This article is part of a series in which OECD experts and thought leaders – from around the world and all parts of society – address the COVID-19 crisis, discussing and developing solutions now and for the future.
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The COVID-19 crisis has triggered a global recession nearly without precedent in its speed and depth – driving dramatic increases in small business closures and unemployment. While unwanted, this crisis presents governments with an opportunity to build back better…as long as the right decisions are made on start-up policies to respond to the losses.
A shortfall of small business numbers and jobs to make up
To date, the small business policy response to COVID-19 has concentrated on short-term cash support for firms to survive the crisis. The measures have targeted all small businesses regardless of sector, size or productivity.
We do not know yet how successful the policy interventions will be, but we know the losses will be significant given the economic impact the health shock and containment measures have had on our societies. Governments now need to gather data and intelligence on these small firm closures and design a reinforced start-up policy to allow the small business sector to recover. But what kind of start-up policy?
Must-dos to Move Out of the Crisis: SMEs and COVID-19, by Véronique Williams, Secretary General, SMEunited
Should we return to the pre-crisis small business economy?
Although some small firms are productivity leaders in their sectors, their productivity overall is only half that of large firms. Productivity and innovation are lowest in micro and one-person businesses in excess supply sectors, that is food services, personal services and retailing among others. This drags down small business wages and efficiency and the capacity of small firms to respond innovatively to grand social challenges. Before COVID-19, three-quarters of jobs created by new firm births were in sectors with below median productivity. These business creations should not be subsidised.
A replacement strategy or renewal strategy?
Governments have a key choice to make in re-booting start-up policy:
- Option 1: Replacement Strategy. Seek to quickly replace the existing small business base with similar businesses. This implies small-scale financial subsidies, perhaps combined with training and advice, to large numbers of start-ups. The Replacement Strategy would rapidly create new jobs, but has two downsides. Many of the starts will be low-productivity micro business in excess supply sectors, driven by necessity. Furthermore, evidence shows that mass start-up subsidies have often proven ineffective. Since one-third of employer start-ups fail to survive for three years, a significant part of the subsidy may be wasted.
- Option 2: Renewal Strategy. Seek to promote higher productivity, more innovative start-ups. It implies favourable framework conditions and packages of finance and advice targeted to start-ups with growth and innovation potential.
Read the OECD’s analysis on Italian regional SME policy responses
How to support better starts?
A renewal strategy would stimulate survivable and growth-oriented businesses that can raise productivity and innovation. It could also encourage and foster start-ups that focus on the high-priority social objectives of the post-COVID-19 world – including climate transition and social inclusion. It is difficult to identify these firms in advance, even more so since consumer tastes are shifting. Gazelles (young firms with rapid growth) for example represent only 2% of the enterprise population and come from a wide range of sectors and business models. Therefore, a more effective strategy would be to focus on start-ups that demonstrate survivability and initial growth success rather than targeting all nascent entrepreneurship and new firms with support, financial or otherwise.
A renewal strategy would stimulate survivable and growth-oriented businesses that can raise productivity and innovation
Regional entrepreneurial ecosystems
As well as direct support, a renewal strategy must reinforce the entrepreneurship environment. Clearly, national conditions matter – regulations, finance, knowledge creation/diffusion etc. – but regional conditions are also vital. Rates of business creation vary widely within countries: to take two examples, from 10% of active firms in Alberta to 5% in Quebec in Canada, or from 17% in the Algarve to 9% in Pinhal Interior Sul in Portugal. This is explained by regional conditions like entrepreneurial culture, talent and networks. Start-up policy must identify the local bottlenecks and mobilise actors to address them, including paying close attention to ecosystem leaders like regional governments, invested entrepreneurs and civil society organisations.
Big Ideas for Small and Medium Enterprises: Helping SMEs achieve digital transformation, by Stuart Nash, Minister for Small Business, Revenue, Fisheries and Police, New Zealand
The significance of this cross-roads
Whether the structure and productivity of the small business sector post-COVID-19 improves depends both on the scale of the losses of existing firms and by how well new companies perform compared to those that close. Governments have already made their decisions on their small business saving strategies. Now, they must decide the shape of their post-COVID-19 start-up policies.
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