Study objectives and scope

In recent years policy makers showed increased interest to foster fast growing enterprises as they are seen a key driver of economic growth and em-ployment. Europe has performed relatively badly in generating high-growth innovative companies that quickly become global leaders. Against this background this Policy Brief addresses the following main questions: What role can the EU level play in supporting high-growth SMEs? How are policies in support of high-growth SMEs distinct from general SME policy? What examples of such effective policies exist in European and other countries?
 

Overview of key findings

Attention for high-growth SMEs: High-growth SMEs have attracted much attention in recent years. Findings suggest that high-growth firms contribute significantly to creating new jobs.

Few targeted policies in Europe: While attention for high-growth SMEs is high in the European Commission, attention in Member States is limited. Few policy initiatives target high-growth SMEs.

Initiatives outside Europe: Korea and Singapore have recently implemented policies for high-growth SMEs. Israel plans to introduce such policies. In Canada, combined SME support through R&D programmes and venture capital increased the number of high-growth companies considerably.

Lack of evaluation studies: There is a lack of evaluation studies that could substantiate certain measures to support high-growth SMEs as being particularly effective or ineffective.

Systematic support advisable: Support for high-growth SMEs may require a comprehensive ap-proach that could include certified coaching net-works, improved access to equity finance, and fa-cilitated internationalisation.

Prepare breeding ground: Policies should pre-pare a fertile breeding ground for SMEs to grow, e.g. by removing incentives to stay small, rather than trying to “pick winners” and foster them.
 

Key definitions

The OECD defines high-growth enterprises as firms with average annualised growth in employ-ees or in turnover greater than 20% a year, over a three-year period, and with ten or more employees at the beginning of the observation period. “Ga-zelles” are newly born high-growth enterprises not older than five years. These definitions have be-come prevalent in publications on this issue. The notion of “large international player” may however more accurately describe what policy makers de-sire, since the definition of high-growth firms in-cludes companies that remain small after three years of “high growth”.
 

Consistent statistical data is missing

Comparable international data about high-growth SMEs are missing, so that a consistent picture of their prevalence cannot yet be drawn. The OECD-Eurostat Entrepreneurship Indicators Programme found that in 2006, the USA were ahead of most European countries for which data were available. A Eurobarometer study found that in several Euro-pean countries the share of high-growth firms in the three years before 2009 was larger than 20%.

A recent study found that the share of young en-terprises among large innovative companies was much larger in the US and also in other countries than in the EU. Thus the US is apparently a better breeding ground for high-growth innovative SMEs than Europe. One may however contest the im-portance of such “big young global leaders” for overall economic wealth by pointing to the “hidden champions” in Europe.
 

Theoretical arguments for SME support

Policies promoting high growth of innovative SMEs should be in accordance with principal insights of economic theories. Most relevant here are the theories of market failure and state failure. Market failures with respect to policies in support of high-growth SMEs can above all potentially be traced back to externalities and imperfect information.

However, some arguments do not only apply to SMEs performing high growth, and growing enterprises may also produce negative externalities. State failure theory deals with possible failures in governmental decisions and policy making. As regards the relationship between governments and companies, state failure can be traced back to one principal source: imperfect information. This questions attempts to “pick winners”.
 

Growth determinants and related policies

The answer to the question why enterprises grow is complex. Many factors can trigger enterprise growth and, vice versa, possible barriers to growth are manifold. In recent years, research has widely substantiated the importance of high-growth new companies for job creation. The number and share of high-growth enterprises is small, but the number and share of jobs they create is disproportionally large.

However, the number of studies about policies to support high-growth enterprises is still small. Re-search for this Policy Brief found hardly any fo-cused analyses, such as cost-benefit analyses of specific instruments or longitudinal studies with control groups of companies not receiving specific types of support.
 

Policy examples in Europe and beyond

In Europe, policy attention for high-growth SMEs is limited. Related EU-wide programmes include Eurostars and the growth facilitator of the Euro-pean Investment Fund. Targeted national policies for high growth SMEs were mainly found in the Nordic countries of Denmark, Finland and Norway. Further countries with such policies include Estonia, France, Ireland, Netherlands, and Spain. Beyond Europe, relevant policies were found in Australia, US, China, Singapore and Korea.
 

