Go­ing green to help speed up re­cov­ery of SMEs in South­east Europe

Top 100 See - - See Top Industries - By Tsve­tan Ivanov, SeeNews Com­pet­i­tive In­tel­li­gence

Small and medium-sized en­ter­prises (SMEs), tra­di­tion­ally viewed as the back­bone of ev­ery na­tional econ­omy, ac­count for an av­er­age 99.5% of the to­tal num­ber of com­pa­nies in the coun­tries in South­east Europe (SEE). They pro­vide 70.2% of the to­tal em­ploy­ment in the re­gion and gen­er­ate 58% of the gross value added in its econ­omy.

The two most im­por­tant de­ter­mi­nants of in­trare­gional dif­fer­ences in the struc­ture of the SMEs group are the rel­a­tive weight of the in­dus­try in which they op­er­ate in the na­tional econ­omy and the pub­lic at­ti­tude to en­trepreneur­ship and pref­er­ences for self­em­ploy­ment.

Ac­cord­ing to a Euro­pean Com­mis­sion sur­vey, in 2012 the en­trepreneur­ship rate (share of the adult pop­u­la­tion who have started a busi­ness or are tak­ing steps to start one) and en­tre­pre­neur­ial in­ten­tion (share of the adult pop­u­la­tion who in­tend to start a busi­ness within three years) in SEE were higher than the EU av­er­age. The high­est per­cent­age was reg­is­tered in Bul­garia and Croa­tia, with Slove­nia fall­ing be­low the EU av­er­age. Pref­er­ence for self-em­ploy­ment fol­lows the same pat­tern - while an av­er­age of 37% of EU ci­ti­zens pre­fer to be self-em­ployed, in Croa­tia and Bul­garia their share stands at 54% and 49%,

Un­der EU law, small and medium-sized en­ter­prises (SMEs) fall into three groups de­fined in terms of num­ber of em­ploy­ees and ad­di­tional cri­te­ria, ei­ther turnover or to­tal as­sets, as fol­lows: Mi­cro: less than 10 em­ploy­ees; less than 2.0 mil­lion euro turnover or 2.0 mil­lion euro in to­tal as­sets

Small: less than 50 em­ploy­ees; less than 10 mil­lion euro turnover or 10 mil­lion euro in to­tal as­sets

Medium-sized: less than 250 em­ploy­ees; less than 50 mil­lion euro turnover or 43 mil­lion euro in to­tal as­sets

re­spec­tively. Soar­ing un­em­ploy­ment rates and stag­nat­ing wages are seen as the key driv­ers of the in­tense in­ter­est in start­ing an own busi­ness in the re­gion. Even the largely neg­a­tive pub­lic per­cep­tion of entrepreneurs does not seem to un­der­mine the at­trac­tive­ness of run­ning your own busi­ness. How­ever, the sur­vey results sug­gest that the ma­jor­ity of entrepreneurs in SEE go into busi­ness for lack of al­ter­na­tives.

Al­though the struc­ture of the SMEs group is sim­i­lar in the coun­tries in the re­gion, some na­tional specifics ex­ist. Nine out of ten com­pa­nies in SEE are mi­cro en­ter­prises, which is in line with the sit­u­a­tion in the EU and glob­ally. In Ser­bia and Ro­ma­nia, with their tra­di­tion­ally well-de­vel­oped heavy in­dus­tries, the share of mi­cro com­pa­nies is lower. In Moldova only 75.6% of the com­pa­nies are mi­cro, but the share of small en­ter­prises is three to four times higher than in the rest of the re­gion and the EU av­er­age. In Mace­do­nia and Al­ba­nia, on the op­po­site end of the spec­trum, where the economies are dom­i­nated by agri­cul­ture, trade and ser­vices, the share of mi­cro en­ter­prises is above 95%. Small en­ter­prises con­sti­tute 8.3% of the to­tal num­ber of en­ter­prises in SEE. The coun­tries with a small share of mi­cro en­ter­prises – Moldova and Ser­bia - have an above-av­er­age share of small com­pa­nies. Medium-sized en­ter­prises do not ex­ceed 2.0% in any of the na­tional economies in the re­gion with the ex­cep­tion of Moldova.

In terms of em­ploy­ment gen­er­ated by SMEs, the sit­u­a­tion in the re­gion is iden­ti­cal to that in the EU with 70% of all em­ployed peo­ple work­ing for SMEs. In Al­ba­nia and Mace­do­nia, SMEs pro­vide with a job over 80% of the pop­u­la­tion, while in Moldova this share is 57%. Within the SMEs group, mi­cro en­ter­prises are the biggest em­ploy­ers (ex­cept in Moldova), ac­count­ing for 30% of em­ploy­ment in the re­gion, fol­lowed by small com­pa­nies with a 21% share and medium-sized com­pa­nies with a 19% share.

Across the re­gion, dis­par­i­ties in the em­ploy­ment struc­ture match the dif­fer­ences in the struc­ture of the SMEs group in terms of num­ber of com­pa­nies. While al­most half of the work­ing pop­u­la­tion in Al­ba­nia and Mace­do­nia is em­ployed in mi­cro en­ter­prises, in Moldova this fig­ure is only 17%.

