The Role of the Public Sector

Small and medium sized enterprises (SMEs) play an essential role in the economy internationally and above all in Europe, where over 20 million SMEs account for around two thirds of jobs and half of turnover in the non-agricultural business sectors. SMEs’ contribution to growth and employment, not to mention innovation, makes them key players in the achievement of the Lisbon Strategy goals (European Investment Bank, 2005). At the same time, restrictions on SMEs’ access to external finance create unwanted obstacles to employment and growth. Whilst there is no indication of generalised market failure across Europe for the supply of finance to SMEs, the Commission has, in a recent Communication, stressed the need for public action as a catalyst to the development of the markets at European, national and regional levels in three specific areas (European Investment Bank, 2005, p.6): 1.the improvement of the framework conditions for SME finance with, in particular, the development of financial markets in the New Member States which suffer from a low level of equity investments and bank lending; 2.early-stage finance, in particular through guarantees and microlending; 3.equity. Innovative small and medium sized enterprises represent an extremely small proportion of SMEs overall in any country, but they have a relevant role in creating new jobs and in enhancing technological development, with positive fallouts on economic growth. For these firms, financial constraints and serious equity gaps are observed even in the most developed countries, due to market failures, that are particularly significant for this kind of business. For these reasons, policy-makers are developing different types of intervention specifically focused on innovative SMEs (ISMEs) , at the national and international level. This chapter analyses the best practices developed in different countries both inside and outside the EU, with the aim of identifying overall best practices on the basis of the concrete results achieved by different schemes, and specifying intervention criteria that could improve the effectiveness of private-public cooperation. The chapter is organized as follows. Section 8.2 provides an analysis of the motivation for public sector intervention to bridge the equity gap facing innovative SMEs and a description of different types of scheme being developed by policy-makers at the national and international level. Section 8.3 introduces the guiding lines of the EU approach. Section 8.4 outlines the key elements of each country study, trying to identify best practices and pioneer schemes suitable for broader application. The countries surveyed are the USA, Israel, UK, Germany, the Netherlands, France and Denmark. Summaries and important conclusions for the implementation and evaluation of public policies and incentive schemes for this sector are provided in Section 8.5.