market for specialised labour and for intermediate inputs; and there can be “informational spill-overs”
owing to the increased intensity of communication facilitated by the geographical concentration of
producers. Clustering can be of particular benefit to smaller firms who, because of their size, often cannot
provide specialised training or maintain in-house services such as R&D or marketing.
According to one view, clusters develop naturally, based on the intrinsic advantages such as
natural resources (e.g. mines, port facilities) found in a particular region. For example, firms in the steel
industry are often established close to energy supplies and good transportation networks. Others argue
that the process of clustering is marked by historical “accidents”. An invention or technological
development is exploited by an enterprising individual and leads to persistent centres of production,
particularly in industries which are “rootless”, that is, industries which are not dependent on fixed natural
resources (e.g. light manufacturing). For example, Silicon Valley owes its start to the Vice-President of
Stanford University who established the famous research park on university land, leading later to the
creation of many dynamic new firms. These two views are not mutually exclusive and a combination of
both a priori regional advantages provided by the presence of natural resources and historical accident are
responsible for the creation of many clusters. Both views agree that clusters generate cumulative benefits
that can progressively increase the cluster’s competitive edge.
A number of intangible factors at the regional level such as culture, social capital and local
networking influence enterprise development. Much of the literature on clusters cites the importance of
the social environment and of social cohesion within the network of firms, enabling the maintenance of a
high level of wages even in sectors dominated by developing countries which benefit from cheap labour.
This is the case, for example, in the textiles sector in Denmark and the shoe industry in Italy.
While clusters of enterprises can be stable over long periods of time, it would appear that these
cumulative advantages are not altogether decisive, and the position of an entrenched cluster can be
successfully challenged. Examples of this abound: steel in Europe and the United States, certain types of
computer chip-making in the United States and Japan, automakers in the United States, cameras in
Germany, textiles in many industrial countries. Therefore, as production becomes standardised over time,
localisation of an industry can fade away. There appears to be a kind of product cycle in which emergent
new industries initially flourish in localised industrial districts, then disperse as they mature. As clusters
of enterprises mature and disperse, the regions in which they are situated may suffer an economic shock as
firms down-size or close, causing high social costs from which it is difficult to recover.
Traditional regional development policies introduced to assist regions suffering from a declining
industry have often been guided by a development model which promoted large investments in
infrastructure or in social assistance. Another relatively common regional development policy has been to
attract firms from other regions or countries to establish themselves in the disadvantaged region by
offering subsidies of various kinds. More recently, entrepreneurial policies have been introduced which
concentrate on improving the labour pool and intermediate inputs. For example, training policies have
been introduced in several countries to encourage employee training, many of them targeted at small
firms. Recognising that much of the training undertaken is informal, the Australian government has
sought to encourage more training by creating an accreditation scheme for skills obtained on-the-job
Krugman, P. (1991), Geography and Trade, MIT Press, MA.
Colardyn, D. (1996), La gestion des compétences, PUF.
Policies have also tried to improve the supply of information and advice sought by smaller firms. For
example, the US government has created a nation-wide network of locally managed manufacturing
extension centres dedicated to helping smaller manufacturers improve their competitiveness by adopting
Entrepreneurial policies are also being introduced by local authorities who have begun to play an
increasingly important role in regional development since the 1980s. In their view, a self-sustaining
entrepreneurial pole can be created in disadvantaged regions. The objective of these policies is to create
the conditions which generate the cumulative benefits leading to economic growth. A number of policies
concentrate on developing the “technological spill-overs” that come from close proximity. For example,
prompted by the high-tech success of clusters such as Silicon Valley in California and Boston’s
Route 128, geographically targeted technology programmes have been introduced in order to create
similar clusters. Some communities have created research parks in which new firms and/or the R&D
departments of large companies carry on research in close co-operation with a university or public
research facility. Others have created high-tech incubators which provide new high-tech firms with an
optimum chance of survival. Science parks have also been created to encourage existing high-tech firms
to relocate by offering them attracting surroundings and close proximity to research facilities.