The weight of SMEs in the to­tal gross value added gen­er­ated by the na­tional economies in the re­gion - 58% - is com­pa­ra­ble to that in the EU. In Al­ba­nia, Mace­do­nia and Mon­tene­gro, where the high­est num­ber of busi­nesses are SMEs, they ac­count for more than two thirds of the to­tal gross value added, while in Moldova this share is roughly one third.

Mi­cro en­ter­prises ac­count for 21% of the to­tal gross value gen­er­ated by the SME group, and small and medium-sized com­pa­nies hold an 18% share each. In line with the na­tional specifics in the group's struc­ture, in Al­ba­nia and Mace­do­nia mi­cro en­ter­prises have the biggest share of to­tal gross value added gen­er­ated by the group, in Moldova small com­pa­nies ac­count for the bulk, and in the other SEE coun­tries medium-sized com­pa­nies cre­ate most of the gross value added.

Gen­er­ally, SMEs show lower pro­duc­tiv­ity lev­els com­pared to large en­ter­prises for a num­ber of rea­sons – lack of economies of scale, more dif­fi­cult ac­cess to fi­nanc­ing and lim­ited op­por­tu­ni­ties to carry out re­search and de­vel­op­ment ac­tiv­i­ties. Large en­ter­prises dom­i­nate sec­tors with high gross value added, while SMEs con­sti­tute the ma­jor­ity of the com­pa­nies in low value added sec­tors like agri­cul­ture and trade.

Us­ing gross value added per em­ployee as a mea­sure of pro­duc­tiv­ity, two trends can be distin­guished - gross value added per em­ployee of a large en­ter­prise is al­most twice as much as that per em­ployee of an SME in both the EU and SEE, whereas in Slove­nia the low av­er­age num­ber of em­ploy­ees of SMEs and bet­ter de­vel­oped knowl­edge-in­ten­sive in­dus­tries and busi­ness ser­vices boost the coun­try's pro­duc­tiv­ity well above the EU av­er­age.

Do­mes­tic de­mand seen spurring growth

SMEs in EU weath­ered the 2009 down­turn bet­ter than larger en­ter­prises but re­cov­ered at a slower pace. This dis­par­ity is largely due to weak do­mes­tic de­mand in the re­gion, which is a key market driver for SMEs, whereas large en­ter­prises gen­er­ally ben­e­fit from rapidly re­cov­er­ing ex­ports. How­ever, do­mes­tic de­mand is ex­pected to strengthen in 2014, which should af­fect pos­i­tively the de­vel­op­ment of SMEs. In SEE, like else­where in the EU, SMEs started hir­ing new staff again in 2012, much later than large en­ter­prises. As of 2013, SMEs are trail­ing be­hind larger en­ter­prises in terms of value added growth, as well.

Be­tween 2011 and 2013 the num­ber of peo­ple em­ployed in SMEs in the re­gion dropped but the num­ber of SMEs stayed sta­ble. Mi­cro, small and mid-sized com­pa­nies strived to stay in busi­ness, be it at the cost of down­siz­ing their staff and oper­a­tions.

The SMEs in the sec­tor of ser­vices, char­ac­terised by lower en­try bar­ri­ers, per­formed bet­ter than SMEs in man­u­fac­tur­ing, which suf­fered badly from a sharp de­cline of in­vest­ments in cap­i­tal for­ma­tion and in­no­va­tion caused by re­stric­tive credit con­di­tions and slug­gish do­mes­tic de­mand.

Some of the es­sen­tial in­gre­di­ents of a recipe for SMEs' re­cov­ery and pros­per­ity in­clude na­tional poli­cies har­monised with the EU guide­lines, im­proved ac­cess to fi­nance, strong de­mand for the goods and ser­vices pro­duced by SMEs, an ap­pro­pri­ate amount of at­ten­tion to labour market poli­cies and sim­ple reg­u­la­tory and ad­min­is­tra­tive re­quire­ments.

Value added gen­er­ated by SMEs too is ex­pected to grow in the 2013-2014 pe­riod al­though at a slower pace than with large en­ter­prises. SMEs are also ex­pected to start hir­ing more work­ers as lend­ing picks up and do­mes­tic de­mand rises.

Green win­dow of op­por­tu­nity

Given the very low level of in­no­va­tions and small num­ber of com­pa­nies that have de­clared their in­ten­tion to pur­sue green busi­ness plans com­pared to the EU av­er­age, the de­vel­op­ment of green prod­ucts and ser­vices could pro­vide a cru­cial op­por­tu­nity for growth for SMEs in SEE. Fur­ther­more, the dy­namic growth of de­mand for such prod­ucts world­wide opens up am­ple op­por­tu­ni­ties for ex­pan­sion to new mar­kets.

