Making SMEs survive an economic downturn – a Finnish model

Juhapekka Suutarinen

Adviser, Confederation of Finnish Industries EK

International seminar in Tirana, Albania

February 2-3, 2012

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Making SMEs survive an economic downturn: contents

• Background: enterprise structure in Finland• What is EK and how do we work?• Small Business Act defines EU Commission’s SME policy• Public sector toolbox for SMEs during a downturn• Special financing tools often needed when economy slumps• Economic downturn separates the wheat from the chaff

Enterprise structure in Finland

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Employees

Number and share of enterprises (2010)*

N % Cumulative %

1-4 227 022 86,5 86,6

5-9 18 077 6,9 93,4

10-49 14 514 5,5 98,9

50-249 2 321 0,9 99,8

250- 614 0,2 100,0

Total 262 548 100,0Source:Statistics Finland *excluding primary production sectors

Number and share of enterprises by size class

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Finnish enterprises by size class

Size class

Number of enterprises (excl. sectors of primary production)

1995 2000 2005 2010

1-4 156142 183833 196421 227022

5-9 14280 15644 16369 18077

10-49 9351 12728 13085 14514

50-249 1746 2200 2293 2321

250- 496 560 576 614

Total 182015 214965 228744 262548

Share of enterprise base, %

1995 2000 2005 2010

85,8 85,5 85,9 86,5

7,8 7,3 7,2 6,9

5,1 5,9 5,7 5,5

1,0 1,0 1,0 0,9

0,3 0,3 0,3 0,2

100,0 100,0 100,0 100,0

Source: Statistics Finland, Statfin –database

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Source: OECD (2009). Measuring Entrepreneurship. A Collection of Indicators. 2009 Edition

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Source: OECD (2009). Measuring Entrepreneurship. A Collection of Indicators. 2009 Edition

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Employer enterprises and self-employed persons in Finland

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Elinkeinoelämän keskusliitto

Finlands Näringsliv

Confederation of Finnish Industries

9 EK/Eng/shs11.2004

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www.ek.fi/ek/en/index.php

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EK represents

• The entire private sector and companies of all sizes

• 27 branch associations

• About 16,000 member companies, of which 96% are SMEs

• Over 70% of Finland’s GDP

• Over 95% of Finland’s exports

• About 950 000 employees

Unparalleled knowledge and information of Finnish business

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EK members’ share of all Finnish companies 2010, %

Number of employees

Number of EK members

Companies in Finland1

EK share of all companies, %

Less than 10 6 972 245 099 2,8

10 – 49 6 230 14 514 42,9

50 – 249 2 017 2 321 86,9

At least 250 608 614 99,0

Total 15 827 262 548 6,0

1 Source: Statistics Finland, Company register

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Director General

Mikko Pukkinen

EK organisation

Regional officesAssistant manager Annaleena Mäkilä

SME AffairsDirector Pentti Mäkinen

EK BrusselsHead of EK BrusselsTytti Peltonen

DirectorTellervo

Kylä-Harakka-Ruonala

Infrastructure

DirectorTimo Kekkonen

InnovationEnvironment & Competences

DirectorJussi Mustonen

Economic policy

DirectorEeva-Liisa Inkeroinen

Industrial relations

DirectorJukka Ahtela

Legislation and trade policy

CommunicationDirector Leena Jaakkola

AdministrationDirector Markku Järvenpää

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EK activities

Regional Offices Regional Offices

EK BrusselsEK Brussels

• Energy• Supplies

Management• Logistics• Infrastructure• Climate • Environment • Sustainable

Development

CommunicationsCommunications

BusinessInfrastructure

• Labour and Social Law

• Business Law• Competition

and EU-law• Corporate

Security• Trade Policy

• Economy• Taxation• Business

Cycles • Employment• Financing

Welfare

• CoordinatingCollective Bargaining

• Development of Working Life

• Wage Increase andLabour MarketAnalysis

• Labour marketstatistics

Legal Affairs and Trade Policy

Economic Policy IndustrialRelations

• Education and Training

• Labour and Immigration

• Innovation Environment

• Company Growth andInternationali-sation

• Foresight• Information

Society

Innovation Environment

and Competences

SME Affairs SME Affairs

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Delegation for Entrepreneurs