The regional dimension to entrepreneurship is not limited to clusters of enterprises but also
includes micro-enterprises and small firms and their role in indigenous development. These firms
contribute to economic, employment and social development as well as to the socio-cultural development
of a region, especially when they are created in disadvantaged areas. Programmes to assist the creation
and development of micro-enterprises in inner cities and remote rural areas have become widespread
policy tools in OECD countries due to their important economic impact on the general business climate
and their potential to act as a catalyst for further growth.
Evidence is emerging that the formulation and delivery of policies to promote the start-up and
growth of small businesses can be most effectively delivered with the input of local authorities who are
more aware of and sensitive to local conditions and needs. For example, regional and local programmes
can provide debt financing to small enterprises more effectively than national schemes. It is argued that
loans delivered by regional credit co-operatives have a lower loan default rate than the loans of
government programmes or banks because the co-op is better able to assess the credit risk of the loan
proposal. Co-ops, being linked to trade associations, benefit from local industry experts who provide
consulting advice as well as loan monitoring. Perhaps even more importantly, because the loan applicant
is known personally to the loan reviewer and, indeed, the other members of the co-op, this creates a very
strong social pressure on the loan recipient to fulfil his loan obligations.
Governments wishing to adopt the policies of other regions or countries should take the regional
context into account. A policy which is effective in one country or region may not perform well
elsewhere. Certain regional features, such as population density, influence the effectiveness of
entrepreneurial policy. Policies to improve labour-force skills can be effective in urban regions or in
intermediate regions, but have little impact in rural areas where take-up rates are low. Conversely,
policies which seek to create new firms may be more effective in rural areas than in urban or intermediate
regions due to lower dead-weight and displacement effects.
Shapira, P., D. Roessner and R. Barke (1995), “New Public Infrastructures for Small Firms Industrial
Modernization in the USA”, in Entrepreneurship and Regional Development, pp. 63-85.
Brusco, S. and E. Righi (1989), “Local Government, Industrial Policy and Social Concensus: The Case of
Moden Italy”, in Economy and Society, Vol. 18, No. 4, November, pp. 405-423.
BEST PRACTICE POLICIES FOR SMEs
As a conclusion, this section presents some of the lessons learned from policies implemented in
the following five areas:
- Business environment;
- Management capabilities; and
- Access to markets.
Role of government in financing SMEs
The main role of the public sector in supporting venture capital and other types of risk financing
should be to reduce the risk and cost of private equity finance. The government should complement and
encourage the development of the private-capital industry, including enhancing the skills of the people
involved in undertaking this task. A danger is that “excessive” public interference (including spending)
will crowd out or retard the development of private financial intermediation. In particular, the efficacy of
financial government-induced incentives is the subject of heated debate. Advocates of financial
incentives by government argue that investors are attracted to relatively risky projects which would not
otherwise have been undertaken. Critics claim that government incentives attract unsuitable players into
the private equity market, who display poor performance and give a bad image to the whole industry.
Direct government measures and policies to encourage and support the provision of risk capital
include: development banks; loan guarantee schemes; fiscal incentives; regulations regarding the
treatment of innovations; rules regulating investment by insurance companies and pension funds in equity
classes; taxation and regulation of stock options; the provision of loans at preferential rates; and the
direct provision of risk capital for particular classes of investment as a catalyst for private financing.
Indirect measures (structural and supportive policies) include market support and regulation; training;
communication; support for R&D; and privatisation.
Obstacles to providing bank credit to SMEs
“Conventional” bankers are generally less well equipped than venture capitalists to address the
specific issues and risks inherent in financing the seed and start-up stages of enterprises. Banks' credit
assessments are based on track record, projections of future cash flows and collateral. Consequently,
banks are in a better position to provide loans to existing SMEs than to new SMEs.
