Is there a need to update the definition of SMEs?

Is the definition of SME still valid in the current – especially Polish – economic reality? It would seem that this question should be addressed not to a lawyer, but to an economist – an observer of economic phenomena. However, I admit that I also have an opinion on this topic and I will not hesitate to use it in this post.

A bit of history and statistics
. Let us start from the fact that the discussion on validity and adequacy of the SME definition to the economic reality has been going on practically since the European Commission adopted a uniform definition for the European Union, i.e. since 1996. In theory, it (i.e. the definition) is subject to constant evaluation by the EC. The last major study of the SME definition was commissioned by the EC in 2012, at which time no need for a revision of the definition was identified, merely pointing to the need for practical clarification of certain concepts and the EC’s approach to certain issues. This is reflected in the new content of the Guide to the Definition of SMEs.
The European Commission also conducts a number of very interesting studies relating to the economic activity of SMEs and their position on the European market. Such cross-sectional reports are published annually on the EC website.
The latest report from 2015 shows, among others, that the number of SMEs in Poland practically corresponds to the European average (99.8% of all enterprises), with the SME group employing 67.8% of all employees (the European average is 66.9%), as well as having a 50.8% share in the so-called added value (the European average is 57.8%). The above data show that, at least statistically, Polish SMEs do not differ significantly from the European average. In particular, we are not faced with a situation where a larger number of Polish enterprises than the European average is excluded by definition. However, the small percentage share of large enterprises in the total number of Polish enterprises (in absolute numbers they accounted for 3114 enterprises) does not illustrate their actual strength and importance for the Polish economy, as indicated by at least two other factors, i.e. employment and the so-called added value. The statistics itself shows that Poland is not particularly motivated to change the definition of SME in the direction of its extension, e.g. by creating new higher thresholds for employment or turnover or balance sheet total.

What do SMEs have to do with?
Do statistics tell the truth and, most importantly, is it really in Poland’s interest at present to discuss a change in the definition of SME? In my opinion there are grounds to take up this issue.

First of all, it is important to point out the purpose of singling out the SME category. As the European Commission points out in the latest Block Exemption Regulation 651/2014: 'Small and medium-sized enterprises play a decisive role in job creation and, in a more general sense, are also a factor for social stability and economic development. However, their development can be hampered by market failures, leading to the occurrence in SMEs of the typical problems described below. SMEs often find it difficult to obtain capital or loans due to the risk aversion of some financial markets and the limited collateral that SMEs can offer. Their limited resources may also limit their access to information, particularly regarding new technologies and potential markets. These considerations justify, in the Commission’s view, preferential treatment of SMEs, for certain categories of aid.

At the same time, the Commission has introduced rigid SME criteria (i.e. thresholds for employment, turnover and balance sheet total), the fulfilment of which results in a presumption that a given entrepreneur is facing the above-mentioned problems. As a reminder, these thresholds are as follows:
Size of enterprise
Employment
Finances
Micro enterprise
<10 employees
Turnover ≤ €2 million or balance sheet total ≤ €2 million
Small enterprise
<50 employees
Turnover ≤ €10 million
or
Balance sheet total ≤ €10 million
Medium enterprise
<250 employees
Turnover ≤ €50 million
or
Balance sheet total ≤ €43 million

The devil is in the detail
While one can undoubtedly agree with the accuracy of the Commission’s diagnosis as regards the barriers to the development of SMEs, two issues raise my doubts:
Firstly, in the current reality, should the employment criterion continue to be the criterion which alone determines the status of an enterprise?

Secondly, should the status of an SME really be measured solely on the basis of employment criteria and also on the basis of financial criteria, such as turnover and balance sheet total? Shouldn’t other criteria also be taken into account?
As regards the first issue, in my opinion a good example of the inadequacy of the current definition to its purpose are e.g. those enterprises which employ a large number of unqualified employees, in addition for low wages as a rule, e.g. security agencies, cleaning companies, food chains, and which at the same time may face the same barriers as other SMEs (difficult access to financing, know-how, lack of access to new markets, etc.). In addition, it is worth asking whether the employment criterion has any raison d’être at all in certain sectors. At the present time, with significant automation of processes and outsourcing of services, many companies are significantly reducing employment by using outsourcers. It seems, therefore, that in some sectors high employment will not so much give a significant competitive advantage, but may even indicate the backwardness of a given enterprise in relation to its competitors on the market. These are, of course, my loose observations arising from practice and not supported by any research. It is worth noting that the problem of companies with high employment and relatively low turnover and balance sheet total was also signalled by the new Member States in the recent evaluation report of the SME definition. It might therefore be worth investigating this issue further. If, for example, it were to turn out that the turnover and balance sheet total of such theoretically large companies differ significantly from the upper limit for medium-sized companies, this would certainly be an important argument in the discussion on changing the definition.

Quo vadis SME?
Wondering how to formulate such an additional or substitute criterion, perhaps it would not be out of place to refer to the degree of development of a given enterprise in the context of its innovativeness level. Undoubtedly, if one looks for a significant difference between enterprises at present, it manifests itself not so much in the number of their employees, or (in my opinion more measurable level of turnover), but most of all in the degree of technological development – i.e. innovativeness. If we look for significant differences between our domestic entrepreneurs and foreign entities, then in this criterion we are undoubtedly still clearly lagging behind Western standards, as shown, for example, by the PARP report on innovativeness or by the Commission’s own studies. Since the criterion of innovativeness is one of the key criteria for the evaluation of projects, it might be worthwhile for the level of innovativeness of enterprises (although the problem here would probably be the selection of universal measures of the level of innovativeness, as well as the manner of their reporting) to also become a reference allowing to classify a given enterprise as an SME. When discussing the need to change the definition of SME from the point of view of Polish entrepreneurs, in my opinion it would be worthwhile to go in this direction.