OECD Small and Medium Enterprise Outlook for 2021
In most OECD countries, 20–40% of SMEs received some state support in 2020.
The restrictions imposed to contain the COVID-19 pandemic caused the most serious global recession in the post-war period. Most small and medium-sized enterprises (SMEs) were forced to close their businesses or faced a significant drop in income.
Despite the fact that the introduction of digital technologies for small firms is more difficult, online sales have helped to contain the decline in revenue for a number of small and medium-sized enterprises. The policy measures were generally swift and decisive and greatly contributed to preventing a wave of bankruptcies.
There are significant cross-country differences in the share of SMEs receiving state support, partly reflecting institutional conditions, the effectiveness of service delivery mechanisms and budgetary capacity.
At the end of 2020, a significant percentage of SMEs continued to voice the need for additional support in the future, especially in countries with strict measures for containing the spread of coronavirus.
Looking to the future, as the economic situation gradually normalizes and supportive measures are taken, governments will need to ensure that the resulting debt of SMEs does not jeopardize the viability of companies.
SME and Entrepreneurship Policy for an Equitable and Sustainable Recovery
Despite the serious economic shock caused by the pandemic, the available statistics (until the beginning of 2021) show a slight increase in the total number of bankruptcies. This is largely due to government support measures, which made it possible to avoid the mass closure of firms and the growth of unemployment.
Government support has helped millions of small and medium-sized enterprises around the world. In most OECD countries, 20–40% of SMEs received some state support in 2020.
The size of the emergency aid packages is unprecedented, albeit with wide variations across countries. The International Monetary Fund estimates that from January 2020 till March 2021, governments provided about 8.48% of GDP in additional COVID-19 losses and supported liquidity through capital, loans, and guarantees by about 8.28% of GDP (IMF, 2021). Government policies helped support short-term liquidity for SMEs and the self-employed.
Many countries and regions have adopted differentiated territorial approaches to crisis management. The impact of the crisis was felt differently within countries, partly due to different sectoral activities within regions, while regions dependent on tourism were severely affected. Therefore, subnational Governments have also played a crucial role in the policy response to SMEs as a complement to national measures. According to a study by the OECD and the European Committee of Regions (COR) conducted in June 2020, 30% of the EU subnational authorities provided major direct support to enterprises and the self-employed, and 28% provided significant technical assistance and support services to local participants. In Austria, for example, all nine federal states have established assistance packages for SMEs to complement and expand the measures taken by the federal government.
The following three specific areas of critical importance to a just and sustainable recovery emerge from the crisis:
1. The growing risk of SME debt and its impact on the sustainability of SMEs and their future productive investments. While the level of SME debt varies from country to country, there is growing global concern about the growing risk of SME default and the more limited ability of SMEs to stimulate recovery through investment. This raises the broader issue of SMEs having access to adequate and diversified sources of financing.
2. Possible displacement and return to industrial policy, the key role of local SMEs and the impact on their access to strategic resources and markets. The economic crisis may lead to a reconfiguration of international trade and investment. In this context, many reshoring strategies have been developed at the national or territorial level as a way of reducing dependence on third countries or as a means of preserving sovereignty in strategic areas and supporting local employment.
3.The impact of the crisis on digitalization, innovation, business dynamics and entrepreneurship. During the crisis, there is more and more evidence and examples of how small and medium-sized enterprises integrate new methods and tools improved by digital technologies into their activities. Small enterprises develop creative solutions or initiatives in the field of social innovation. However, the process of economic change often implies the need not only for firms to adapt, but also for some of them to leave. As past OECD studies have shown, the scars from the great recession are likely to be smaller in countries where business conditions are favorable and business dynamics contribute to the redistribution of capital and labor in favor of the most efficient firms.
SME Debt and Future Financing of Production Investments
Since the beginning of the COVID-19 pandemic, public support has helped millions of small and medium-sized businesses around the world overcome long periods of declining revenues and severe liquidity shortages. While the level of SME debt varies from country to country, there is growing concern about the emerging risk of SME default and the possible impact on SMEs' sustainability and planned productive investments. This raises the broader issue of ensuring that SMEs have access to adequate and diversified sources of financing over the long term.
