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

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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

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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

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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

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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 RD, better education, more social and
  regional equality, and more environmental
  regulation the EU in fact wasnt able to move
  at all
• more of the same wont 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

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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 Commissions 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 cant be
  postponed indefinitely

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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

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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

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Portfolio of a Bank with high SME orientation
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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

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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
• more efficient procedures
• creation of incentives and competition
• less detailed regulation
• benchmarking for better regulation

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Labour Market Regulation OECD index of barriers
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Lower regulation leads to higher employment
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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

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Strengthening Qualification and Human Capital
Years of formal education in OECD countries
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Strengthening Qualification and Human Capital
Level of education attained by adult population
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Innovation and SMEs

• RD 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 RD
  expenditures than all but 2 EU Countries

Lisbon Goal
OECD 2004
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Innovation and SMEs

• the EU recognized the growing importance of RD
  and innovation in the Lisbon Agenda and its 6th
  Framework Program
• SMEs officially play a growing role in European
  RD 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!

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Innovation and SMEs
SMEs in the EUs 6th Framework Program RD
million Euros 2003 2004 2005 FP 6
SME-Funds in total1) - not specified - - not specified - - 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
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Innovation and SMEs

• necessary steps to strengthen the European RD
  environment are
• adjustment of the EU aid framework to the new
  circumstances
• fast introduction of the Community patent
• less segmentation of RD 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

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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 RD through simplified
  programs
• avoiding measures detrimental to the stated goals