Smaller potential borrowers have a handicap in obtaining loans from banks because credit
assessment costs are fixed. In response, banks have been seeking ways to improve their SME credit
assessment skills so as to be in a better position to price the credit risks of SMEs as well as to better assess
their credits. Information on the spread of interest rates paid by SMEs seems to suggest that financial
intermediaries outside the United States tend to have greater difficulties in assessing and pricing credit
risks than US financial institutions.
Loan guarantee schemes
To overcome these problems with borrowing, G7 countries such as Canada, France and the
United Kingdom, have introduced loan guarantee schemes. A percentage of the loan is guaranteed by the
state so that, in the event of default, the loss to the financial institution is only a proportion of the sum at
risk. In return, the charge paid by the borrower on such loans is higher than under normal arrangements
since an additional premium is paid to the state to cover expected losses. Even so, the SME is able to
access funds from a financial institution without access to collateral. The table below shows the financing
terms for Canada, France and the United Kingdom.
Table 9.1 Loan guarantee conditions
% of loan guaranteed
Interest rate premium
The general lessons for loan guarantee schemes are that the criteria for success should be clearly
specified. These include:
- Minimisation of dead-weight: the state will wish to ensure that its funds are not used by
banks as a substitute for their own loans.
- Job creation: the state may wish to be satisfied that there are wider economic benefits, for
example additional job creations, associated with the scheme.
- Developing banking expertise: the guarantee scheme may encourage banks to lend more on
the basis of the quality of the project and less on the basis of available collateral. If private-
sector banks can develop more expertise and become better at distinguishing good projects
from bad ones, this will lead to increased lending to small firms by banks from their own
- Speed of decisions: in implementing any guarantee scheme it is vital that, since SMEs
require speedy decisions, access to the guarantee does not add significantly to the time taken
to make decisions about loans.
Financing the seed and start-up stages of investment
In Canada and the United States, it is relatively easy to obtain early-stage venture capital.
Outside North America raising early-stage funds is more problematic, thereby shifting the emphasis onto
later-stage investments. In a number of countries, commercial banks have set up subsidiaries to provide
venture capital but they seem to be more active in the later stages of investment.
Involvement of institutional investors in venture financing
Institutional investors generally prefer larger and later-stage investments over relatively small
and early-stage investments.
The evolution of the limited partnership model in combination with favourable regulatory
changes (in particular allowing pension funds to invest in private equity) and changes in the tax code
spurred the flow of capital to the private equity market in the United States (more than 75 per cent of
venture capital is provided through limited partnerships, with pension funds providing the bulk of total
Raising private equity via limited partnerships seems to becoming more popular outside the
United States. However, in many OECD countries, pension funds are barred from investing in the private
The importance of exit mechanisms
Efficient exit mechanisms (trade sales, initial public offerings and repurchases) are crucial for a
healthy venture-capital industry. In Canada and the United States, sales to portfolio investors are the most
common exit route, while in Europe trade sales and buy-ins/buy-outs are most widely used.
The limited possibility of exiting through sales to portfolio investors is a serious obstacle to the
full development of the European venture-capital industry.
Second-tier and private equity markets for unlisted securities are important for SMEs.
Second-tier markets for initial public offerings constitute efficient exit vehicles in the United States and,
to a lesser extent, in Japan.
Problems with existing exit vehicles in countries outside Japan and the United States have
stimulated the development of new parallel markets, notably in Western Europe. Thus far, these new
markets have been more successful than the earlier European experiments.
Informal venture capital
While the formal venture-capital sector is of considerable interest to policy makers, the
conditions for informal venture capital, provided by private individuals or “business angels”, are also of
primary importance. Such individuals are thought to provide significantly more equity to private business
than the formal sector.
Experience from Canada and the United States suggests that the informal venture-capital sector
can be stimulated through:
- improved networking services to enhance the flow of information between investors and
- use of the taxation system to encourage wealthy individuals to invest in private business.
The role of taxation
Taxation may impose a relatively heavier burden on small than on large businesses, and it is
appropriate to consider steps to reduce this distortion.
