Central European Initiative 8th Economic Forum

1
Central European Initiative8th Economic Forum
Structural Reforms Way of Improving Business
EnvironmentRaising the Competitiveness of Small
and Medium Enterprise (SME)
Robert Simoncic General Manager, Microsoft
Slovakia President, American Chamber of
Commerce Bratislava, November 23-24, 2005
2
Lisbon Strategy Reloaded 2005 A New Start for
SMEs

• Growth and jobs requires increasing Europes
  attractiveness as a place to invest and work
• EU must focus on SMEs which constitute 99 of all
  enterprises 66 of employment over 50 of GDP
  80 of taxes
• Too many obstacles to becoming an enterpreneur or
  starting a business
• Balance between risk and reward associated with
  entrepreneurship should be reviewed
• Stigma of failure complicates a fresh start and
  even deters many from starting a business in the
  first place
• Insufficient risk capital available to start up
  innovative young businesses and current tax rules
  discourage the retention of profits to build up
  equity

3
Global Competitiveness in SMEs Can Be Driven by
Knowledge Economy

• Competitiveness should be understood as the
  ability of companies, industries, regions,
  nations and supranational regions to generate,
  while being and remaining exposed to
  international competition, relatively high factor
  income and factor employment levels on a
  sustainable basis
• must demonstrate a strong commitment to quality,
  flexibility, design, reliability, accessibility,
  and networking, not just pricing. Competitiveness
  depends on the way firms combine technology,
  managerial entrepreneurship, employee skills,
  business organization, and software to service
  markets and to interact with customers and
  suppliers (OECD)
• KE - Economy in which human resources (knowledge
  workers) and knowledge are the most important
  assets of companies i.e. not tangible assets
  like land, buildings, equipment, but intangible
  assets (tacit and codified) knowledge
• Companies are becoming knowledge intensive, not
  capital intensive (knowledge is replacing
  capital, monetary prowess, natural resources, and
  labor as the quintessential economic resource).
  Shift from product-centric to knowledge-centric.
• Knowledge is productive only if it is applied to
  make a difference (rather than simply exist) it
  is this productivity that is going to be the
  deterministic factor in the competitive position
  of any company, or industry.

4
U.S. SME Success Story Had Good reasons

• Structural
• access to capital to start businesses (California
  and Massachusetts alone have bigger
  venture-capital industries than the whole of
  Europe U.S. has 75 of WW risk capital)
• a relatively flexible labour market that allows
  you to hire and fire workers more easily than
  elsewhere
• a legal system that does not stigmatise you if
  you fail
• and a tax system that allows you to keep most of
  the spoils if the business succeeds
• Cultural
• the nail that sticks up gets hammered down (Paul
  Morin of the Wharton School of Business)
• those sort of things take at least a generation
  for governments to kill
• workforce mobility
• 47 Europeans would like to be self-employed
  17 make the leep in U.S. it is 34!

5
What Can Be Done in Europe in Order to Encourage
More People to Set up SMEs?

• Reducing the administrative and regulatory
  obstacles
• Reinforcing a culture of entrepreneurship, from
  school level to higher education
• Improving the balance between risk and reward
  of entrepreneurship
• Facilitating access to finance and the setting of
  an appropriate framework for SMEs
• Simplifying the administrative environment,
  cutting down red tape
• Facilitate access to and training on the use of
  information and communication technologies (ICT)

6
SMEs in Europe Need Entrepreneurship Policy
Support

• STREAMLINE POLICIES - Policy action for
  entrepreneurs and SMEs needs a coherent approach
  in support of the competitiveness of enterprises
• DEVELOP ENTREPRENEURIAL EDUCATION - Integrating
  entrepreneurship education in all school
  curricula is an essential action needed to foster
  entrepreneurial mindsets among young people
• REDUCE TAXATION - is of direct relevance to
  boosting entrepreneurship.
• FACILITATE ACCESS TO FINANCE - Access to finance
  is key to reduce barriers to the start-up and
  growth of businesses. Access to high-quality
  banking products, and expert financial
  consulting, venture capital market
• CHANGE BANKRUPTCY LAWS - Severe penalties for
  failure can greatly impact on the willingness of
  entrepreneurs to take risks
• BETTER AND SIMPLIFIED REGULATION FOR SMEs
• high administrative burden on business diverts
  resources from productive investments and
  discourages entrepreneurship.
• proportionate cost for a small company to comply
  with regulation is, as a consequence, nearly six
  times higher than for a medium-sized or large
  company