Specific policy issues

Entrepreneurship: Certified coaching may help grow SMEs and cross the “chasm” between pilot markets and mass markets. There are specific coaching programmes for entrepreneurs aspiring for high growth and high-growth programmes offering coaching. However, many SMEs do not take advantage of coaching opportunities, and there is, as of yet, no appropriate infrastructure to encourage the replication of coaching networks throughout EU Member States.

Access to finance: Improving access to venture capital (VC) may be a priority policy objective when supporting high-growth SMEs. Existing structures of public support for VC in Europe may be revised in the years to come, aiming at establishing a European venture capital market.

Internationalisation: Companies seeking to grow quickly need large international markets. However, the benefit of participating in platforms such as the Enterprise Europe Network (EEN) may not be tangible enough for SMEs, and the EEN’s search tool currently does not allow semantic search which limits its usefulness.

Industry focus: Business ecosystems are im-portant for SME growth and often cut across sev-eral industries. Targeting specific industries may thus neglect important links to other industries. Furthermore, empirical evidence suggests that high-growth companies can be found in any industry.
 

General and high-growth SME policies

One may label policies seeking to support founda-tion and viability of SMEs, without specific growth objectives, as “general” SME policy. On the other hand, policies for high-growth SMEs target out-standingly high growth. The instruments of both types of policies may be the same, e.g. easing access to finance, taxation, and regulation, but their specifications are different. There is no simple answer to the question of how to best allocate resources between general and high-growth SME policy. One side of experts argues that governments should do both, while others favour a policy focused on the most promising SMEs.

A basic economic model can illustrate this trade-off issue and reach intuitive conclusions. Assuming that the government spends 100% of available resources on one type of policy, even if maximum returns from one type of policy were higher than for the other type, it may well be economically efficient to spend resources on both types.
 

Case studies: increased interest to support high-growth SMEs outside Europe

Case studies for this Policy Brief show how some countries support high-growth SMEs, while others focus on general SME policies. Cases from Korea, Singapore and Japan were selected because these countries are often considered as being among Europe’s main competitors, while the understanding of their policies is limited. Canada provides insights about the combination of government-funded research and venture capital; Israel is of particular interest due to its current innovative and economic performance.

South Korea: Recently there have been noticea-ble changes in the direction of SME policies in Ko-rea. The policy concept for SMEs has been di-rected towards competitive SMEs, away from pro-tection of the weak. Transforming traditional SMEs to high-growth SMEs is a new policy focus, in particular in the “inno-biz” and “Global Stars” programmes. It is yet too early to assess the impacts of these programmes. However, Korean SME policies have been criticised for being ineffective and inefficient.

Singapore: The government is currently seeking to diversify the country’s high-growth sectors. Two agencies are directly involved in supporting high-growth SMEs: SPRING assists promising local businesses with funding, capability and management development, technology and innovation enhancement, and internationalisation. GET-Up supports long-term pre-competitive R&D. Since there are no evaluation studies that could substantiate the impacts of the government’s SME policy, lessons for Europe are difficult to draw.

Canada/USA: In either Canada or the USA there are no specific grants that focus on high growth SMEs. Since the high tech bubble burst there has been a drastic drop in capital financing, especially for venture capital (VC). VC support to SMEs has been shown to lead to more high growth SMEs. In the USA, the SBIR program is the major form of federal assistance provided to SMEs, which work with large research departments of the federal government. Typically in Canada and the USA, only 4-6% of all firms are “gazelles”; but among those firms which access VC, the level of “gazelles” increases to 12%. Furthermore, when combined with certain government R&D assistance programs, these rise to over 20%.

Japan: The strategic line of SME policy discussion in 2010 gravitated around the diversification and clustering of SME business activities. Diversification policy initiatives focus on supporting SMEs to move (1) up the technology ladder, (2) between industries, and (3) across national borders. Clustering policy initiatives focus on promoting local clusters, such as regional linkages among manufacturers, and university industry collaborations. The government’s 2009 New Growth Strategy identifies SMEs as an engine for future high economic growth. However, there are no specific policies for high-growth SMEs in Japan.

