A study of SMEs in the EU is a fascinating exercise. Look at how the European Commission has laid out a funding plan for them:
It is often highlighted that European Union’s efforts in achieving economic well-being depend on SMEs in the region – the largest creators of jobs and also a major driver of innovations. Recent studies have shown that SMEs make up over 99% of EU companies.
EU member states have recognized the implicit need to support them in a big way. It is a fact that some of the iconic European brands began as SMEs.
The EU is now working towards creating a single market for services and integrating the energy and communications SME markets and this is expected to have a major positive impact on the SMEs in the region.
INTEGRATING CAPITAL MARKETS
The European Commission (EC) has realized that investment is key for all efforts in the SME realm and as a first step it is pitching for integrating EU capital markets to provide SMEs with better access to loans and investment options and persuading member states to invest more in research and development, as well as education, upskilling and reskilling.
However, over half of the EU’s net turnover comes from large businesses, which are just 0.2% of enterprises categorized as ‘large’ (employing 250 people or more). In addition the medium-sized enterprises comprise 0.8% of the total. In the global context, SMEs make up about 90% of businesses and over half of all employment, according to the World Bank.
MAJOR CATALYST
SMEs contribute significantly to the EU’s GDP and employment. They are considered as an essential catalyst for innovation, competitiveness and growth in the region and hence one of the main beneficiaries of European funding programs, particularly Horizon 2020, which is the EU’s funding program for research and innovation, with nearly €80 billion of funding available over 7 years (2014 to 2020). The subsequent Horizon Europe, also a funding program for research and innovation with a budget of €95.5 billion, has been giving SMEs substantial priority.
SMEs are estimated to contribute 55% of EU’s GDP and providing two-thirds of the total private sector employment. They also have a key role in the process of technological change in the region as they are more agile, innovative, and adaptive than larger organizations. The EC has recognized that these qualities can ultimately drive technological advancements and enhance the region’s global competitiveness.
Member states of the EU have been designing and implementing various funding programs to support SMEs, especially those making use of hi-tech. These include loans, micro financing, guarantees, investment and participation through venture capital funds or business angels. Such supports have advantages such as reducing the interest rate, increasing the ceiling of financial provision or laxity in collateral.
TOUGH FISCAL CONDITIONS
An EU survey published in January this year on access to finance by SMEs in the EU region has found that SME businesses faced tighter financing conditions in the past year due to the general economic downturn. In 2023, the survey said, nearly 8 in 10 businesses experienced increased interest rates, and over a third with plans to grow in the next 2-3 years, saw interest rates or prices being too high as the most important limitation to accessing finance in the future. Also, 8 out of 10 businesses in general reported increased costs for materials and energy, though lower than the year before, while SMEs reported increased labour costs as well.
INVESTEU PROGRAM
On its part, the EC has proposed to increase the capacity of the financing guarantee under InvestEU program with €7.5 billion, to be made available through a new specific Strategic Technologies for Europe Platform (STEP) window, also available for SMEs. The InvestEU program supports sustainable investment, innovation and job creation in Europe. It helps Europe’s SMEs access finance by providing more favourable financing conditions to them.
It is proposed that EC will make more than €200 billion available to SMEs under its various funding program running until 2027. This includes substantial amounts under the EU’s Cohesion Funds (€65 billion) and the Recovery and Resilience Facility (€45.2 billion) dedicated to direct and indirect measures in support of SMEs.
The EC has a major initiative, called the Ideas Powered for Business SME Fund, which was set up in 2023. The fund is a grant scheme designed to help EU-based SMEs protect their intellectual property (IP) rights. The fund is expected to run from 22 January 2024 to 6 December 2024.
SOME SME TITBITS
- 24 million European SMEs represent 99% of all businesses in the EU
- These SMEs create 2 out of 3 jobs
- They generate more than half of value added in the non-financial business sector
- They contribute to local economies with 42% of SMEs located in a small town or village
- Around €200 billion is expected to be the need for funding for SMEs under different EU funding programs until 2027
- There are EU program like Next Generation EU providing up to 45 billion euro to SMEs under the Recovery and Resilience Facility, the EU Chips Act, the Digital Services Act and the Digital Markets Act, and Cohesion policy funds, among others.
FUNDING AVENUES
There are 7 major funding programs for SMEs in the EU.
1. Horizon 2020 and Horizon Europe, which are the largest research and innovation funding programs in the EU, which have helped SMEs to introduce new ideas to the market and then help to further develop these ideas.
2. The Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME), which is a program that aims to facilitate the access of SMEs to financial resources in all phases of their life cycle (creation, expansion or transfer of business). While providing easier access to guarantees, loans and capital for businesses, the program also offers financial support through local financial institutions in member countries.