How­ever, SMEs in the re­gion seem slow to recog­nise the po­ten­tial that green busi­ness holds for them. They tend to be much more re­luc­tant than their peers in the rest of EU to em­brace the idea of go­ing green, and are con­sid­er­ably less likely to ap­ply mea­sures to im­prove their re­source ef­fi­ciency com­pared with the Euro­pean av­er­age, partly due to in­ad­e­quate pub­lic sup­port for such mea­sures than in the rest of Europe. Dis­par­i­ties are clear even within the re­gion - coun­tries with work­ing SME strate­gies like Ser­bia and the EU mem­bers Slove­nia, Croa­tia and Bul­garia al­most match the Euro­pean av­er­age of 93%, while Mon­tene­gro, Al­ba­nia and Mace­do­nia are still trail­ing far be­hind with only two out of three SMEs us­ing re­source ef­fi­ciency mea­sures.

The pro­por­tion of SMEs in the re­gion that of­fer green prod­ucts or ser­vices (20.5%) is con­sid­er­ably be­low the EU av­er­age of 26%. Slove­nia is again the only ex­cep­tion - more than a third of the Slove­nian SMEs are en­gaged in green busi­ness, which ranks the coun­try among the most ad­vanced in Europe in terms of sus­tain­able busi­ness. On the other ex­treme, only one in ten SMEs in Al­ba­nia is ac­tive in green busi­ness. Sim­i­larly un­der­de­vel­oped are en­vi­ron­ment-friendly prod­ucts and ser­vices in Mace­do­nia, Ro­ma­nia and Ser­bia.

To speed up the lo­cal SMEs' in­volve­ment in the green econ­omy and make it more ef­fec­tive, sev­eral con­di­tions should be in place: bet­ter ac­cess to in­for­ma­tion and fi­nanc­ing, tech­ni­cal as­sis­tance, iden­ti­fi­ca­tion of the needs of “green skills” and their de­vel­op­ment – this is done with the sup­port of in­dus­try and re­gional non-gov­ern­ment or­gan­i­sa­tions.

A ma­jor source of fi­nanc­ing for such mea­sures is the EU with its op­er­at­ing pro­grammes and struc­tural funds. The Euro­pean In­vest­ment Bank (EIB) pro­vides fi­nanc­ing op­por­tu­ni­ties to SMEs in EU member states and all other SEE coun­tries for in­vest­ment in en­ergy ef­fi­ciency through its Green Ini­tia­tive. It fi­nances projects in­volv­ing im­prove­ment of the en­ergy per­for­mance of build­ings, equip­ment and in­fra­struc­ture. The to­tal value of an el­i­gi­ble project must not ex­ceed 25 mil­lion euro, the EIB loan is ex­tended for a max­i­mum of three years and can cover up to 50% of the project's value.

An­other fac­tor to be con­sid­ered is that the in­tro­duc­tion of in­no­va­tions by SMEs in the re­gion re­mains be­low the EU stan­dards ow­ing to the in­suf­fi­cient lo­cal sup­port for re­search and de­vel­op­ment and the still emerg­ing cul­ture of en­trepreneur­ship in these coun­tries. How­ever, in­vest­ment in in­no­va­tion pro­vides higher re­turn in terms of sales rev­enue in SEE com­pared to the rest of Europe, which should be an ad­di­tional im­pe­tus for SMEs to con­sider in­vest­ments in re­search, skills and sus­tain­able busi­ness.

Un­tapped market po­ten­tial in green busi­ness and knowl­edge-in­ten­sive ser­vices - largely un­der­de­vel­oped in the re­gion, where most SMEs op­er­ate in whole­sale and re­tail – of­fer fur­ther op­por­tu­ni­ties for the lo­cal SMEs.

Ac­cord­ing to Euro­pean Com­mis­sion pro­jec­tions, SMEs op­er­at­ing in both man­u­fac­tur­ing and the ser­vices in EU will post growth. The knowl­edge in­ten­sive ser­vices sec­tor and busi­nesses with an em­pha­sis on sus­tain­able de­vel­op­ment, com­posed largely of SMEs, will con­trib­ute ac­tively to the shift in the man­u­fac­tur­ing sec­tor to­wards highly pro­duc­tive and more com­pet­i­tive oper­a­tions.

SeeNews Com­pet­i­tive In­tel­li­gence cal­cu­la­tions show that the Com­pound An­nual Growth Rate (CAGR) for the SEE re­gion, based on data for the pe­riod 2012-2014 for the economies of the four EU mem­bers - Ro­ma­nia, Bul­garia, Croa­tia, Slove­nia - stands at 2.9% in terms of num­ber of en­ter­prises, 1.3% in terms of em­ploy­ment and 2.5% in terms of gross value added. In com­par­i­son, the av­er­age CAGRs for the same pe­riod in the EU amount to 1.5% for num­ber of en­ter­prises, 0.7% for em­ploy­ment and 1.4% for gross value added. The high­est growth is pro­jected in Ro­ma­nia, roughly dou­ble the av­er­age rate of the re­gion, while the slow­down in Slove­nia and Croa­tia will likely con­tinue.

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