General Assembly

Board

Extended Management Group

Director General

Management GroupCommittee of

Member Federations

• Business Infrastructure• Legal Affairs and

Trade Policy• Economic Policy• Industrial Relations• Innovation Environment

and Competences• SME Affairs• Regional Offices• EK Brussels • Communications

Regional Advisory Boards

Committees

Member Companies Member Federations (27)

Decision making in EK

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EK Departments

DirectorMr Jussi Mustonen

DirectorMs Tellervo

Kylä-Harakka-Ruonala

Director Mr Jukka Ahtela

Director MsEeva-Liisa Inkeroinen

Labour and Social LawDirector of LegislationMr Lasse Laatunen

Business LawDirector of LegislationMr Hannu Rautiainen

Trade Policy andInternational

RelationsChief Policy Adviser

Mr Simo Karetie

Corporate Security

EconomicsSenior EconomistMr Penna Urrila

TaxationChief Policy AdviserMr Tero Honkavaara

Coordinating Collective Bargaining

Development ofWorking Life

Wage Increase andLabour Market

Analysis

Labour market statistics

Energy and Climate Chief Policy Adviser Mr Mikael Ohlström

Transport and Infrastructure

Chief Policy Adviser Ms Tiina Haapasalo

Natural Resources and

Supplies Management

BusinessInfrastructure

Legal Affairs and

Trade Policy

EconomicPolicy

IndustrialRelations

DirectorMr Timo Kekkonen

Innovation and Growth Director of Innovation Ms Hannele Pohjola

Education, Training and Labour

Director of Education and Training

Ms Jaana Lehto

Innovation Environment

and Competences

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Ways for EK to influence national policy and legislation

The President of the Republic

The Government

Ministries

The Parliament

Committees

Political parties

• Opinions at request• Own-initiated statements and recommendations• Participation in committees and working groups• Hearings • Background contacts

EK

Departments

Member federations

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Ways for EK to influence in the EU

Commission EuropeanParliament

Council

Ministries and Finnish EU Mission

• Opinions by EK and BUSINESSEUROPE at request• Own-initiated statements and recommendations• Participation in committees and preparatory bodies• Hearings in Finland and Brussels• Direct contacts in Brussels

BUSINESSEUROPE

Sector federations

EK

Departments

Member federations

Small Business Act defines EU Commission’s SME policy

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How Small Business Act shapes EU SME policy

• The Small Business Act for Europe (SBA; COM(2008) 394) forms a guideline for both the Commission and the Member States to pave the way for SMEs to prosper

• The SBA:˗ anchors the “Think Small First” principle in law and policy

making to strengthen SMEs’ competitiveness

˗ acknowledges the crucial role of SMEs in the wellbeing of a society

˗ stands on a set of 10 principles and offers a guide for policymakers and legislators in EU and Member States to create a level playing field for SMEs

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Principles of the SBA 1(2)

• The 10 principles are:

2) Ensure that honest entrepreneurs who have faced bankruptcy quickly get a second chance

1) Create an environment in which entrepreneurs and family businesses can thrive and entrepreneurship is rewarded

3) Design rules according to the “Think Small First” principle

4) Make public administrations responsive to SMEs’ needs

5) Adapt public policy tools to SME needs: facilitate SMEs’ participation in public procurement and better use State Aid possibilities for SMEs

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Principles of the SBA 2(2)

7) Help SMEs to benefit more from the opportunities offered by the Single Market

6) Facilitate SMEs’ access to finance and develop a legal and business environment supportive to timely payments in commercial transactions

8) Promote the upgrading of skills in SMEs and all forms of innovation

9) Enable SMEs to turn environmental challenges into opportunities

10) Encourage and support SMEs to benefit from the growth of markets

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Where we stand now

• Launched in 2008 and reviewed in 2011, the SBA is still far from being implemented

• The Commission has been faithful to most of its commitments

• Though adopted by the Member States in Dec 2008 Council, they have so far failed to deliver on several actions

• The 2011 review proposes, in connection with the economic crisis and the Europe 2020 strategy, both new actions and developed existing actions in these areas:˗ making smart regulation a reality

˗ paying special attention to SMEs’ financing needs

˗ improving market access for SMEs with a broad approach

˗ helping SMEs’ contribution to resource-efficient economy

˗ promoting entrepreneurship, job creation, and inclusive growth

Public sector toolbox for SMEs during a downturn

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The tools in the box

• Secure access to finance

• Provide special financial support to exports

• Encourage innovation

• Offer diversified possibilities to training and education

• Increase write-off possibilities for investments

• Consider other tax incentives for e.g. research & development expenditures, private venture capitalists’ investments etc.

