Entrepreneurship in Europe
A consultation document issued by the European Commission
Comments from ACCA
June 2003
Executive Summary
Addressing inequalities and recognising diversity
ACCA welcomes the Commission�s Green Paper as an important contribution to the fostering of entrepreneurship in the European Union (EU). We believe that targeted interventions from the European Commission (EC) and Member States are important in order to redress the competitive inequalities which exist for small businesses vis-à-vis large firms.
ACCA believes that it is necessary to take an 'inclusive' view of entrepreneurship. Small businesses are differentiated by size, sector and the motivations of their owners. There should not, therefore, be a �one size fits all� approach to the provision of services and the development of appropriate EC policies.
ACCA believes that certain central policies, such as reducing the negative effects of regulation, can be pursued by all Member States to create the right environment for entrepreneurship. We recognise, however, that the factors which affect entrepreneurship vary across regions and countries. The EC should, therefore, be cautious in attempting to build generally applicable policies for all Member States and candidate countries.
The availability of finance
ACCA considers that the EC should focus on proposals to address the barriers which some groups, such as ethnic minorities and women, face when accessing finance. There is also a general lack of rigorous research into the types of finance being used by businesses of different sizes, sectors and locations. ACCA calls on the EC to address this matter.
Training and business support
Small businesses often favour informal training practices. Research, however, is ambiguous on the effects of both formal and informal training on small firms� performance. ACCA believes that the EC should consider a systematic review of the evidence to form a coherent base for its policy making.
Reducing the risk of failure
ACCA believes that insolvency laws should be reviewed to reduce the barriers for entrepreneurs starting new businesses. Many businesses can avoid insolvency by adopting rescue procedures, but only if appropriate advice and support is provided in a timely manner. ACCA believes that professionally qualified accountants are critical to this process and their expertise should be recognised.
Business transfers
ACCA believes that the importance of business transfers and succession planning should be reflected in Member States� policy initiatives. We believe that owner-managers should be encouraged to start considering succession planning from an early stage and that the EC should be more pro-active in promoting the qualified advice services that are available.
ACCA looks forward to seeing how the Green Paper develops into an action plan for entrepreneurship.
Corporate social responsibility
ACCA believes that the Commission should take steps to ensure greater involvement from the small business community with respect to spreading socially responsible business practices throughout the whole corporate sector. The best way to do this is to emphasise the business benefits which flow from adopting good employment and environmental practices.
Specific Comments
In the following paragraphs we address the relevant questions within the Green Paper. Over half ACCA�s 98,000 members work in or service SMEs (Small and Medium-sized Enterprises) and it acts as a voice for small businesses.
Question 1. What should be the key objectives for an agenda for entrepreneurship in the European Union and how should these relate to other political ambitions? How can we build a model for entrepreneurship in an enlarged Europe?
ACCA welcomes the Green Paper as an important contribution by the European Commission (EC) to fostering entrepreneurship in the European Union (EU).
ACCA believes that, before determining key objectives and building a model, the starting point for the development of an agenda for entrepreneurship in the EU should be a useful working definition of 'entrepreneurship'. We identify below a number of issues which we believe should be considered in the formulation of such a definition.
Recognising the diversity of enterprises
Small businesses are not just smaller versions of large firms. They are differentiated by not only by size, but also by sector and the motivations of their owners. There should not, therefore, be a 'one size fits all' approach to the provision of services and policy.
Smaller businesses exist in every area of the economy. They are established and managed by individuals of both sexes and from varying age groups, educational backgrounds and ethnic groups. This extreme heterogeneity means that they face different markets, use different skill sets and employ very different organisational structures to achieve a wide range of both personal and business goals. ACCA believes that the Green Paper fails to reflect fully this diversity. We consider that the EC needs to adopt a proposal in the action plan to undertake research into understanding what specific types of assistance businesses of different sizes and sectors need.
Lifestyle businesses
6. There is surprisingly little attention given in the Green Paper to the so-called 'lifestyle' businesses. These form the majority of firms, provide a large proportion of the employment in Member States and make a significant contribution to the European economy. A lifestyle business is one which essentially represents an extension of the proprietor's private and personal life. Such a business places the proprietor in overall control and its strategies will be determined by the owner�s personal value set.
7. While entrepreneurship does contribute to job creation and growth, it is important to recognise that the creation of employment is not necessarily the main aim of all owner-managers. Employment creation may occur, but often as a by-product of the owner-managers pursuing their personal and business goals.