3. EU Finance for Innovators (InnovFin), which is a joint effort by the European Investment Bank Group (EIB and EIF) and the EU. InnovFin includes an integrated and complementary set of financial instruments and advisory services covering the entire research and innovation value chain.
4. European Fund for Strategic Investments (EFSI), which creates the cornerstone of the European Investment Plan. It has a €5.5 billion ‘SME Window’ that provides loans or guarantees to SMEs through the EIF. SMEs can also collaborate with the private sector and venture capital firms.
5. EU Program for Employment and Social Innovation (EaSI), which finances efforts that create quality and sustainable employment. It also ensures social inclusion, fight poverty and improve working conditions. Small loans up to 25,000 euros are provided to small enterprises and vulnerable groups who want to start or develop a small company.
6. European Innovation Council (EIC), which is the region’s flagship program to identify, develop and scale up breakthrough technologies and innovations.
7. Cultural and Creative Sectors Guarantee Facility (CCS GF), which is the ‘Creative Europe’ program that offers guarantees to financial intermediaries. The facility provides necessary financial resources for cultural and creative sector programs.
Of these Horizon 2020 and Horizon Europe are unique funding mechanisms for commercialization of research. There are 2 initiatives – the Innovation in SMEs under Horizon 2020 and the European Innovation Council under Horizon Europe – which aim to help SMEs bring innovative ideas to the market. These initiatives encourage the translation of research into practical applications, fostering a more innovative and resilient economy.
The EU, in its mission for sustained growth and citizen well-being, believes that SMEs have a major role and therefore its funding policy is aligned to help the SMEs. Programs like Horizon 2020 and Horizon Europe are tuned to achieve the goals outlined in this mission. For instance, Horizon Europe, with its major focus on the European Green Deal and the digital transition, incentivizes SMEs to develop solutions that address these key areas.
The EU has also recognized the need to help the SMEs as their well-being only can boost economic recovery after the havoc wreaked by the covid pandemic. It also believes that SMEs have a wider range of opportunities and collaborations beyond the borders of EU, taking into consideration their potential for innovation and growth.
The EU SME Envoy
In a significant step very recently, the European Commission (EC) has created a position of what it calls an SME Envoy to provide guidance and advice to the EC on SME issues and to advocate SME interests externally. The SME Envoy is now heading the SME Envoy Network, maintaining close contact with the national SME Envoys, and working together with business associations to address the special concerns and needs of SMEs within the EC. The main aim is to reduce the bureaucratic burden for the SME companies, and filtering upcoming SME-related EU legislation and recommending to the EC those which call for close attention from an SME perspective. The EC has already initiated various steps on an SME relief package.
In January, EC appointed Markus Pieper as the SME Envoy. He will report directly to EC President Ursula von der Leyen and to the Commissioner for Internal Market on all SME-related activities. He will chair the SME Envoy Network, thus maintaining close contact with the national SME Envoys, and work together with business associations to advocate for the special concerns and needs of SMEs within the Commission, in line with the Commission’s Better Regulation Agenda. The EU had set up the SME Envoys Network in 2011 to review the functions of SMEs in the EU. And each EU country has a national SME Envoy who functions in the interests of the concerned country in the SME Envoys Network.
EU SMEs Mitigate Risks
A look at a recent narrative of worldwide risk landscape shows that SMEs have an important role in averting global challenges.
An interesting survey of experts across various sectors by the World Economic Forum at the beginning of this year on the likely impacts of global risks in 1, 2 and 10 years, as well as on how to mitigate these risks shows that nearly 27% of those surveyed feel that in the next 2 years there could be ‘upheavals and elevated risk of global catastrophes’, while another 54% anticipate ‘some instability, moderate risk of global catastrophes. The survey, titled ‘Global forecasts predict even higher risk levels, including 17% of experts expecting the ‘global catastrophic risks looming’ and only 9% expecting ‘low or negligible risk levels’.
The top risks listed are extreme weather, AI-generated misinformation and disinformation, societal and/or political polarization, cost-of-living crisis and cyberattacks. More importantly, out of the top 20 most frequently predicted risks for 2024, nearly half of them are economic, including an economic downturn, skills or labour shortages and disruptions to energy, food and other critical supply chains.
SMEs can be impacted by almost all these risks. Especially so in the case of SMEs in the EU region. More so, since they constitute 99% of the EU companies. But, there is a positive side. SMEs can also play a crucial role in helping prevent the said risks, going by their sheer numbers and the tasks or work they are engaged in. The EU SMEs and startups support the green digital transformation of industries, they enhance cyber resilience by offering their cybersecurity tools and facilitating the digitalization of other businesses and local public services. And they shoulder a major responsibility in fostering skills development and preventing shortages. SMEs, which have adopted the digital, can have a vital role – directly as stakeholders in processes like governance, R&D, supply chains, public-private partnerships, etc and as providers of technical expertise to those in need.
This really is an indicator of the crucial role they have.
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