Marco Marchese, EconomistOECD Centre for Entrepreneurship, SMEs and Local DevelopmentLocal Economic and Employment Development (LEED) Programme marco.marchese@oecd.org

POLICIES FOR SME INNOVATION AND SME FINANCING: THE EXPERIENCE OF THE OECD LEED PROGRAMME TRENTO, 22 OCTOBER 2015

My main areas of work at the OECD

• OECD SME and entrepreneurship policy reviews at national and local level – Canada (2015), Israel (2014), Italy (2013),

Mexico (2012). – Abu Dhabi (2015), Andalusia (2011), Marche

(2010). • Thematic projects on SME-related issues

– Productivity growth in micro-enterprises (2015)

– High-growth firms (2010-2014)– SME Ombudsman (2014)

Examples of published work

Focus themes of the presentation

• Local policies for innovation in SMEs – Issues – Main policy recommendations – Policy examples

• Local policies for SME financing – Issues – Main policy recommendations – Policy examples

INNOVATION IN SMEs

Key issues in innovation

• Uncertainty of the innovation process • Positive externalities of innovation

(societal returns higher than private returns)

• System failures also matter (technology lock-ins, lack of networks, legal and social institutions, lack of infrastructure).

• Collaborative and interdisciplinary nature of innovation

Key policy recommendations

• Foster I-U collaboration to support SME innovation through a wide range of possible policy options.

• Concentrate resources in centers of excellence to attain critical mass and be globally competitive.

• Modernize traditional manufacturing through horizontal technologies in local consolidated sectors (related variety) .

• Ensure that local systems are open to external sources of knowledge to avert the risks of technology lock-ins.

• Make public procurement an agent of innovation by earmarking a share of local contracts with innovative content for local SMEs.

• Support in-work training in SMEs to strengthen their ability to work with knowledge organizations, keep pace with technological change and move up the global value chain.

Policy examples

• Innovation purchasing initiatives (e.g. innovation vouchers) *

• Business accelerators*• Business incubators• Collaborative research centres • Mobility programmes for research staff • Student placements (e.g. coop

education) • Intermediary technology centres

Innovation vouchers • Rationale

– i) Stimulate KT directly and favour long-term I-U relationships; ii) help SMEs articulate innovation problems and questions; iii) help PROs to engage with SMEs.

• Practice– i) public advertisement of vouchers; ii) applications based on hands-on

problems; iii) selection (e.g. lottery); iv) awarded SMEs submit research questions to HEIs or ROs; v) time limit to use the voucher; vi) min reporting requirements.

• Issues for consideration– i) matching fund requirements.; ii) pooling of vouchers; iii) different

voucher types/sizes; iv) allowing for cost difference; v) nature of the innovation addressed; vi) selection process (e.g. criteria).

• Success factors: – i) simplicity and light-touch admin; ii) commitment by knowledge

partners; iii) effective brokerage. • Risk factors

– i) short-termism; ii) choosing the implementation agency. • Evaluation issues

– i) additionality (increased inno. investment); ii) behavioural change

Vouchers: the example of the Netherlands

• Two types– Large vouchers (7,500 euros) (co-funding req.) (3,000 units)– Small vouchers (2,500 euros) (3,000 units)

• Evaluation – 80% of additionality – High satisfaction with the programme, less with price/quality ratio

of the service – Main impact on process improvement, no effect on new products or

processes (i.e. incremental innovation)– Ltd. one’s own resources committed

• Strengths – Online open-end application – Minimal admin and reporting requirements – Quick decision process – Allowed voucher pooling (fostering collaboration among SMEs)

• Transferability – Easy to replicate: Similar schemes available in other countries and

regions

Business accelerators: main issues

• Governance– BA are often PPPs where activities are delivered by private

intermediaries• Activities

– Business diagnostic; entrepreneurial and mgmt. skills development (e.g. training, coaching, networking, peer learning)

• Duration – Anything from a few weeks to 5 years

• Participant profile– Often from affluent regions; diff. mix of sectors;

• Selection criteria: – Mix of quantitative and qualitative info; resource

concentration warranted.

Main policy recommendations on business accelerators

• Involve private sector organizations in the design and implementation of BA.

• Consider co-funding of BA by participants to ensure commitment and self-selection by growth-oriented entrepreneurs.

• If the BA takes an equity stake in the portfolio companies, ensure that this does not discourage participation (e.g. symbolic share or convertible share).

• Develop skills development activities which use interactive and experiential learning (e.g. peer learning)

• Don’t scatter resources over too many firms (focus on growth potential), but avoid public support for too long without milestones.

• Select firms by using a mix of quantitative criteria (e.g. recent turnover and employment growth rates, export sales, and investment in innovation) and qualitative criteria (e.g. new products or services, personal ambition) where the former are more prominent.

• Don’t limit BA to high-tech sectors and ensure that growth-oriented companies from less wealthy regions are given special consideration.

Three examples of different accelerators

• The Netherlands’ Growth Accelerator (2009)– i) Run by a consortium of 5 BDS; ii) aimed at firms with turnover of at

least 3-5 million and ambition to achieve 20 million in 5 years; iii) 5-year duration (govt. budget, € 5 million); iv) co-funded by participants (€ 75,000 over 5 years); v) 130 participants in three years: most firms grew but not as much as expected.

• Finland’s VIGO (2009)– i) Delivered by private for-profit companies required to invest in HGF

portfolio (revenues based on fees and expected company growth); ii) activity: mix of mgmt. support and equity investment (min. €30,000) over 18-24 months; iii) govt. role: select accelerators, co-invest in firms, pay BA mgmt. fees, make available other sources of finance.