8. Research indicates that owner-managers of 'lifestyle' businesses often perceive some 'ideal size' for their enterprises. Although some may wish to grow, this growth can be limited by concerns about maintaining control of day-to-day operations and increases in costs from expansion of the enterprise. For example, owner-managers may wish to avoid delegating to others managerial or oversight (especially financial) responsibilities.
9. While a small proportion of firms grow rapidly and are successful in creating new employment, 'lifestyle' businesses massively outnumber them. We recommend that the Commission recognises this problematic aspect of growth associated with lifestyle enterprises. We believe that the EC should attempt to achieve the right climate to allow all businesses to prosper by, for example, reducing the burden of regulation on small firms. The key objectives should focus on 'lifestyle' businesses as well as on entrepreneurship and business growth.
Inequalities between large and small businesses
10. When formulating policy which targets entrepreneurs, there must be recognition of the fact that there are inequalities between large and small businesses. These inequalities may crystallize in the shape of problems in accessing finance, the prevalence of late payment and the lack of training opportunities. There is no 'level playing field'.
11. Targeted interventions from the EC and Member States are important to redress the inequalities which exist for small businesses, as compared with large firms, which have more and wider resources. One way in which Member States can make a difference and reduce these inequalities is by addressing the issue of regulation, and the resource burden, both human and financial, which regulation places upon smaller businesses.
12. Small businesses consistently rank taxation and employment regulation as the most important constraints on business performance. Research in the UK demonstrates that tax administration is found to impose the heaviest burden on SMEs. The smaller the business, the heavier the red tape cost. Recent research also shows that the cost of compliance with employment regulations can affect small businesses differently, according to their sizes and sectors. It also reveals that various types of regulation affect small businesses differently, according to their workforce composition.
13. ACCA believes that a positive and practical approach to dealing with regulation is required. The EC should consider how Member States can promote the use of information technology to reduce the growing administrative burden on small businesses so that information which is stored electronically can be transferred to the relevant authorities through the Internet, thereby reducing the cost of regulation. We also believe that there should be a system of 'sun-setting' for all new regulation so that measures lapse automatically unless they are re-introduced by ministers.
14. ACCA believes that a 'bottom-up' approach to policy for small businesses, which is supported by rigorous research and considers their needs first, would prove much more effective than previous initiatives, which have often taken a 'top-down' approach, focusing on large businesses first. This approach to formulating economic and industrial policy should ensure that initiatives will be relevant to small business and that these firms do not face inequalities as a result of being small.
Business support
15. The UK Government has pursued an active policy of business support in order to promote entrepreneurship and to provide an environment conducive to business. Nevertheless, independent evaluations show that small business support services in the UK have suffered from extremely low market penetration. One of the most important reasons for the lack of take-up is that the owner-managers feel that what is offered is not what they want or need and that the support provider �does not understand� their business.5 ACCA believes that a weakness of the Green Paper is its failure to address the issue of potential customers� attitudes.
The importance of research
16. Sound policy formulation and evaluation requires a rigorous research base on which to build. In order to develop clear policies and to spread best practice, it is important to investigate whether some Member States have developed more favourable environments for entrepreneurship and small business than others. We believe that it would be useful for a thorough review to be conducted of policy on entrepreneurship within the EU. There should also be research into what support different sizes and sectors of businesses need. Research should cover owner-managers� aims and whether there is some degree of consensus between the four key groups � SMEs, policy makers, stakeholders and the academic community � on entrepreneurship and business support and how it should be provided.
17. ACCA believes, therefore, that the EC should be cautious in attempting to build general policies on entrepreneurship in both the Member States and the candidate countries. ACCA was disappointed with the brevity of the consideration given to this issue in the Green Paper. We look forward to more definite proposals in the action plan on how specific contexts will be taken into account.
Question 2. How can we improve the availability of finance (tax measures, public-private partnerships, stronger balance sheets, guarantees) and what alternatives to bank loans should be promoted (business angel finance, leasing, factoring and micro-loans from non-bank lenders)? How can entrepreneurs be supported in obtaining external finance?
18. Access to finance is an important area for entrepreneurs starting or expanding a business. Finance is also integral to many owner-managers' everyday strategic decisions. The following paragraphs identify the relevant issues which ACCA believes the EC should address.