Source UNICE
7
2004 EU Program for Competitiveness and
Innovation (CIP)

• Encouraging innovation and sustainable use of
  resources
• Demonstrating and supporting eco-efficient
  innovation in SMEs
• Promoting investment in eco-efficient innovation
• Supporting policy development and the
  implementation of the Environmental Technology
  Action Plan (ETAP)
• Ensure the mastery and best use of ICT
• Access to finance
• Microcredits for SMEs
• Strengthening the Equity Capital of SMEs for
  setting up a business of their own
• Strengthening the Equity Capital of already
  existing businesses
• Holding shares as nominal partners in
  SME-Shareholder Companies
• Transparency obligation for firms banks
• Securitisation of SME-loans
• Economic and administrative reform for more
  entrepreneurship and a better business
  environment.

8
A Dream Pan-European Exchange for Small And
Mid-Sized Companies

• Initial public offering (IPO) in Europe is not
  realistic for most small firms. Unlike America,
  Europe has fragmented stockmarkets that lack the
  liquidity
• Proposals to set up a pan-European small-cap
  market to funnel capital to SMEs - Exchange
• It could increase GDP in the European Union by
  0.3 to 0.6 up to 5 of mid-sized firms in V4
  could go public in the next five to ten years
• Pan-European exchange for SMEs is not new (EASDAQ
  failed). Problem has been nationalism
• European Private Equity Venture Capital
  Association (EVCA) - things that would help a
  pan-European exchange to succeed
• harmonisation of listing criteria
• aggressive marketing
• easy connectivity for investment banks from
  remote locations
• barriers to cross-border capital flows to be
  removed
• more independent research on small firms

9
Opportunities for SMEs Can Be Accelerated By
Focusing on IT Sector

• Growth potential
• IT sector achieved average annual growth of over
  10 percent well above the growth rate realized
  by the global economy as a whole.
• New jobs
• The rapid growth of the IT industry has generated
  millions of high-wage, highly skilled jobs within
  the industry as well as countless millions more
  jobs in a range of supporting industries.
• Taxes
• The IT industry has also emerged as a major
  source of tax revenues (corporate tax payments,
  income taxes paid by IT workers, and from VAT on
  sales of IT products and services.
• Industry efficiency
• Investments in IT help organizations become more
  efficient and productive. This allows firms to
  expand output and increase wages without raising
  prices. This helps to achieve higher levels of
  real, non-inflationary growth and rising
  standards of living
• Business model
• Partnering business model fuels local firms and
  economy

10
EU Impact on SMEs in Slovakia

• Advantages
• 35 - better purchasing/supply chain
• 21 - uniform legislation
• 20 - better partner opportunities
• 30 - no advantage
• Disadvantages
• 45 - higher competition
• 26 - concern about workforce drain
• 21 - higher quality reauirements
• 24 - no disadvantage

Source Narodna Agentura pre Rozvoj maleho a
Stredneho Podnikania
11
SMEs in Slovakia Compared to EU SMEs

• Better position of Slovak SMEs
• 45 - labor costs
• 31 - reliable business partner
• 23 - access to qualified workforce
• Better position of EU SMEs
• 34 - solvency
• 33 - access to capital
• 24 - technology base

Source Narodna Agentura pre Rozvoj maleho a
Stredneho Podnikania
12
Strategy for Slovakia and V4 in SME Growth Focus
Conditions Tools

• Conditions
• Improvement of legislative environment
• SME position strengthening and stimulation of
  growth
• Enhancement of SMEs ability to compete
• Internationalization and penetration to new
  markets
• Cooperation with big companies
• Develop managerial abilities entrepreneurial
  experience
• Tools
• Financing through risk capital (CEE Exchange)
• Network of incubators and technology parks
• Innovation through Intellectual Property
  Protection
• Boosting productivity through ICT

