SMEs and the Business Environment
While the Covid-19 crisis has had heavy effects on the entire Single Market economy, SMEs have particularly suffered from the crisis. Lockdowns forced many small businesses to close temporarily and, as consequence, SME value added declined sharply. The number of SMEs decreased by 1.3% in 2020 and employment by 1.7% in 2020 (representing 1.4 million jobs lost), and value added in SMEs fell even by 7.6%.
The EU SME Strategy for a sustainable and digital Europe remains the compass for the recovery of all types of SMEs. The priorities of the strategy (digitalisation, sustainability, and resilience) as well as the actions related to capacity-building, access to finance and improving market access have only gained in importance during the crisis.
In addition to EU actions, individual Member States have a crucial role in creating an SME-friendly environment. Under the open method of coordination, the European Commission works closely with Member States to exchange best practices on SME policy through, for example, the SME Envoy Network. In order to monitor the state of SME policy across Member States, it also conducts the SME Performance Review to assess key strengths and challenges in the business environment.
SMEs business environment and the Single market – why does it matter?
Many small companies in the EU struggle to internationalise their business even with an open and fair trade framework in place. The Commission aims to help European businesses face competition, access foreign markets, and find new business partners abroad.
Regulatory conditions are among the most important factors affecting SMEs and entrepreneurship. SMEs usually face bigger challenges than large firms in screening the regulatory environment and dealing with norms. By monitoring the business environment, the Commission can understand which areas need further policy support.
Based on the various business environment dimensions identified in the SME Strategy and the Small Business Act, the dimensions below are composed of 5-10 indicators each and compare Member States’ performance to the EU average.
- Entrepreneurship: create an environment in which entrepreneurs and family businesses can thrive and entrepreneurship is rewarded. To assess this, we measure among others entrepreneurship education and entrepreneurial activity.
- Second chance: ensure that honest entrepreneurs who have faced bankruptcy quickly get a second chance. For this, we take into account indicators such as the time and cost to resolve insolvency procedures.
- Think Small First & Responsive Administration: make public administrations responsive to the needs of SMEs and design rules according to the ‘think small first’ principle. This dimension includes for example the time and cost to set up a business and the time it takes to comply with tax obligations.
- State Aid & Public Procurement: adapt public policy tools to SMEs’ needs, facilitate SMEs’ participation in public procurement and better use State aid possibilities for SMEs. This is measured by indicators such as the share of SMEs successfully bidding for public contracts and prompt payment behaviour by public authorities.
- Access to Finance: facilitate SMEs’ access to finance and develop a legal and business environment supportive to timely payments in commercial transactions. For this, we measure indicators such as the willingness of banks to provide loans.
- Single Market: help SMEs to benefit more from the opportunities offered by the EU’s single market. The indicators measuring this include the share of intra-EU exporters and importers among SMEs.
- Skills and Innovation: promote the upgrading of skills in SMEs and all forms of innovation. This includes, for example, SMEs innovating in-house and collaborating with others.
- Environment: support SMEs’ transition towards sustainability and resource efficiency. This is measured, among others, through the share of SMEs taking resource efficiency measures and public support measures towards sustainability.
- Internationalisation: encourage and support SMEs to benefit from the growth of markets, including outside the EU. This includes the share of extra-EU exporters as well as trade facilitation indicators related to the ease of trading with non-EU countries.
- Digitalisation: support SMEs in taking advantage of the opportunities offered by the digital transition. For this, we take into account e.g. the shares of SMEs using digital technology and the availability of digital infrastructure.
Full information on the business environment and the methodology behind the dimensions presented below can be found on the website of the SME Performance Review (SPR), one of the main tools the European Commission uses to monitor SME-related developments across the EU. Moreover, the 2021 SPR pays particular attention to the digitalisation of SMEs.
- Skills, training, innovation and digitalisation remain key challenges for EU SMEs. The lack of adequate access to technical skills or highly skilled workers is a commonly identified challenge across Member States.
- All EU Member States took measures aimed at softening the impact of the Covid-19 pandemic and the imposed restrictions on business. Most measures have been aimed at maintaining employment and helping SMEs address liquidity needs and get access to finance.
- red: below the EU average (< -0.5 standard deviations)
- yellow: within the EU average (within -0.5 to +0.5 standard deviations)
- green: above the EU average (> +0.5 standard deviations)
At the centre of the Commission's action is the new SME Strategy for a sustainable and digital Europe. It aims to considerably increase the number of SMEs engaging in sustainable business practices as well as the number of SMEs employing digital technologies. Ultimately, the goal is that Europe becomes the most attractive place to start a small business, make it grow and scale-up in the single market and beyond.