled/ management staff and costly

I. Employer networksPooling resources and cooperation in a variety of ways (GTOs, supply chains etc.) => small firm benefits [economies of scale, information, tailoring/quality of training provision, externalities (-)poaching (+)dynamic effects] S Korea - levy-supported Training Consortia of SMEs appoint training managers to liaise with local providers to deliver members’ training needs; smaller firms benefit in terms of cost and type/quality of training, including OTJ elementsIreland – Skillnets - sector/area-based networks helping small firms to strategically address joint training requirements; supports network and customisation of training for member firms. Additional support/higher grants for enterprises most in need of vocational enhancement. Clear small firm benefits/response (85% participants <50; 40% < 10)Network principles also in Canada – Workplace Skills Initiative; and UK new Growth and Innovation Fund (GIF)

J. Accounting standardsAccounting approach to change valuation/perspectives w.r.t. training expenditureConcept needs further development, but practicality questions for small firms, who are unlikely to be receptive

K. Pay-back clausesSystem for reducing risk relating to training investments - already utilised in differing degrees, but enforcement problems particularly for small firms

L. Occupational licensingRange of occupations/sectors in which this might be expanded as a compulsory measure to drive up skills levelBut - limited number of potential occupations, and significant costs of administration and training - effect on small firms depends upon funding support

‘Next practice’ ‘Best practice’ is highly subjective in relation to engaging small

employers in training, since subject (type of firm) and context (spatial, cultural, sectoral) vary to such a large extent.

Issue needs to be addressed with respect to both the static and dynamic aspects of the problem; sub-optimal small firm investment in skills emerges from complex situations, made up of multiple behaviors and processes, and interventions need to acknowledge this.

Given the context of tighter budgets, policy-makers generally will be under pressure to move in the direction of (1) reduced public spending, (2) more precise targeting to ensure value for money, and (3) a switch from direct subsidies to indirect or facilitation spending.

Findings of this report can support this process through showing (1) available types of intervention mechanisms, (2) key principles of their design, and (3) how different policy formulations affect policy effectiveness and efficiency.

Holistic approach to determine the balance between skills objectives relating to small businesses, and individual/group skills objectives affecting social justice and labour market efficiency.

Some types of small business are more susceptible to policy measures than others; offering higher net returns to public expenditure - especially if support is explicitly linked to business performance improvement. Other small employers may be more appropriately supported less directly through targeting of types of employees.

Important policy issue is how to ensure support is available for those firms with ambitious production strategies.

Some measures – tax breaks, and many subsidies – while targetable, address the issue in a narrow way. Report stresses importance of intervention mechanisms addressing the range of barriers to small firm engagement in training. It identifies some broad approaches (e.g. some levies, networks), amenable to different national contexts, that both address a range of barriers, and promote commitment (including financial) of small firms.

Room for more subtlety in policy design/delivery – limited evidence of entrepreneurial methods, more use of behavioral ‘nudge’ techniques