If assistance to small businesses is considered desirable, then there is a need to consider whether
such help is best delivered through the tax system. The economic arguments for aiding small businesses
suggest helping certain types: firms in dynamic sectors of the economy; firms having difficulties in
raising funds, etc. It is rarely the case that any tax paid by small businesses will coincide closely with a
target group, be it personal income tax, corporation tax, general consumption taxes or taxes on the owners
of small businesses. The disadvantages of this lack in precise targeting of tax-based measures must, of
course, be measured against the attractions of using existing administrative machinery. A fundamental
question is to what extent the tax system is an appropriate vehicle for removing obstacles to SMEs in a
The following is a list of areas where the tax system has a potential role to achieve various
policy aims: limiting the cost disadvantages faced by small businesses in complying with tax legislation;
encouraging the creation of new small businesses; ensuring the continuation of small businesses when
control passes from the founder of the firm to another person.
From the viewpoint of SMEs, legislation is perceived to be drafted to satisfy the interests of law-
makers, administrators and enforcers, rather than seeking the most cost-effective means of satisfying legal
Five initiatives can help to strike a balance between the need for regulation and the interests of
those -- particularly SMEs -- complying with the regulations:
- New regulations should be scrutinised in a systematic manner. Those proposing legislative
change should have to clearly justify any new procedures. Economic side effects, such as
differential compliance costs according to firms size, showing be estimated and quantified.
- A Business Impact System could be implemented to ensure the audit and monitoring of new
legislation along the lines of an Environmental Impact Assessment.
- Countries such as Canada seek to trawl existing regulations with a view to eliminating those
where compliance costs exceed the benefits. The Enterprise and Deregulation Unit in the
United Kingdom has similarly been successful in eliminating much “unnecessary”
- The government of the Netherlands has sought to introduce legislation which exists only for
a fixed period of time -- the so-called “sunsetting principle”. The advantage is that, if at the
end of its lifespan, it is felt necessary to re-introduce the legislation, then a specific case has
to be made, rather than allowing legislation to continue by default. This forces politicians to
debate the value of legislation and enables regulated firms to make their case for
- Greater use should be made of information technology. Increased use of information
technology creates opportunities for reducing bureaucratic burdens on SMEs. For example,
enterprises could be given a single number for use in all their dealings with government.
This would avoid the duplicating information to a variety of government departments such
as taxation, business registration or employment agencies. The problem with this is that,
whilst wider adoption of electronic data interchange (EDI) would be particularly helpful to
smaller enterprises, it is precisely these firms that are the least likely to have access to
expertise in this area. They therefore run the risk of being significantly and increasingly
Government action to remove obstacles to firm-level learning of best-practice technology and
innovation management must take into account the different needs of the various types of firms (Figure 2).
It must also avoid crowding out private initiatives in the service sector. Table 9.2 gives examples of
recent initiatives in OECD countries.
Experience in OECD countries suggests that technology diffusion initiatives and services can be
improved through the use of best practice whether at the overall policy level, the programme level or the
service delivery level. A recent OECD report
identifies a number of trends in OECD technology
diffusion programmes which also reflect emerging agreement on best practices at a general level:
Ensuring quality control -- technology diffusion programmes should take steps to ensure the
quality of service providers, the appropriate training of consultants and the effectiveness of local
delivery systems. In the United States, this is achieved among the numerous centres of the
Manufacturing Extension Partnership by merit-based competition and ongoing external review
of centre performance. In the Austrian MINT programme, the effective training of consultants to
work with firms in developing strategic upgrade plans is a key element of the programme's
Focusing on customers -- technology diffusion programmes should start with a focus on
customers and users and aim at meeting the changing technical needs of companies. Germany’s
Fraunhofer Society promotes technology development and diffusion through a network of
46 research institutes mainly through demand-led contract research projects between firms and
the research institutes.
OECD (1997), “Diffusing Technology to Industry: Government Policies and Programmes”.
Upgrading the innovative capacity of firms -- technology diffusion programmes should promote
a general awareness of the value of innovation among management and stimulate demand for
technical and organisational change within firms. In Norway, the Business Development Using
New Technology (BUNT) Programme was one of the earlier schemes focused on developing the
problem-solving capacities of firms and their organisational ability to incorporate technology.