Israel: In Israel, the main relevant body is the Of-fice of the Chief Scientist in the Ministry of Indus-try, Trade and Labour (OSC). The OSC operates no policy tools aimed explicitly or exclusively at high growth SMEs; however, high growth SMEs can benefit from all the supportive policy measures provided by the OCS. Furthermore, a new programme named “The Relative Advantageous” will address the whole value chain of strongly growing sectors.
 

Findings from the IW Future Panel

According to the IW Future Panel, a survey of several thousand German enterprises, the single most important reason for growth stated by high-growth companies is that management actually targeted growth. Further important reasons were that “the company supplies to a growing market” and “successful introduction of new products or services”. Company growth is apparently mainly the consequence of entrepreneurs taking active advantage of business opportunities.

The most important reasons for non-growth stated by non-high-growth enterprises were an unfavour-able development of the business cycle and strong competition. The companies stated a great variety of reasons for non-growth, including e.g. unfavourable political framework conditions.
 

Policy implications

Research for this Policy Brief led to the following ten policy implications. Items 1-5 are on a general level and thus apply to policy making on European, national or even regional level; item 6 about legal framework conditions applies mainly to national policy but may partly be influenced by European Directives, Recommendations and Communications; items 7-10 take a European per-spective and require co-operation between European-level policy making with Member States

1. Policies supporting high growth of SMEs worthwhile: Since there is empirical evidence for the importance of high-growth SMEs for employ-ment creation, it appears to be worthwhile to sup-port high growth of enterprises in order to leverage the positive impact of these enterprises. Such policies in any case need to result from market failure.
2. Seeking sustainable (high) growth: As high growth can also lead to high failure, the policy ob-jective should be to generate sustainable growth. Policies should not set incentives for simply grow-ing or growing strongly.
3. Policies for general SMEs and for high-growth SMEs may coexist: Arguments from mar-ket failure theory and a theoretical welfare model assuming that both types of policy generate posi-tive returns for society suggest that policies for general SMEs and for high-growth SMEs should co-exist. Expert statements for this Policy Brief also support this view.
4. Broader approach to support high growth of SMEs: Existing evaluations and expert statements collected for this Policy Brief suggest that such policies should take a broader approach, not exclusively focusing specific aspects (e.g. finance).
5. No need to focus on specific industries: Since high-growth enterprises can be found in any industry and since business ecosystems, which are important for companies’ sustainability and growth, often cut across different industries, policies in support of high-growth SMEs should not necessarily target specific industries.
6. Creating right framework conditions: There are ample examples of legal framework conditions unfavourable for high growth of SMEs. They may for example be related to investment regulation, start-up regulation, market entry barriers, labour law, bankruptcy law, taxation, and also to SME policies rewarding to stay small. Hence, rather than trying to “pick winners”, policy makers should first of all set framework conditions right in order to prepare a fertile ground for winners to pick themselves. Second, policies could be designed for “hampered winners”, i.e. those that would not grow substantially without support – see implications 7-9.
7. Specific roles of the European Commission: Theoretical and empirical arguments weighing centralisation and subsidiarity against each other suggest that the European Commission can take specific roles in supporting high-growth SMEs. The Commission’s main role could be to drive the further expansion and improvement of the Single Market, e.g. for venture capital, rather than launching specific measures for high-growth SMEs.
8. Enhance coaching opportunities: Since many SMEs do not take advantage of coaching opportu-nities and may not know where to find qualified coaching, an infrastructure to encourage the repli-cation of existing successful coaching networks throughout EU Member States could be set up. A certificate for high-growth coaching could be intro-duced.
9. Improve access to growth finance: Since ac-cess to finance is a problem for many growth-oriented SMEs in Europe, improving the access to growth finance should be a priority for policy mak-ers seeking to support high-growth SMEs. From a European perspective, this means e.g. to realise a single market for venture capital.
10. Improve internationalisation opportunities: Since high growth requires tapping larger markets, and national markets may be too small, internationalisation of SMEs should thus be facilitated. This may include further work towards single markets in Europe as well as enhancing the European Commission’s Enterprise Europe Network.

video interviews:

• South Korea (part I)
• South Korea (part II)
• Singapore (part I)
• Singapore (part II)

Attachments: 

Case Study - Canada (long version)

Case Study - Japan (long version)

Case Study - Korea (long version)

PDF version: 

INNO-Grips Policy Brief No. 2: Policies in support of high-growth innovative SMEs