The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses

Centre for Entrepreneurship, SMEs and Local Development

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Contribution to the OECD Strategic Response to the Financial and Economic Crisis

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Foreword

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Foreword

FOREWORD

Access to financing continues to be one of the most significant challenges for the creation, survival and growth of SMEs, especially innovative ones. The problem is strongly exacerbated by the financial and economic crisis as SMEs and entrepreneurs have suffered a double shock: a drastic drop in demand for goods and services and a tightening in credit terms, which are severely affecting their cash flows. Governments are responding generally by three types of measures aimed at: i) supporting sales and preventing depletion of SMEs working capital; ii) enhancing SMEs access to liquidity; iii) helping SMEs to maintain their investment level. The present report brings to the attention of governments recommendations to tackle the long-standing deficiencies in the SME financial environment, as well as to prepare SMEs and entrepreneurs for a phase of innovation-led growth.

In October 2008, the OECD Working Party on SMEs and Entrepreneurship (WPSMEE) started a debate on the impact of the global crisis on SMEs and entrepreneurs access to finance and on government responses in this area. A survey among member and non-member countries was subsequently conducted in January and February 2009 to gather information on the situation and on the measures adopted or to be adopted by governments, in order to contribute to the OECD Strategic Response to the Financial and Economic Crisis launched by the Secretary General. Twenty-nine countries, the European Commission and the European Investment Fund responded to the questionnaire. The results of this exercise were discussed at the Turin Round Table, which was held in Italy on 26-27 March 2009, under the auspices of the WPSMEE at the invitation of Banca Intesa Sanpaolo.

This report, entitled The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses, presents the findings of the survey and the outcome of the discussion at the Turin Round Table, which gathered more than 100 participants from thirty seven countries/economies and international financial institutions.

The report has been prepared by a team of the SME and Entrepreneurship Division of the OECD Centre for Entrepreneurship, SMEs and Local Development (CFE), led by Marie-Florence Estim (Deputy Director, CFE) and including Yasuhiko Yoshida and Jorge Galvez Mendez, together with Lorraine Ruffing (Consultant, Senior Advisor to UNCTAD). Paul Dembinski (Director, Observatoire de la Finance, Geneva) and his team, and Glenda Napier (FORA, Copenhagen), sponsored by Switzerland and Denmark respectively, provided important inputs.

Both the report and the Turin Round Table benefited from the close guidance of the WPSMEE informal Steering Group on SME and Entrepreneurship Financing, chaired by Salvatore Zecchini, President, IPI, Italy. The report also reflects valuable comments expressed by WPSMEE delegates and delegates of the Committee on Industry, Innovation and Entrepreneurship (CIIE), its parent committee.

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Foreword

The report was transmitted to the OECD Secretary General Angel Gurra, by Ken Warwick (United Kingdom), Chairman of the Committee on Industry, Innovation and Entrepreneurship (CIIE) and Jacques Augustin (France), Chairman of the WPSMEE, as an input to the OECD Strategic Response to the Global Crisis, and its Executive Summary will be part of the background documentation for the upcoming meeting of the OECD Council at Ministerial level (MCM) on 23-24 June 2009

Sergio Arzeni Director, OECD Centre for Entrepreneurship, SMEs and Local Development

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T.O.C.

TAbLE OF CONTENTS

EXECUTIVE SUMMARY 5BackgroundImportanceofSMEsinnormaltimesandintimesofcrisis 5ImpactoftheglobalcrisisonSMEandentrepreneurshipfinancing 6Policyresponsesofgovernments 9Proposalsforfurtheraction 10PreparingSMEsandentrepreneursforrecoveryandinnovation-ledgrowth 12ProposedRolefortheOECD 14

I. BACKGROUND 15

II. IMPACT OF THE CRISIS ON SMES AND ENTREPRENEURSHIP FINANCING 17A. SMEsunderstresstheindicators 17B. SMEsreactions 19C.SMEsdemandforbankcredit 20D.Tightenedcreditconditions 21E.Supplyofequity,venturecapitalandalternativesourcesoffinancing 26

III. POLICY RESPONSES OF GOVERNMENTS 30A. Existingmeasures 30B. Proposalsforfurtheraction 40

IV. PREPARING SMES AND ENTREPRENEURS FOR RECOVERY AND INNOVATION-LED GROwTH 44

V. PROPOSED ROLE FOR THE OECD 46

ANNEXES 48Annex1.ShorttermfinancialbalancetheFrenchexample 48Annex2.Evidenceoncreditdemand 49Annex3.Evidenceoncreditconditions 52Annex4.AlternativefinancingsourcesforSMEs 55Annex5.PolicymeasuressupportingsalesandpreventingdepletionofSMEsworkingcapital 56Annex6.PolicymeasuresenhancingSMEsaccesstoliquidity,Especiallytobanklending 59Annex7.PrivateEquity&VentureCapitalMarkets 66Annex8.WorkingPartyonSMEsandEntrepreneurship informalSteeringGrouponSME&entrepreneurshipfinancingListofmembers 68

BOXESBox1:SMEsandtheregulatoryframeworkofBaselII 26Box2:NewcreditguaranteeschemeforworkingcapitalinGreece 33Box3:CreditMediationinFrance 35Box4:NewZealandsInvestmentReadyTraining 37

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Ex. Summary

EXECUTIVE SUMMARY

Background

Access to financing continues to be one of the most significant challenges for the creation, survival and growth of SMEs1 especially innovative ones. The problem is being exacerbated by the most severe financial and economic crises in decades. Financing has been a key area of work for the OECD Working Party on SMEs and Entrepreneurship (WPSMEE) for several years. In June 2004, Financing Innovative SMEs in a Global Economy was one of the themes addressed by the 2nd OECD SME Ministerial Meeting in Istanbul. In March 2006, the OECD Global Conference on Better Financing for Entrepreneurship and SME Growth, held in Brasilia, assessed the SME financing gap. Further work and research on Financing Innovative and High- Growth SMEs was carried out in 2007-2008. In October 2008 the 34th Session of WPSMEE engaged in a preliminary exchange of views on the impact of the global crisis on SME and entrepreneurship financing and discussed strategies so far adopted by governments to deal with the problem.

In order to further the debate on policy responses to the global crisis, a Round Table on the Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses was held in Turin on 26-27 March 2009 under the auspices of the OECD WPSMEE and hosted by Intesa Sanpaolo. The Turin Round Table had before it an issues paper which was based on the responses of 29 OECD Members and non-Members, as well as the European Commission and the European Investment Fund, to a questionnaire which covered the supply of financing to SMEs, their demand for financing, the credit conditions, loan approvals and defaults as well as information on equity financing. The responses also described in detail the policy measures taken by governments for SME and entrepreneurship financing. The presentations and discussions of the Turin Round Table have been incorporated into this report. The Round Table was an import