13
APPENDIX
14
Labor costs optimistically catch up with Spain in
15y realistic 18y with Portugal
15
Venture capital investment, 1999-2002Percentage
of GDP
16
How does Slovakia rank in Information Society (35
out of 53)
36
26
45
35
17
How does Slovakia rank in contribution of ICT
producing sector to GDP growth
Source Piatkowski, Economic Forum, Krynica,
September, 2004.
18
Europes ICT Effectiveness Matrix

• IT Development
• Connectivity
• penetration of fixed lines
• broadband access
• mobile phones
• PC/Internet users
• Internet servers
• Qualitative variables
• quality of Internet connections
• levels of e-business development
• online commerce,
• level of Internet/web literacy

• government support for ICT development
• laws governing the Internet
• ICT skills of the workforce
• quality of ICT supporting services

• ICT Enablers
• affordability of Internet access
• telecoms market competition
• security of the Internet infrastructure

19
ICT Development vs. GDP Per Head

• ICT deployment by itself is not enough skills,
  innovation and competition are crucial to making
  technology work
• Deficits in these areas explain much of Europes
  lag behind the US in ICT-led productivity growth
• Policymakers and business leaders recognize the
  nature of the challenge, but must remain on the
  offensive

20
SAV Economic Impact Study supports the imperative
IT focus

• The Impact of information technology (IT) on
  economic growth and employment
• A 1  increase in investment into IT will lead to
  a 0.11  and 0.12  increase in real GDP and real
  GDP per capita, respectively, controlling for
  other factors.
• A 1  increase in both investments into software
  and services will generate a 0.08  and 0.09 
  increase in real GDP and real GDP per capita,
  respectively, controlling for other factors.
• The correlation analyses for the same countries
  also suggest that
• Investment into IT would not generate required
  returns without investment into human capital
  accumulation and IT infrastructures
• Investment into IT leads to the expansion of
  other sectors, especially the service sector
• Investment into IT increases multifactor
  productivity and leads to an increase in wages,
  a decrease in cost of production and eventually
  boosts firms competitiveness.
• What is the position of the Slovak IT sector in
  global and regional context?
• The ratio of investment into IT to GDP in
  Slovakia is below average (2005 - 700M, 13.8 to
  Czech).
• Today, over 31,000 people are employed in the IT
  sector in Slovakia. By 2006, more than 12,000 new
  IT jobs will be added to the economy.
• Slovakias per capita expenditure was about 161
  USD in 2003 (70  of Hungary)
• The Slovak IT sector accounted for a 0.86  of
  the total employment in 1995, which is estimated
  to have increased to about 1.6  in 2003.
• Positive progress in the Slovak IT sector.
  Compared to other countries and given the human
  potential this sector should receive a more
  serious attention in the future.

21
Microsoft is creating EU Grants Support to
accelerate the Lisbon goals

• Designed for small and medium businesses
• Broad information on available funds
• Streamlined application processes
• Productivity enhancements through ICT

Goal Enable local entrepreneurs to grow their
businesses, stimulating economy
22
Featuring the EU Grants Advisor in Homepages
Simple profiling requirements ! EUGA allows
users to receive email alerts when new Grants
matching their Profile are available
After profiling, users access to A customized
Grants homepage
Also, users can redefine their Search (i.e. to
other regions or countries)
Initial summary of available Grants per
category is displayed in Local Language and
English Enabling cross-border investments
Detailed information is provided to the users
for each Grant Subsidiaries can manage their
website giving more visibility to
local Consortium partners

• Phone/Mail Assistance for
• Mid Market
• SB Intermediaries (Associations)
• ISVs / SBCs
• Partners (incl. MBS)
• LRG Accounts

Online Information for Small Businesses
All interactions with users are displayed in the
web Users can check the status of their Grant
application
23
Microsoft is creating EuroScience to support the
Lisbon goals

• Focused on accelerating fundamental innovation in
  science and computing that will spur the next 25
  yrs.
• Two principles
• Advances in computing can revolutionize science
• New kinds of science can revolutionize computing
• Building Blocks of the Next Century of Computing
  Long-term advanced research into new areas at the
  frontiers of science technology that can
  re-define the future of computing. 
• New Tools for Advancing Science Working with the
  science community in Europe and around the world
  to build the next generation of advanced
  computing tools for science-based innovation.
• The New Everyday Creating devices that will
  become tomorrows everyday, from things that
  think to invisible computers and ambient
  intelligence.