• The UK Growth Accelerator (2012)– i) Activities: Phone-based and online business assessment, half-a-day

meeting with a coach, signposting to external BDS providers for 7 days of coaching over 12-18 months; ii) co-funded by firms (from £ 600-3000 depending on firm size), while average public investment is £ 7,500; iii) 800 accredited business coaches; iv) focus areas: commercialisation, business planning, investment readiness, leadership skills.

SME FINANCING POLICIES

Main issues in SME financing

• Financing market main constrains – Supply-side: lack of collaterals, poor credit history, information

asymmetries, high fixed costs of small-sized loans. – Demand-side: unfamiliarity with the lending process, unwillingness

to share info, unwillingness to share ownership (in case of equity fin.).

• Financing Pecking Order1) Internal sources (savings, retained earnings)2) External debt finance (loans, credit guarantees)3) Equity finance (business angels venture capital)

• Local policy approaches – Supply side: Credit guarantees, microcredit, equity finance funds,

BAGs– Demand side: Financial education and investment readiness

programmes

Major recommendations in SME financing

• Carry out an intermediation role in financing markets by – developing CGS to facilitate SMEs’ access to debt finance – lowering information barriers that prevent the emergence of a local equity

market (e.g. business angel networks, business pitch events).

• Support microfinance by involving community orgs and local banks, expecting subsidisation.

• Make sure that SME microfinance support viable productive activities

• Encourage the emergence of community-based banks (savings banks, co-operative banks, etc.) which are more inclined to SME lending.

• Support financial education and investment readiness programmes to strengthen the likelihood of local SMEs to receive external finance.

Access to finance: loan guarantees

• Rationale – Information asymmetries; lack of collaterals; fixed costs in lending

• Typology – Government-sponsored: i) govt.-managed (SVN, SVK); bank-managed (UK, NLD)– Mutual schemes (threefold roles of associations, banks and govt.)

• BA: first screening and first-level guarantee• Govt.: second-level guarantee or counter-guarantee• Banks: final choice and keep 20-50% of default risk

• Pros and Cons– Pros: i) Leverage on bank expertise; ii) favour integration in mainstream credit

market; iii) low costs if well managed (related to the default rate)– Cons: i) Useful for average SMEs but less for disadvantaged groups; ii) risks of

opportunism if risk is not shared; iii) high operational costs of govt.-managed schemes.

• Evaluation evidence: – Improve credit conditions but do not result in credit expansion– Positive impact on growth (sales, employment, export) but not on new firm

creation.

Key criteria to set up loan guarantee schemes

• Firm eligibility– Dep. on the policy objectives, criteria may include: size,

age, target group. • Coverage ratio

– Anywhere between 20%-100% (i.e. make sure banks still bear some risk)

– Median of 80% in 76 schemes worldwide • Average guarantee period

– Variable, 2-10 years – Loan guarantee should not be too long and repeated.

• Cost recovery– Entry fees, annual fees, application fee.

• Additional services– Financial education, training.

Examples of loan guarantee programmes

• Japan’s Credit Guarantee Corps (govt.-managed). – Size: 52, all public institutions under a National Federation; 33%+ of SMEs

supported; guaranteed loan volume = 7% of nat. GDP.– Mai features:

• Available only to industry firms with <300 workers and services-based firms with <50 workers

• Italy’s Confidi – Size: 200+ of them; 1 million SMEs members of MGS; MGS guarantees 41% of all

EU guarantees; guaraante-backed loans, 1.4% of GDP. – Main features:

• Multi-layer system of guarantees: First-level local guarantee from local BA; regional counter-guarantees from reg. BA or govt.; direct guarantees from Nat. Guarantee Fund.

• Coverage ratio: typically around 50%

• Spain’s mutual guarantee societies – Main features:

• Distinction between participatory members (86,000 SMEs subscribing shares) and protective members (local authorities)

• Ministry of Industry provides counter-guarantees • Coverage ratio: 100%, of which between 30-75% counter-guaranteed by the govt.

Microfinance

• Rationale – To address market, cultural and skills barriers

• Pros and cons– Pros: Targeted at dis entrepreneurs; helps build credit history– Cons: unlikely to be self-sustainable (strong subsidy); risk of credit

market segmentation• EU Definition

– € 25,000< & targeted at micro-firms, self-employed or unemployed• Services offer

– Mix of financial (business credit, consumer credit, insurance) and non-financial (training, fin education)

• Features – Combined product offer; higher-than-average interest rates; loan

application fees; public support (63% repayment ratio in surveyed EU MFIs).

– Disadvantaged entrepreneurs are targets but less than thought (EU: 27% of clients are women, 13% immigrants or ethnic minorities, 10% aged 15-24.

Examples of microfinance initiative: Belgium’s Crédal MF Coop.

• Target group– Low-income people with no guarantees and bad credit history

• Offer: – Start-up microloans and social credit (transport, training,

health issues)– Start-up microloans: b/w €5,000-12,000, maturity 48 months,

5% rate for future entrepreneurs turned down by banks. – 2012: 642 start-up loans and 2032 social loans

• Main lessons: – combination of diff. fin. products (start-up and social loans)

allows for risk diversification; – market-level interest rate made possible by public support of

operational costs and supporting services; – multi-source support may be needed at the beg. & expansion

phases.

Examples of microfinance initiative: UK Fair Finance

• Target group – Un-bankable clients who have been prey of usury loans

• Offer– Start-up loans (up to GBP 10,000) and personal loans (up

to GBP 2,000) – financial education through debt advice and financial

capability workshops – help in relationship with comm. banks

• Main lessons– Financial education can help reduce indebtedness – Time is needed to attract private funding – Microcredit can help social inclusion of marginal groups,

but supported business may not always be viable.

Comments or questions?

Thank you