SMEs
Development and Competitiveness
Stephanie Vella
University of Malta
Conference on Competitiveness Strategies for Small
States
June 2013
Main Themes
• SMEs as the backbone of an economy
• Private Sector Development and Economic
Resilience
• Performance of Small States in promoting business
(Doing Business Index – World Bank)
• Managing Reform
• The importance of SME policy within the EU fora
• Specific measures adopted in Malta to promote
the development of SMEs
SMEs as the backbone of an
economy
SMEs as the backbone of an economy
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By international standards, most firms in small
states would be considered SMEs.
Typically most of the enterprises in small states
are micro enterprises.
SMEs currently account for over 85% of firms
and 60-70% of employment in OECD countries.
SMEs in Malta
Overcoming limitations
• Early economic theory was based on the notion that small
enterprises were at a disadvantage
– Limited capacity in reaping economies of scale
– Limited possibilities of diversification
– High fixed costs of learning about foreign environments
– Difficulties in negotiating with national governments
Fragmentation of production processes and strategic
corporate alliances has made it possible for networks
of small firms to overcome their limitations and to
compete
Positive features of SMEs
• Flexibility in responding the dynamic market
condition and evolving consumer preferences
• Motivation and commitment
• Ability to exploit market niches
• Stronger competitive tendency
Two areas of focus
• Economies of speed
• Strategic corporate alliances, networks and
clusters
Economic Resilience and
Private Sector Development
SMEs and Economic Development
Recent assessments of growth point to an
understanding that the rate at which countries
grow is substantially determined by
1) their ability to integrate with the global economy
through trade and investment;
2) their capacity to maintain sustainable
government finances and sound money; and
3) their ability to put in place an institutional
environment in which contracts can be enforced
and property rights can be established.
Source: OECD
Economic Resilience
• Globalisation has brought on a new set of
economic challenges for small states (Review of
the Small States Agenda)
– Faster than anticipated preference erosion for
traditional exports
– Globalisation facilitates the extent to which
shocks can be passed from one economy to
another
• These challenges will translate into enhanced risk
unless backed by appropriate resilience policies.
• With appropriate policies these challenges can be
translated into opportunities
Economic Resilience and Private Sector Development
• One of the pillars upon which economic resilience
depends is microeconomic market efficiency.
• The efficiency and effectiveness with which
resources absorb or adjust to economic shocks,
be they positive or negative.
• The efficiency of the market depends on
– Number of economic players in the market
– Absence of externalities
– Extent of flexibility
Economic Resilience and Private Sector Development
• Lewis (2004) explains that the key to
increasing productivity and efficiency is
through intense, fair competition which
tends to prevail in an environment where
private sector initiatives are encouraged
• Loayza and Soto (2003) also indicate that
the prerequisites for the proper functioning
of markets include private participation
and the existence of competition among
private agents
Economic Resilience and Private Sector Development
• ADB encourages private sector development as a
means to attaining economic development
through three main thrusts:
– Creating enabling conditions
– Generating business opportunities
– Catalyzing private sector investment
These thrusts have been anchored in four main
areas which are governance, financial
intermediation, public private partnership and
regional and sub-regional cooperation
Economic Resilience and Private Sector Development
• There is a tendency for market failure in the
absence of the conditions required for the
effective operation of the market.
• This situation seems to prevail even more so in
small states as domestic markets are often
small and thin (Downes, 2006)
• Therefore there are typically only a small number
of players arising in monopolistic and
oligopolistic market structures.
• Policy intervention such as competition law is
required to minimise welfare loss.
Economic Resilience and Private Sector Development
The existence of market failure however does
not exclude the role of the private sector
nor its contribution in nurturing the
economic resilience of small states.
RATHER it emphasises the supportive role
that government needs to undertake to spur
private sector development.
Performance of Small States in
DBI
Business Reform in Small States
• Doing Business Index published by the World Bank (2013)
– Starting a business
– Dealing with Construction Permits
– Getting Electricity
– Registering Property
– Getting Credit
– Protecting Investors
– Paying Taxes
– Trading Across Borders
– Enforcing Contracts
– Resolving Insolvency
Small States – Performance in DBI
Starting a Business
Easing start-up was recently listed by a panel
packed with Nobel laureates as one of the most
cost effective ways to spur development ahead of
investing in infrastructure, developing the financial
sector and scaling up health services.
Experience shows that removing obstacles to
business start-ups is associated with new formal
business, added jobs and more investment
(World Bank, 2006)
Dealing with Construction Permits
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Procedures are typically long and costly thus
stifling the development of SMEs.
In Malta (Rank 167) it takes 237 days to deal
with construction permits.
In PNG (Rank 159) there are 21 procedures
which cost over 100% of income per capita
Getting Electricity
Registering Property
• Defining property rights is one of the most
important prerequisites required in developing the
private sector.
• When it is too burdensome to go through official
channels, owners transfer ownership informally.
– loss in tax revenue for the government
– owners lose clear title to their land thus making
financing more difficult.
Getting Credit
• Access to credit is critical to ensure strong
business growth.
• Areas for reform include:
– Weaknesses in the regulations which affect the
legal rights of borrowers and lenders.
– Weak credit information systems and weak
collateral laws.
Getting Credit
Protecting Investors
• This variable measures the strength of minority
shareholder protection against misuse of
corporate assets by directors for their personal
gain.
• Most small states fair reasonably well in this
indicator including Antigua and Barbuda,
Dominica, Fiji, Grenada, Samoa, St.Kitts and
Nevis, St.Lucia and St.Vincent and Grenadines.
• Most of these small states score highly in terms of
liability of self-dealing and possibility of suing but
low in terms of transparency of transactions.
Paying Taxes
• High progressive income tax rates tend to
discourage private initiative.
• Type of tax systems and complexity of the
system.
• Compliance costs
Trading Across Borders
• This category includes the extent to which
international trading is encouraged.
Enforcing Contracts
• Commercial courts should be fast, fair and
affordable and efficient in their operations.
Resolving Insolvency
Managing Reform
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Excessive Regulation and ‘Dead Capital’
Establishing the ‘optimal level’ of regulation
Prioritising reforms
Reform is required to build economic resilience
Small states simply cannot afford to fall behind in
reform.
SME Policy in the EU
Special Reference to Malta
EU Regional Competitiveness Index
The index includes a basic pillar, an efficiency pillar
and an innovation pillar.
Overall Malta is ranked in the 25th position out of a
total of 27 EU Member States
From a regional perspective Malta ranks in the 223rd
position out of a total of 268 regions in the EU
It is interesting to note that overall, small states in
the EU feature in the lower half of the index in
terms of competitiveness.
EU Regional Competitiveness Index
Standardised Scores
SMEs Policy in the EU
•Both the European Commission and Member
States have committed themselves to set out the
necessary measures to improve the regulatory,
administrative and business environment and to
support European SMEs – Small Business Act
SME Policy in the EU
The main focus was, and remains, structured
around three areas:
• Ensuring access to finance,
• Taking full advantage of the Single Market and
• Smart regulation
SME Policy in Malta
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Entrepreneurship
Think Small First
Responsive Administration
Public Procurement and State Aid
Access to Finance
Skills and Innovation
Environment
Internationalisation
Thank you for your attention