The evidence of a finance gap
19. Since the 1980s, and particularly the 1990s, there has been a large growth in the amount of small business research, with access to finance probably being the most researched area. There has been an accepted understanding that smaller firms may face more problems than large businesses in raising finance.
20. Research, however, is equivocal on whether accessing finance is a major problem for small businesses. The latest results from the Bank of England reveal that there is little evidence of firms facing difficulty accessing debt finance. Evidence from UK small business organisations suggests that concern about access to bank finance is not something which their members are raising with them. A recent Small Business Research Trust survey suggests that regulations, paperwork, general economic growth and cash flow are the major barriers to growth, while the Small Business Research Centre European Survey for Lloyds TSB found that access to finance was a constraint on growth for only around 1% of businesses. The Green Paper, however, suggests that 20% of EU small businesses report problems accessing long-term finance.
21. Research has, therefore, produced some inconclusive results, which are capable of a variety of interpretations. ACCA believes that, in general, there is a lack of robust data and statistical information for investigating whether access to finance is a major problem for small businesses in the European Union.
22. There is, however, evidence that a number of groups do have problems in raising finance. ACCA believes that the EC should develop proposals to address the barriers which some groups, such as ethnic minorities and women setting up in business in the UK, face when accessing finance. For example, evidence reveals that women achieve one third of the funding of men. Finance is often restricted due to lack of collateral and personal equity as well as limited business experience.
Bank finance
23. ACCA believes that one way to improve the availability of finance is for the EC to promote a change in focus in the lending criteria used by the banks and other lending institutions. In particular, we believe that the development of a closer relationship between the lender and the client has the effect of reducing the element of 'risk' for the lender, which, in turn, is likely to result in reducing the cost of capital to the smaller enterprise. ACCA recognises that the development of personal relationships would need to be cost effective. One suggestion is for banks to consider utilising developments in the telecommunications industry. This should assist the building of individual relationships as well as improving transparency.
24. It is generally accepted that a key issue in improving access to finance is increasing competition between the main banks. In March 2002, the UK Government published the Competition Commission�s report on banking services to SMEs. The report found the four main UK clearing banks to be charging excessive prices and therefore making excessive profits, with adverse effects on their SME customers. The Competition Commission made a number of recommendations to remedy these adverse effects, and these recommendations were agreed by the Office of Fair Trading with the banks in the form of two sets of undertakings which took effect from 1 January 2003. On the basis that this may not be a peculiarly UK issue, we recommend the monitoring of competition mechanisms in the banking sector across all EU Member States.
Micro finance
25. There are a growing number of sources of alternative finance in the UK. These include, in particular, a large number of micro-credit schemes which provide finance to those who, for whatever reason, are refused funding through formal channels. A significant proportion of micro-credit schemes operate regionally and do not have large marketing budgets. The small business sector is often unaware of such schemes. To address this problem, the UK DTI Business Support Directory has been developed. This provides a single Web portal for small businesses on government grants and finance schemes. If successful, the UK website approach could be adapted by other Member States.
Business angels and venture capital
26. Although the informal venture capital market is the main source of external risk capital for SMEs in Europe, there is a lack of reliable information on the scale of this market. ACCA believes that the EC should address this data gap before developing any initiatives which aim to promote the take-up of business angel finance and venture capital by entrepreneurs. An improvement in the scope and depth of statistical information will enable the EC to become more aware of the importance of informal venture capital and to have a more accurate perception of where intervention may be required and the nature of this intervention.
27. A number of different approaches can be suggested to address the lack of information on the informal venture capital market.14 Information could be collected from the business angel networks. A representative panel of business angels in each country/region could be surveyed each year. Organised angel syndicates could be identified and used to collect annual investment statistics. Such approaches should give a useful indication of the characteristics of business angel investments and trends over time with regard to the nature of investments.
28. The EC should also consider, however, that some evidence demonstrates that a significant proportion of owner-managers are unwilling to access business angel or venture capital finance as this would mean giving up a share of their business and possibly having less control.
Lack of research
29. There is a general lack of rigorous research and information on what finance is being used by businesses of different sizes, sectors and locations. ACCA calls on the EC to address this problem by working with key stakeholders including banks, Business Angels, venture capital organisations and intermediaries who advise small businesses on funding, such as accountants and small business owners themselves.
