Beyond the crisis – implications for small business

At the joint conference organised by the Swedish Entrepreneurship Forum and Swedish government Agency Growth Analysis, a number of well known researchers and other experts analysed the implications of the financial crisis on SMEs and job creation. A special focus was on the financial markets and their functioning from a small business perspective.

As a base for the discussion, Professor Zoltan Acs, George Mason University, introduced his new index to measure entrepreneurial activity, the Global Entrepreneurship Index. Many of the existing indexes fail to capture the real picture and policy relevant implications cannot be drawn from them. The analysis behind the GEI is based on different stages in entrepreneurship activity (the factor driven stage, the efficiency driven stage and the innovation driven stage). Among the building blocks there are also attitudes, activity and aspirations, as well as institutional variables.

– Well educated and smart people do not want to work in big business and be told what to do, said professor Acs, as an observation about attitudes.

Professor Johan Wikström, Syracuse University, commented on the new index. He welcomed its new approach and noted the fact that its relevance all depends on what it is you wish to measure. He did question the artificial cleavage between the driving forces behind “social” entrepreneurship and “economic” entrepreneurship.

– All entrepreneurship is social!, according to Johan Wiklund.

Professor Rebel A. Cole discussed the availability of credit to small businesses and the financial crisis of 2008 and beyond.

– Banks lending has fallen at 19% annual rate during the past three months, whereas business lending has fallen at 28% rate. The reason is that the banking system is in serious trouble that continues to worsen, and also that small business owners typically pledge real estate as collateral when applying for credit.

– The number of bank failures has passed 100 for the first year since 1992 and more than 400 “problem” banks.

A conclusion is that the problems of financing for SMEs will continue to hamper the small business sector in a disproportionately high degree and that further job losses will come.

Somewhat on the same note, Professor David Robinson, dwelled on the”Entrepreneurial Finance after the Crash”. He focused particularly on the effect of the crisis on high technology and innovative business. How does liquidity problems, and access to capital, influence those firms?

– The IPO market is dead. Especially for small firms, according to Professor Robinson, who also went through current figures on Venture Capital and other possible forms of finance.

– The fundamental problem is insufficient downstream liquidity for investors in innovation, which is especially bad news for the youngest, most innovative firms that need the most time and capital to develop.

The next speaker, Jens Henriksson, Executive Director at IMF, analysed the macro economic effects of the ongoing crisis. The IMF has created a model based on 88 financial and 222 currency crises in the last 40 years.

Continued GDP downturn and decreased growth is to be expected. In order to counteract future banking crises there is a great need for structural reforms. But first of all: governments must handle the actual banking crisis with a blanket guarantee and taking the shares. After that the automatic stabilizers should be allowed to work, in combination with discretionary measures. The next phase is for long term budget consolidation and structural reforms. Jens Henriksson also described how Sweden had dealt with its banking crisis in the 1990s in a way that the tax payers actually got their money back after a number of years of successful consolidation.

– Last but not least, all sectors of society have to share the burden in order to create legitimacy for crisis management: I believe in capitalism but not one where the private sector takes all the gains and the government sector all the losses, was Jens Henriksson’s closing remarks.

 

SMEs and entrepreneurs – their role as job creators in a post-crisis economy

The second part of the discussion focused on job effects of the crisis and how SMEs will find their role as job creators in a post-crisis economy.

Jim Spletzer, Senior Economic Analyst at the Bureau of Labor Statistics, presented statistics showing that the job loss have increased significantly when comparing the present crisis with former ones. He also established the fact that a larger share of micro companies (1-19 employees) reduces their amount of employees.

Professor Paul Reynolds enlightened the audience on the state of the art research on start-ups and the expected effect of the present downturn on new firm creation. In his international comparisons and comparisons over time he saw certain patterns, e.g. isolated examples of major impact when dramatic changes occur in the economy, that prior economic growth seems to have little effect on start-up activity, and that in rich countries, growth in GDP per capita has a statistically significant impact on increase in business creation. The total number of working people has dropped quite dramatically in 2009, which in turn reduces the base from which most nascent entrepreneurs emerge.

Peter Vikström, Director Entrepreneurship and Enterprise at Swedish government agency Growth Analysis, in his presentation emphasised the importance of high growth firms for innovation and job creation. They exist in all size classes but are overrepresented among SMEs. They also exist in all industries but tend to be overrepresented in business services. Another characteristic is that high growth firms are more knowledge and capital intensive.

Download presentations by speakers from the conference at the House of Sweden, October 30th, in Washington DC, a joint event by Swedish Entrepreneurship Forum and the Swedish government agency Growth Analysis.

Zoltan Acs
Rebel  A Cole
Pontus Braunerhjelm
David Robinson
Jens Henriksson
Paul D Reynolds
Jim Spletzer
Peter Vikström

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