Policy Design, Implementation and Evaluation -- …

1 Policy design , Implementation and Evaluation -- rationale , efficiency and Systemic ConcernsPrepared by Thomas AnderssonDeputy DirectorDirectorate for Science, Technology and IndustryOrganisation for Economic Co-operation and Development (DSTI/OECD)For the SME Forum: Public Policies for SMEs in Europe Lisbon, 13 - 14 April , the interest among Policy makers in how to improve the performance and socialcontributions of small and medium-sized enterprises (SMEs) is greater than it has ever been. Thisinterest is fuelled by the perception that the intertwined processes of globalisation and technicalprogress have given rise to a strong trend for large firms to internationalise and downsize theiroperations. SMEs, on the other hand, are seen as confronted with a number of new opportunitiesto do things that previously required large scale, but also as subjected to strong pressures forchange which they have difficulty in managing effectively on their addition, it has become clear that many policies and programmes directed at assistingthe development of SMEs are not fully effective, and that more could be done.

2 However, there is alack of adequate information in this respect, partly because of the limited application of evaluationand critical assessment of Policy making in this the next section, I will briefly review some of the Policy challenges confronting OECD countries with respect to SME development in the New Economy . Building on the experienceand current trends in OECD countries1, I will then turn to Policy rationale , efficiency andevaluation of SME policies. I will end with a few remarks on Policy Implementation . Along theway, I will emphasise the importance of systemic concerns. 1 The OECD Working Party on Small and Medium Sized Enterprises provides a unique forum for policymakers in this area to meet, compare and assess experiences, and to co-operate on key On 13-15 June 2000, back to back with the 14th Session of this Working Party, the OECD will for the first timeorganise a Conference for Ministers in charge of SMEs and Industry; Enhancing the Competitiveness ofSMEs in the Global Economy: Strategies and Policies.

3 New Economy and SMEsA number of recent developments have led to intense debate about whether or not we areliving in a new economy . The most important factor underlying the argument for a neweconomy is the growth record of the United States, which is continuing its prolonged boom andexceptional productivity performance with a striking absence of inflationary pressures. Thisunexpectedly strong performance is not confined to the United States; a number of other highlydeveloped countries mostly relatively small ones such as the Netherlands, Australia and Ireland are also doing very well. On the other hand, not all countries are showing signs of this newdynamism. It appears that the forces pushing for convergence in growth rates have weakened inthe 1990s, and there are now stronger signs of economic are also changes in the factors that appear to drive economic growth.

4 In particular,this applies to information and communications technology (ICT), which was long observed toshow up "everywhere but in productivity figures". Today, the contribution of ICT to output andproductivity growth is visible, significant and rising (Schreyer, 2000).2 Rather than stemmingfrom ICT per se, however, it would seem that growth is strongly dependent on the interplay ofICT with changes in innovation processes, organizational change and upgrading of human the most conspicuous changes is the trend towards take-overs and acquisitions, and theformation of strategic alliances between the biggest and most powerful firms. Many questionshave been raised about what all this means for small play a key role in all OECD countries in many respects, and especially in terms ofemployment.

5 Figure 1 shows the distribution of the labour force within the manufacturing sectorin a selection of countries as of the late 1990s. As can be seen, using a definition for SMEs offirms employing up to 99 people, these firms account for a share of between 30% and 60% of thelabour force in all the countries except the United States. Using the US definition of an SME as afirm with up to 500 employees, the category accounts for more than 50% in all countries exceptthe United States. Today, however, the bulk of total employment is found not in manufacturingbut in services, and there SMEs have an even stronger position, particularly in wholesale andretail trade and in hotels and restaurants. In construction, SMEs tend to account for 80 to 90percent of all employment.

6 Again, the distribution varies across countries (OECD 1997ab and2000).3 Moreover, the importance of SMEs in employment tends to be increasing. From the mid1980s to the early 90s, SMEs displayed more rapid net employment growth than larger firms in allOECD countries. This development is partly because of rationalisation in large firms followingpressure to increase productivity and, lately, focus on core business. Some of the new jobs inSMEs thus emerge as the result of outsourcing from large firms, and today there is a very dynamic 2 In Canada, the United Kingdom and the United States, the growth contribution of ICT equipmentamounts to about half of the entire growth contribution of fixed capital.

7 In France, Germany and Japan, thecontribution of ICTs to output growth has been somewhat smaller, but is still For example, SMEs share of total private sector employment has been estimated to reach about 80percent in Ireland and Switzerland, about 70 percent in Japan, Belgium and the United Kingdom, and some50 percent in Italy and Finland as of the mid 1990s (OECD 1997b).development of SMEs in business services, many of which co-operate closely with manufacturingfirms. However, jobs in SMEs are less stable; there is much more turmoil caused by births anddeaths among these firms compared to bigger ones. Also, SMEs display much lower productivitygrowth than bigger firms, their rate of internationalisation is much lower on average as is theirR&D intensity and their use of new SMEs destined to fall behind?

8 There is no one answer to this question that applies to allSMEs, but many categories of SMEs enjoy an advantage in terms of speed and flexibility andthese are major advantages, given the nature of the new economy . They are less likely than bigfirms to suffer lock-in with respect to existing plants, technologies and organisational tend to be strong on incremental innovation, which is close to the adoption and use oftechnologies for new market needs. ICTs are also opening up new opportunities, allowing theadvantages of small scale to be combined with economies of scale and scope through networkingamong SMEs (or with larger firms or other actors such as universities). There is evidence thatnetworking is becoming key for enhanced specialisation among understanding of the new economy is certainly far from perfect.

9 The OECD hasjust embarked on a major project to examine the magnitude and nature of the changes that aretaking place in growth performance; an interim report will be published in June this year and thefinal report is due in 2001. Some Policy issues are nevertheless clear-cut: reduced costs foraccessing and using information infrastructure are crucial for SMEs. Well functioning venturecapital markets, economic and regulatory conditions that allow for stable and secure transactions,mobility and the diffusion of technologies, knowledge and skills, are all important. Furthermore,the prevailing economic and social conditions must be conducive to entrepreneurship and shouldnot discourage risk-taking. On a more fundamental level, however, the Policy challenges arecomplex: individuals and countries are affected by a range of inter-related policies.

10 They fareincreasingly differently, raising concern about the existence of a digital divide , characterised byexploding income differences as those who engage in cumulative learning reap the gains ofexpanding information flows, while those who lack the means and knowledge of how to gainaccess to the new technologies are left behind. Social safety nets obviously have a role to play incounteracting such developments. One should not, however, underestimate the importance of thepolicy frameworks in place with respect to SMEs, start-ups and for PolicySMEs face special challenges but also special opportunities. SMEs are important forthe economy, particularly job creation. So, is that not enough justification for implementing SMEpolicies?