30. Although the majority of research referred to above was conducted in the UK, we believe that the results may hold true for many countries within the EU. It would, therefore, be useful for the EC to consider acting on the recommendation to increase our knowledge of actual SME financing practice at the European level.
The taxation system
31. The taxation system in the UK provides a practical obstacle to internally-funded business growth. It is often more advantageous to the owners of small companies to draw money out of the business than to re-invest it to generate growth. ACCA has been lobbying the UK Government to introduce a lower rate of corporation tax on retained profits. We believe that the EC should actively encourage changes in tax laws to provide incentives for owners to re-invest in the business and thereby increase the amount of internal finance available to support sustainable growth.
Question 4. To ensure high quality businesses, what training and support should be offered for a business start-up (basic training - compulsory or voluntary, incubators, mentoring) and business development (networks, courses, mentoring, distance learning, e.g. e-learning)? Should there be services tailored to the needs of specific groups (women, ethnic minorities) or businesses (knowledge-based activities)? Should the quality of delivery of support services be improved (using ICTs, professional standards)?
32. ACCA believes that the issue of learning and training support for small businesses is extremely important. Our suggestions as to the steps which the Commission might take are set out in the paragraphs below.
Training - the evidence
33. UK evidence demonstrates that large firms provide more formal training to their employees than small firms. There are a number of explanations for this. First, formal training may be too expensive for small firms. Secondly, training may increase the likelihood that the trained employee may leave. Finally, small businesses may be less aware than large firms of the available training courses and the associated costs and benefits.
34. In addition to formal training, businesses also apply informal training practices. The EC will be aware that small businesses often favour the latter. Because they are less expensive, they can be more easily integrated into the businesses� everyday activities and can be focused on each individual�s specific work role needs.
35. The results of research on the effects of training within small firms is ambiguous. There is some evidence that training has a positive effect on individual performance (Bishop, 1994, Bartel, 1995). On the other hand, Storey & Westhead (1996) found little evidence of any correlation between formal training and improved performance in small firms, and Kok (2002)16 cautiously concluded that the balance between benefits and opportunity costs (the costs of lost output) is more favourable for large firms than for small firms.
36. ACCA believes that, because of the contradictory research findings and lack of clarity, the EC should consider a systematic review of the evidence to form a coherent base for its policy making.
ICT
37. ACCA recognises that Information Communications Technology (ICT) provides an increasing opportunity to provide innovative training. It is also important, with all training, to consider who is being targeted and for what purpose. By their nature, entrepreneurs are more likely to try something new and so using ICT may be an appropriate medium for this group.
Training support for selected groups
38. ACCA believes that training support services should not be targeted to specific groups (e.g. ethnic minority and female business owners). The same information should be provided for all, but with clear recognition of the different needs of these groups.
Question 6. What can EU Member States do to make the balance between risk and reward more favourable to promoting entrepreneurship (reducing the negative effects of bankruptcy, making more social benefits available for entrepreneurs, reducing the tax burden either in terms of administration or rates)?
The need to change attitudes to business failure
39. It is widely reported that fear of failure and bankruptcy is a barrier to many potential entrepreneurs setting up in business. ACCA believes it is necessary to change the cultural attitude to business failure. It is also suggested that an exploration of the circumstances surrounding business failure can provide important insights into the economic sustainability of enterprises in our economy. The following paragraphs suggest how this 'attitude change' might be achieved.
40. It is worth noting, however, that many businesses do not fail with large amounts of financial debt and that most small firm closures are not the result of serious business failure. The main reasons for closing a small business are to allow the owner-manager to retire, to move on to another job or to sell the business.
Insolvency laws
41. ACCA believes that it would be beneficial if EU insolvency laws could be reviewed to reduce the barriers for entrepreneurs starting new businesses. In the UK, the Enterprise Act 2002 has reformed insolvency laws by providing a second chance for those who have failed through no fault of their own and by helping to ensure that companies which are in financial difficulty have recourse to well-established and well-recognised business rescue procedures.
42. Many businesses can avoid insolvency by adopting rescue procedures, as long as appropriate advice and support is provided in good time. ACCA believes that professionally qualified accountants are critical to this process and that their expertise should be recognised. Businesses can be made aware of certain warning signs and the steps which should be taken to address the problems and their underlying causes. ACCA has produced guidance in the UK for SMEs and their financial advisers on how to "stay afloat" and, with Commission support, is keen to develop this guidance material for a broader European audience.
