Policy preferences for small businesses

Many governments around the world assign policy preferences for small businesses. These policy preferences support business development and job creation.

There are two rationales for this. First, micro and small enterprises deserve special attention because of their overall contribution to national development. As a total sector, micro and small enterprises are major contributors to employment in almost all countries.

Second, micro and small enterprises are more vulnerable to a poor business environment than larger enterprises. Smaller firms pay a proportionally higher cost for doing business than do large firms. The external threats created by poor business environment place micro and small enterprises in a more vulnerable position.

Governments in both developing and developed economies have introduced policy initiatives that provide preferential treatment for firms based on their size. They have also provided exclusions for small firms from onerous or costly legal and regulatory responsibilities.

One important example of policy preferences to small businesses is the European Union’s (EU’s) Small Business Act.

Small Business Act for Europe

In Europe, increasing attention is being given to providing policy preferences to small businesses. The Small Business Act (SBA) is a regional framework for EU policy on small businesses. It aims to improve the approach to entrepreneurship across Europe, simplify the regulatory and policy environment for SMEs, and remove the remaining barriers to their development.

The Act has four priorities: (1) promoting entrepreneurship, (2) reducing the regulatory burden on small and medium enterprises (SMEs), (3) improving SME access to finance, and (4) improving SME access to markets and internationalisation.

The European Commission (EC) conducts regular SME Performance Reviews to monitor and assess progress in implementing the SBA. This includes consultations with the European Parliament and EU Member States’ governments, as well as the network of ‘SME Envoys’.

The Commission operates two mechanisms to test the impact of EU legislation and programmes on SMEs, which are managed by the Enterprise Europe Network. The first is SME panels, which consult SMEs on forthcoming EU legislation and policies.

The second is SME feedback mechanisms, through which Enterprise Europe Network partners collect the views and feedback from SMEs on a broad range of EU policy initiatives, actions, legislation or programmes related to the internal market.

The ‘think small first’ principle

The ‘Think Small First’ Principle is another example of policy preferences for small businesses. This takes SMEs’ interests into account at a very early stage of policy making. It helps the EU develop SMEs-friendly legislation.

To support and feed the above key enabling factors, the SBA have established ten principles:

1. Education and training for entrepreneurship;
2. Efficient bankruptcy procedures and a second chance for entrepreneurs;
3. Institutional and regulatory framework for SME policy making;
4. Operational environment for business creation;
5. Support services for SMEs and public procurement;
6. Access to finance for SMEs;
7. Supporting SMEs to benefit from Euro-Mediterranean networks and partnerships;
8. Enterprise skills and innovation;
9. SMEs in a green economy; and
10. Internationalisation of SMEs.

The SME Test analyses the possible effects of EU legislative proposals on SMEs. By assessing the costs and benefits of policy options, the test helps implement the Think Small Principle and improve the business environment through:

• A preliminary assessment of the businesses likely to be affected;
• Consultation with SMEs and their representative organisations;
• Measurement of the impact on SMEs (i.e., a cost-benefit analysis); and
• Applying mitigating measures, if appropriate, to reduce the negative impacts on SMEs.

A ‘systematic and proportionate application of the SME Test’ can be found in the European Commission (2015) Better Regulation Toolbox, which contains a range of tools association with impact assessment.

The SBA Review was launched in 2011 to track the implementation of the SBA. Among other things, this review integrates the SBA with the Europe 2020 Strategy. The review found that the implementation of the SBA and its Think Small First principle is ‘patchy or even non‑existent’ in some Member States and within the EU legislative and decision‑making processes.

It is interesting to note that the Think Small First slogan was often interpreted as Think SMEs First. However, 92 per cent of businesses are micro-enterprises that operate in a highly diverse range of markets. Indeed, the Think Small First principle was initially designed with micro-enterprises in mind. Microenterprises find it harder ‘to apply EU policies and legislative measures and consequently deserve more attention and a simplified approach that is tailored to their needs’ (European Commission 2011).

The EU 2017 SBA Fact Sheet and Scoreboard indicates that a total of 35 policy measures have been adopted or implemented in the period (2016-Q1 to 2017). Indeed, over 250 policy measures have been adopted or implemented under the Think Small First principle since 2011. Most of the measures minimise the burdens for businesses, apply the Think Small First principle to administration and apply regulatory exemptions for SMEs.

Recent examples of policy developments include Austria’s facilitation of Loss Adjustment for SMEs that perform accounting on a cash basis and Cyprus’ introduction of an SME Test mechanism. Furthermore, nearly 350 policy measures were adopted or implemented since 2011 at the EU level under the ‘responsive administration’ principle. In particular, the simplification of licensing procedures, reducing the cost and time to register a business and reducing overall administrative and tax burdens. One-stop shops are in place in most EU Member States.

A majority of EU Member States have put in place protective measures for SMEs in case of late payments and have adopted proportionate requirements in public procurement tenders to enable micro-enterprises also to be eligible. In addition, almost all EU Member States have an effective e-procurement portal where all public tenders are announced and can be applied for.

Smart regulation for micro and small enterprises

The EC promotes the use of ‘smart regulation’ that ‘responds to the needs of SMEs in four broader areas:

1. Applying the micro-enterprise exemption. Before the EC-proposed initiatives or revisions of existing EU legislation, comprehensive preparatory work takes place. It publishes roadmaps to inform stakeholders about possible Commission initiatives, available evidence and planned preparatory and consultative work. These roadmaps contain information on the initial problem definition, objectives, options and preliminary assessment of impacts and the envisaged timetable. Through the impact assessment process, the Commission aims to avoid unnecessary regulatory burdens. It analyses whether micro-enterprises can be exempted from the coverage of the initiative without undermining the objective of the potential proposal. However, impact assessments have shown that it is not always possible to exempt micro-enterprises. For instance, they cannot be excluded when there is clear evidence that excluding them would mean that the regulation would not be able to achieve its goals (e.g., to protect workers or consumers).
2. Introducing lighter regulatory regimes for SMEs. When exemptions are not possible, efforts are made to tailor regulatory proposals to suit SMEs, such as by introducing a lighter set of requirements. In addition, some EU legislation leaves it up to each Member State to decide whether it wants to introduce lighter regimes for SMEs (e.g., in the areas of information and consultation of workers, food hygiene, waste and annual accounts).
3. Introducing the SME scoreboard. The EC issues an annual scoreboard covering regulatory initiatives expected to have a significant impact on SMEs. This scoreboard allows all interested parties, including the network of national SME Envoys, to identify where and how progress on SME-relevant legislation is being made at the EU level. It allows the progress of the legislative cycle from Commission proposal through to implementation in Member States to be tracked. It identifies the main issues involved and indicates the positions taken on them throughout the legislative cycle, flagging if a regulatory burden has been added or reduced at the various stages from Commission adoption to implementation.
4. Ensuring regulatory fitness. The SBA has established strong governance mechanisms based on close cooperation with Member States and SME stakeholders. The implementation of the SBA is now supported by a network of SME Envoys with high-level representatives from Member States.

Distorting markets and inhibiting growth

There are many arguments used to support the preferential treatment of micro and small enterprises in the business environment. These are largely based on the problems micro and small enterprises face that reduce their competitiveness and inhibit their growth.

It is encouraging to see how governments are recognising these issues and formulating policies that address vulnerabilities while nurturing growth. However, care should be taken when introducing preferential treatment for MSEs as this can lead to a systemic bias in the business environment in which smaller firms are favoured over larger firms. This requires careful monitoring of the impacts of these policies on micro and small enterprises, as well as on the broader private sector.