• Schedule infrastructure and other public construction projects for downturn periods

• Contemplate offering turnaround management services to SMEs

• Provide a possibility for temporary lay-offs

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Tool by tool 1 / 2

• Scheduling construction projects– public projects keep the wheels rolling in a labour-intensive industry

– launch road, railroad, harbour, public building construction or restoration when private demand in the industry declines

• Speeding up write-offs– investments slow down when demand fades

– shorter period for writing off investments in production facilities encourages execution of strategic plans

– helps in maintaining a positive atmosphere among entrepreneurs

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Tool by tool 2 / 2

• Encouraging innovation, R & D, business angels activities...– if tax incentives have been on the government agenda downturn offers a

perfect time to launch dynamic effects

• Time for updating skills– implement effective lifelong learning measures

– modernize social security system to support upgrading of skills

– encourage cooperation between educational institutions and SMEs

• Temporary lay-offs better than redundancy– for an SME it is essential to hold on to its skilled labour force

– flexible lay-off possibilities need to be accompanied by sufficient compensations

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Special financing tools often needed when economy slumps

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Access to finance key factor in prosperity of SMEs

• Economic hardship often implies growing need of finance for SMEs, especially working capital

• Current economic crisis and new solvency regulations for banks (Basel 2 & 3) form financial challenges to enterprises– secondary sources grow in importance, if there are such

• In Finland, e.g. insurance companies, pension institutes, Finnvera (a specialized public financing company) and Tekes (the Finnish Funding Agency for Technology and Innovation) offer financing for entrepreneurs

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Scarce capital may result in undesirable outcomes

• Difficulties in finding capital could mean slow growth, or no growth– if working capital dries up the road may even lead to bankruptcy

• Common problems entrepreneurs face are– high cost of capital

– demand for securities and real collaterals

– bureaucratic procedures related to many secondary sources

• The financial system ought to be able to provide capital for enterprises at every phase of life cycle– if private sources are not available public sector should bridge the gaps

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Examples of special arrangements in Finland

• Counter-cyclical financing by Finvera– for companies with up to 1 000 employees

– “...prerequisites for profitable business once the economic situation improves”

– for working capital and investment needs

– 40 % of companies that have obtained CCF say this saved them from bankruptcy

• Export credit financing (capital goods exports)– arrangement of financing for foreign customers (one stop shop at

Finvera)

– to ensure the competitiveness of Finnish exporters

– similar models already effective in principal competitor countries

Economic downturn separates the wheat from the chaff

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Anticipation and prioritization

• Prioritization:– make sure you have a clear strategy which is up-to-date

– concentrate on the important issues

– communicate with your personnel and interest groups

• Anticipation:– build a strong balance sheet in order to cope with the challenging

periods

– be customer-oriented

– obtain customers from various trades

Success factors apply in a downturn, too

• Risk tolerance and good planning; customer orientation

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• Mastering markets (customer relations, marketing, market knowledge, communication)

• Mastering production (progressive technology, diverse selection of products)

• Mastering networks (business contacts, distribution chain, corporate image)

• Mastering strategies (strategic planning, management, international experience of the board)

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Board shows direction, management executes

• In an average SME, the board consists mainly, or totally, of members of management and/or owner family

• When pursuing growth – or when economy slumps - this is often not good enough

• According to many studies, wide knowledge and experience are invaluable assets in achieving targeted growth

• At the same time as putting up their time and effort for board work, experienced entrepreneurs or business angels are often willing to make an investment in a promising enterprise

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To make the best use of the board:

• Take care of sufficient diversity of members– age, sex, background, experience

• Keep an active contact with board members, even between board meetings

• Be ready to reward members, and cover their expenses for meetings

• Remember: the board’s main task is not to listen to performance reports but to determine the strategic direction and “spar” the management

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Thank you for your attention!

This Presentation has been produced with the financial assistance of the European Commission. The views expressed herein are those of Bosmip 4 and can therefore in no way be

taken to reflect the official opinion of the European Commission.