October 2009
Small and medium-sized enterprises (SMEs) are the backbone of Europe’s economies. They represent an increasing share of all enterprises, production and employment. They also represent the future: innovations tend to spring from SMEs, which thus act as agents of change. There are big differences among the roles of SMEs in Europe’s economies—as there are major differences overall among SMEs—but the pattern of growth is distinctly clear.
SMEs are important in cyclical downturns and recessions. They cushion the impact on economies that more often than not comes from large enterprises. SMEs tend to be more oriented toward the domestic economy than are large enterprises, which is why the SME sector does not contract as much as large enterprises do when the global economy slows down. SMEs are also more service oriented, which is why big shifts in manufacturing output—due to cyclical effects or to relocation of production—are felt more strongly among large multinationals than in the SME sector. Overall, SMEs are more sensitive to changes in demand and tend to be more flexible. SMEs are also important in economic recoveries. Countercyclical measures tend to favour domestic consumption rather than having an outward orientation and thus have a disproportionate effect on SMEs.
There are several issues facing SMEs. Red tape hinders their growth and export potential. Punitive taxes prevent SME entrepreneurs from building up a capital base for new ventures and expansion. Despite decades of political enthusiasm for SMEs, governments still tend to be insensitive to the limited capacity of entrepreneurs to handle administrative burdens. A zero-tolerance policy towards unnecessary red tape should be introduced.
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