Access to appropriate sources of funding at all stages of their lifecycle is critical to the initiation, innovation and growth of SMEs. Conversely, financial constraints can affect their investment, business and innovation potential, negatively impacting their productivity. Addressing the financing of SMEs is of particular importance for recovery, to ensure that they can participate in necessary transformations, such as the digitalization or greening of their processes, products or services.
SMEs combine various forms of financing, both internal (profit and income) and external (bank loan, asset-based financing, equity financing, etc.) to support their activities and growth. Domestic profits and revenues remain their main source of funding. Bank loans are their main source of external financing, but financing options also vary from firm to firm, such as an alternative loan for SMEs with lower default risk but limited return on investment, or equity instruments for innovative enterprises with high growth potential and higher return on investment but with higher risk.
SMEs and entrepreneurs have gained access to credit and a wider range of financial instruments. Lending has recovered to a large extent, interest rates were at minimal levels, making it easier for small businesses to access credit. Alternative sources, including equity and asset-based financing, have become more widespread, offering a variety of opportunities to companies and investors of all backgrounds.
Nevertheless, SMEs are still heavily dependent on self-financing, often based on domestic revenues. A third of all SMEs in EU countries reported that they do not use any sources of external financing at all, instead relying on internal revenues for their growth or eventually abandoning growth altogether.
The most common programs of governments during the pandemic were debt-related programs, that is, loans and loan guarantees. Many governments have introduced or expanded incentives for commercial banks to lend to SMEs.
Adjustments to loan guarantee schemes included increasing the guarantee capacity, increasing the proportion of credit that can be covered by a guarantee, reducing processing and guarantee fees, expediting procedures and reducing documentation requirements, extending repayment periods, and expanding eligibility criteria.
The OECD's COVID-19 survey of government financial support programs for businesses shows that in December 2020, government support in OECD countries continued to focus on loans and loan guarantees, with the total size of programs varying significantly from a few million dollars to more than $500 billion in some cases.
The deferred payment allowed SMEs to reduce the pressure on liquidity, but it will be necessary to make payments. A relatively large number of countries introduced deferrals for corporate tax and income tax (90%), while a smaller proportion also included deferrals for value added tax (24%) and social security and pension contributions (21%).
Besides, loan guarantees were accompanied by direct lending to state institutions. Many governments have introduced new public lending mechanisms, expanding existing schemes, simplifying access procedures or lowering interest rates.
Canada has introduced a Business Loan Program that provides more than 10 billion Canadian dollars in additional support to businesses experiencing cash flow problems.
As part of their $2 trillion incentive package, they opened an interest-free loan scheme worth $367 billion for SMEs with fewer than 500 employees to cover employee salaries, rental costs and other expenses.
Japan has increased the volume of special interest-free loans offered to SMEs without collateral.
The COVID-19 crisis may lead to a change in the configuration of international trade and investment. In the context of serious disruptions in global value chains, reshoring strategies have been developed at the national or territorial level as a way to reduce dependence on third countries or as a means to preserve sovereignty in strategic areas and support local employment.
However, the de-globalization rationale overlooks the multiple dynamics of globalization and the possibility for local SMEs to access strategic resources and markets through internationalization or to benefit from positive spillovers in global value chains, or by working with, or at some close distance from, multinational corporations.
SME & E Outlook country Profiles for 2021 compare 38 OECD member countries in the following areas:
1) The impact of COVID-19 on business dynamics, existing national policy frameworks, short-term and structural policy responses provided by governments;
2) Factors of structural vulnerability of SMEs, including the size of SMEs and the self-employed population, as well as exposure to blockages and disruptions in global value chains;
3) Sources of SME sustainability, including the introduction of digital technologies, access to liquidity support, availability of skills in the labor market and the regulatory framework for entrepreneurship.
The prospects for the development of SMEs and entrepreneurship for 2021 consist of standardized country profiles, which examine the vulnerabilities and sources of sustainability of the SME and entrepreneurship sector in the country and highlight the government's measures for recovery.
SMEEO's country reviews are based on work done in OECD countries and beyond. The measurement and indicators were selected based on their relevance to SME policy, international comparability and the broadest coverage of countries.
The policy information was taken from recent work by the OECD and other countries on monitoring the impact of COVID-19. In some cases, the information was supplemented with national documentation.
The economic sectors most affected by COVID-19 containment measures are those in which social distancing is more difficult to implement or whose activities are strongly linked to international mobility and trade.