Both the Integrated Production Innovation (IPI) programme in Austria and the Managing
Integration of New Technology (MINT) programme are based on the approaches used in BUNT.
A related programme is the Irish National Technology Audit Programme (NTAP), which
provides an analysis of a company’s operations in relation to technology, human resources and
management with a view to the identification of opportunities for enhancing profitability. The
Production 2000 programme in Germany supports the evaluation of technology needs in firms,
particularly for information and communications technologies, and includes recommendations
for upgrading managerial systems.
Source: OECD Secretariat.
and coordinates private
capacity and screens
Diagnostic of firms' managerial and
(e.g. quality, IT)
DTI report on
"How The Best UK
access to private
IMTs programme (European Union)
MEP (United States)
Consultants and consulting firms
Table 9.2 Government promotion of technological and innovation management in SMEs
STATEGIS (Canada) Benchmarking Information Service (Australia)
Business Links (United Kingdom)
Integrating with national innovation systems -- technology diffusion programmes should build
on existing inter-relationships in national innovation systems and have greater coherence
between programme design (e.g. targets, objectives, modes of support) and service delivery.
Germany's network-based strategy emphasises the development of bridging institutions and
partnerships to promote information flows and new technology diffusion and commercialisation,
including incentives to foster co-ordination and networking within regional technology
infrastructures. Similarly, in the Netherlands, a regional system of Innovation Centres (ICNs)
acts as intermediaries between firms and private and public sources of knowledge. ICN
counsellors advise firms and refer them to public research institutions, commercial suppliers of
knowledge and private consultants. As a way to build on existing local, state and national
resources, the Manufacturing Extension Partnership (MEP) programme in the United States
provides links and referrals to other public institutions such as federal laboratories (for
technology), the Environmental Protection Agency (for environmental technology) or the Small
Business Administration (for financing and business planning).
Building in evaluation and assessment -- technology diffusion programmes should have
mechanisms for assessment which can guide and improve their operation and management on a
continuing basis. Evaluation is currently the Achilles heal of technology diffusion policy in
OECD countries, especially when relating its specific objectives to broader policy goals. There
are a variety of methodological, operational and programme impact issues related to evaluating
technology diffusion that could benefit from cross-national comparison. The OECD work on
best practices in technology and innovation policy and the European Commission’s European
Innovation Monitoring System (EIMS) respond to this need in documenting and comparing the
efficiency of similar programmes across different countries.
Subsidised consultancy and training services
There is a general consensus that the competitiveness of an individual SME is strongly related to
the “quality” of its owner/manager. “Quality” is, in this context, strongly related to the human capital of
the individual, in turn influenced by a combination of formal education, training and experiential learning.
In most OECD countries, it is also the case that:
- the formal educational qualifications of individuals managing smaller enterprises are inferior
to those managing larger enterprises; and
- the probability that a worker or manager is in receipt of formal training is significantly less
in small, than in large, enterprises.
Several G7 governments have sought to enhance the “quality” of owner/managers of SMEs
either by encouraging (subsidising) training and/or by providing access to (subsidised) advisory and
The precise nature of these services varies widely from one G7 country to another. Probably the
most extensive assistance is provided by Japan, which has both a highly developed system of advisory
services and also SME colleges. Established initially in 1962, there are now eight colleges educating
SME employees, consultants and managers. Formal training is provided in courses, of up to 12 months’
duration, which are certified by the Ministry of International Trade and Industry (MITI). In 1993 alone,
short- and long-term training programmes were provided for more than 11 000 people.
Until 1994 the United Kingdom had a consultancy initiative in which SMEs employing external
consultants in marketing, quality, design, etc., for up to 15 days were subsidised at up to 50 per cent. The
role of the consultant was to produce a development plan, in conjunction with the SME, which the SME
would then implement after the consultant’s departure.
Documents you may be interested
Documents you may be interested