Small and medium-sized enterprises (SMEs) were some of the worst hit by the pandemic.
Impact studies have shown that more than half faced severe losses in revenues, and up to one third feared going out of business without further support within one month, according to the OECD.
The World Bank, however, estimates that SMEs comprise about 90% of all businesses and more than 50% of employment worldwide. The effects of the pandemic, therefore, present a serious risk for society.
SMEs are especially critical to our region’s economic stability and future prosperity. In Georgia, for example, 99.7% of all firms were SMEs in 2017, accounting for 62% of total employment and 56% of total business sector turnover, says the OECD. Similarly, 98.7% of all firms in Moldova in 2018 were SMEs, accounting for 59.8% of business sector employment. We also see substantial economic contribution from SMEs in larger countries, such as Poland, where the European Commission says over 99% of companies are SMEs and SMEs accounted for over half (52.9%) of the overall value added by the economy.
Entrepreneurship and SMEs in CEE
Interview with Charlotte Ruhe
We spoke with Charlotte Ruhe, Managing Director for Central and South Eastern Europe at the European Bank for Reconstruction and Development, on the future of SMEs in our region.
This is why SME support should be at the top of governments’ agendas.
Focusing on innovation, digitalisation and entrepreneurship, governments can support SME development and build their global competitiveness. In addition to their vast employment numbers, SMEs play a key role in responding to societal challenges and often add innovative solutions. By fostering an innovation ecosystem where SMEs can prosper, governments can also accelerate their country’s digital and sustainable transformation. Beyond putting the region on the global map, SME development can enhance countries’ overall resilience.
Resilience is imperative during the current crisis, and SMEs could be the key.
SMEs are at the core of our region’s economy, but the COVID-19 pandemic highlighted the fragility of many enterprises. So it is now more crucial than ever that governments prioritise support to help all businesses and entrepreneurs to become more agile and resilient to future shocks.
Access to finance
SMEs and entrepreneurs looking to survive or grow require new forms of funding. While new avenues have been introduced and overall access to finance has improved over the past decade, many enterprises still encounter set-backs in this area. This is often due to:
Enterprise size - small enterprises often do not have a registered credit history or sufficient collateral, which results in bank loan rejections
Barriers to funding applications - requirements for European or national programs are often difficult and time consuming. Smaller enterprises encounter administrative burden in order to cut through the complexity of these processes
Lack of awareness - without easily accessible and structured information, SMEs are often unaware of the initiatives available to them
Limited administrative capacity - the lack of human and financial resources inhibits SMEs from creating their business case in a concise and appealing manner to potential investors and financiers.
How governments can help: develop new instruments for funding innovative companies, establish guarantee funds, simplify applications for national funding, run a communication campaign, create SME-friendly fiscal policies focused on priority sectors, and offer trainings in general business administration, human resource development and financial management.
Access to markets and internationalisation
Typically, SMEs are not known for their internationalisation. But access to foreign markets can help boost both the business and the country’s economy. What is standing in their way? This can be a combination of foreign market, domestic market, and/or internal cultural factors. Looking on the external market side, there can be high costs to enter foreign markets due to the expected product quality, challenges with infrastructure, and lack of access to information. Low-income levels, underdeveloped infrastructure, rule of law concerns, and aging consumers, on the other hand, can stand in the way on the domestic market. Finally, overall competitiveness can be impeded by internal factors. From low productivity results due to outdated technologies to deficits in skills, these can have implications on accessing domestic and European markets.
How governments can help: enhance the export promotion policy, target higher level participation in public procurement, financial and advisory support for external expansion endeavours, further technological enhancement, develop e-commerce possibilities, remove export barriers like customs procedures and costs, and support the upskilling of micro- and small enterprises in marketing.
Digitalisation
Despite massive effort and improvement in digitalisation in CEE, smaller enterprises still trail larger ones when it comes to digital activity. The slower progress is largely due to:
Lack of resources - limited human and organisational capital, insufficient digital skills, and the lack of resources to train employees make it hard to adopt digital technologies
Insufficient understanding of benefits - without understanding the wider impact that digitalisation can have, it is hard to create a clear, informed business case that puts the opportunities and gains above the large cost
Concerns around cybersecurity and data privacy - this is another area where mitigation strategies are needed in order to understand and balance the risks with the benefits
How governments can help: raise awareness about the positive impact digital solutions may bring (through success stories and best practices), launch programmes dedicated to digitalisation of SMEs, remove regulatory and administrative barriers towards digitalisation, boost confidence and trust, provide accessible training options on digital upskilling.
Skills
Digitalisation efforts also require upskilling of employees in order to efficiently use the new technology. But the awareness among SMEs regarding their existing skills gap and desired skill levels varies, as many smaller enterprises do not consider employee training and development a priority. Insufficient demand may also account for the somewhat underdeveloped vocational training in the region, which could be a strong instrument for upskilling.
Another barrier to SME skill development is financial and time constraints. Enterprises often have insufficient funding to provide quality training, and specialised training abroad in particular. Similarly, entrepreneurs may struggle to plan their business activities around training programmes.
How governments can help: provide online tools for enterprises to self-assess their skills and development, support online training platforms that have moderate costs and flexibility, and make professional certificates available to smaller enterprises.
Innovation and technological development
Innovative solutions can help SMEs stand out from the crowd and advance their business on both local and global markets. But the ability to introduce marketing, process, and/or organisational innovations requires appropriate infrastructure, skills and funding. For smaller enterprises, the development of these areas is repeatedly underdeveloped. Similarly, insufficient expertise (as a result of the skills barriers) also means limited innovation-related training. This could create risks for the SMEs sector modernisation and development of new entrepreneurial ideas in the long run.
How governments can help: enhance access to funding for innovation and patent registrations, build innovative startups ecosystems, stimulate and support the recruitment of R&D staff, develop vocational training activities, expand opportunities and access to vocational training, and enhance innovation capacity and appetite of SMEs.
Drivers for SME creation and growth
- Access to available global information and market knowledge
- Implementation and use of innovative technologies
- Improved business environments
- Effective digitalisation and upskilling
Contact us
CEE Director of Brand and Communications, PwC Central and Eastern Europe
Tel: +48 519 506 633