Taxation
43. Taxation policies influence entrepreneurship. In the UK, ACCA has campaigned for the zero rate band of Corporation Tax to be extended from annual profits of £10,000 (�14,225) to £56,000 (�79,660), which is in line with the VAT registration threshold. This would reduce the costs of tax compliance and enable SMEs to keep more cash in their businesses.
44. ACCA also believes that unincorporated businesses in the UK (sole traders and partnerships) are being penalised for the legal structure they have chosen to adopt. Proprietors of such businesses are subject to high levels of income tax, while those who incorporate pay just the small business corporation tax rate of 19%. Unlike small companies, sole traders also do not enjoy tax relief on items such as childcare. ACCA has called for this distinction to be ended.
45. As noted in paragraph 31 above, we also believe that greater strategic use should be made of the taxation system by encouraging more internal reinvestment of profits.
Question 7. How might more prospective entrepreneurs be encouraged to consider taking over rather than starting a new firm (buyers and sellers databases or marketplaces, special training for family-owned businesses, management or employee buy-outs)?
Policy direction
46. The EC's own research has revealed that the successful transfer of businesses is more important than start-ups in terms of employment and other economic measures. ACCA believes this should be reflected in Member States� policy initiatives.
The cost of support
47. ACCA recognises that entrepreneurship is often a learning experience and that because they have then developed their general business skills, many people are more successful in their second start-up than in their first. The cost of support provision for start-ups has, however, to be set against the short life expectancy of new small firms. Up to 60% of all new businesses cease trading within five years. Justifying the cost of support will need strong evidence that those who have failed once will try again and be more successful the second time.
The nature of business transfers
48. ACCA recognises the importance of the transfer of small businesses, through succession, management buy-outs (MBOs), buy-ins (MBIs), and sales to independent buyers. ACCA believes that the EC should address the many issues concerning business transfers, such as succession planning and the provision of expert advice services.
Succession planning
49. Independent research reveals that, in the UK, over one third of SME owners are vulnerable to age-related succession failure and that this proportion has increased substantially in recent years. Handing over the running of a business can be extremely complex and stressful for the owner. Reluctance to let go of the reins can often mean that the transfer of know-how and skills is left until the last minute and is, therefore, rushed. ACCA believes that owner-managers need to start considering succession planning at an early stage. It can take several years to develop an effective 'exit strategy' for a successful business sale or transfer. Success in this instance would be defined as being where the owner-manager profits fully from the sale of the firm and the handed-over business goes on to survive and prosper.
50. It is difficult to implement a successful plan if the business is overly dependent on the owners� managerial and knowledge input. Good communication is essential. ACCA believes that a move to a professionalised management structure with an emphasis on knowledge transfer should be encouraged by the EC. This process should lead to the emergence of a natural internal or family successor in a systematic manner, lessening the emotional impact for the owner when the time comes to leave the business.
51. There are a number of tax, legislative and administrative issues, such as high inheritance tax, which act as barriers to people thinking both about transferring ownership and their potential successors. ACCA believes that qualified accountants can have a key role in succession planning. They have established relationships with their clients and can provide objective and expert advice on a range of different succession situations, specifically relating to each business�s individual circumstances. ACCA believes that the EC should be more proactive in promoting the provision of the expert advice services which are currently available for business owners and their potential successors.
Afterword: addressing the benefits of corporate social responsibility (CSR) from an SME perspective
ACCA believes that the Commission should take steps to ensure greater involvement from the small business community with respect to spreading socially responsible business practices throughout the whole corporate sector. The recently established CSR multi-stakeholder platform has an important role to play in demonstrating that social responsibility and entrepreneurship are not incompatible. The best way to do this is to emphasise the business benefits which flow from adopting good employment and environmental practices.
These benefits may be reflected in a variety of ways ranging from enhanced employee morale and productivity through to greater access to the supply chain as larger firms become more selective in sourcing their supplies from socially responsible producers.
Conclusion
Uniquely among European accountancy bodies, ACCA has an active in-house staff resource aimed directly at the SME and small practitioner communities. Because our membership is so deeply involved in small business issues, we recognise the profound importance of stimulating the entrepreneurial instinct and then creating the right environment for it to thrive. We would be glad to assist the Commission in developing any of the issues raised in this response to the Green Paper.