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Stylised Facts about SMEs Place in Job Creation in Manufacturing Sector: A European Comparison Version: 14/04/2011 Humberto Lpez

Rizzo University of Paris 1 Panthon Sorbonne. Abstract The aim of this work is to widen and clarify the current debate on the importance attached to Small and Medium-sized Enterprises (SMEs), with their relevant contribution to job creation in the manufacturing sector. For this issue, the OECDs database STAN, Structural Analysis Database, is used. The period of analysis is from 1999 to 2007, covering twelve European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. In the present work, an SME is considered, as defined by the European Commission and the OECD, as a firm with less than 250 employees. The share of the SMEs in the manufacturing employment ranges from 48% to 71% depending on the country and the division. Moreover, a typology of the characteristics of the SMEs across the countries is presented. In countries of south Europe (Spain, Italy and Portugal), SMEs provide 7 of each 10 jobs. Furthermore, their mean size is lower than the average of the other countries. The coefficient of correlation of Pearson shows that there is a low negative correlation between the firm size and its share in the manufacturing employment. Likewise, the Portuguese SMEs show underperforming results for some variables. On the other hand, the Germanic SMEs (Austria and Germany) are more robust in size and better performing in the creation of the mean value-added. The United Kingdom's SMEs destroy half a million jobs and the large ones almost 700 thousand. The Spanish and Swedish SMEs created 40,000 jobs over that period. There is a negative SME employment growth rate in 11 manufacturing divisions, while another 12 divisions show a low positive growth rate, and one division had a growth rate over the period in the order of 134%. This is division 37: Recuperation. This division shows positive SME employment growth rate for all the countries.

Keywords: Small and Medium-sized Enterprises (SMEs); Manufacturing Industry; Employment; Comparative Studies of Countries; JEL Classification: L11; L6; J21; O57;

1. Introduction Thirty years ago, economists began to show interest in the small business. This interest was mainly inspired by the conclusions of the works by David Birch in the years 1979 and 1981. The findings of Birch pointed out the fact that small businesses are the economic structure that creates more net jobs vis--vis the large enterprises. Some works then confirmed the early findings of Birch, and others criticised his results. The aim of the present work is precisely to widen and clarify the current debate on the importance attached to Small and Medium-sized Enterprises (SMEs), with their relevant contribution to job creation in the manufacturing sector. The importance of SMEs is a current issue worldwide, because they are taking a relevant position, not only in the political and economic discourse, but also in the implementation of certain programmes. The recent adoption of the Small Business Act (SBA) for Europe in June 2008 is an illustration of this issue.


In the present study, we consider an SME, as defined by the European Commission and the OECD in 2003, as a firm with less than 250 employees. The sector of interest is the manufacturing industry as well as all its divisions (Divisions 15 to 37 considering the classification ISIC Rev. 3). The database is obtained from STAN, Structural Analysis Database, at the OECD. To crunch and squeeze the data to extract the essence of it is positively one main goal of this work. The information available is metadata from 1999 to 2007, and for this project, twelve European countries are considered: Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. In this multi-purpose research, we initially present the descriptive statistics where we may find that a 48% to 71% share of the jobs in the manufacturing is provided by SMEs. Then, in countries such as Spain, Italy and Portugal, SMEs provide 7 of each 10 jobs. The share of SMEs in job creation varies across the countries and across sectors. Moreover, a typology of the characteristics of the SMEs across the countries is presented, considering variables such as the value-added turnover level and the production level. This first examination output the similarities and disparities between the countries as well as between the manufacturing divisions, such as the disparities in performance among the south European SMEs (Italy, Spain and Portugal) and the Germanic SMEs (Germany and Austria). The second objective is to perform a comparative analysis of employment creation between SMEs and LEs, across the countries and the manufacturing divisions. That is a more detailed analysis carried out. We can stress the fact that the SMEs in the United Kingdom destroy 500,000 jobs, while the LEs close about 700,000 jobs. On the other hand, the Spanish SMEs create 40,000 jobs and the large ones provide 20,000. All those previous analyses will let us find out what the best performing SMEs across the countries and the manufacturing divisions are. The manufacturing division where SMEs report the highest employment rate is the S37: Recuperation, with a growth rate from 1999 to 2007 in the order of 134% (average). As a matter of fact, these previous analyses will also let us determine the possible explications of the causes as to why some SMEs perform better than others. For this, finally we propose the analysis of the coefficient of correlation of Pearson. For all SMEs, the value-added seems, overall, to be the variable that better explains their mean size.

2. Literature review Since the conclusions of American researcher David Birch in the late 1970s-early 1980s, the number of works focusing on small businesses in job creation has multiplied notably. The main finding of Birch (1981) was that small businesses (those with less than 20 people) created 80% of the new jobs in the United States during the period 1978-1981. At the time this outcome was taken with scepticism, but years later it was the OECD (1985) which subsequently corroborated the findings of Birch, considering, in turn, that job creation was more important in small establishments than in small business. The evidence presented by Birch was contested by Davis (1992) and later by Harrison (1994). Both authors criticised the current sample and the methodology he used. An additional argument raised by the authors was the fact that Birch did not take into account, in his analysis, the subcontracting factor (coming from large to small firms) as a causal factor of the increasing job creation. Another author who extends Harrisons intuition is Boccara (1998) who believes that most of the jobs created by SMEs are nothing more than an optical effect induced precisely because the SMEs that generate these jobs are owned or controlled by an industry group. Therefore, these jobs can be attributed to a group effect. Another research work that questions the importance of small businesses in job creation is this of Johnson (1989) who pointed out the decreasing net rates in job creation of the English manufacturing small businesses during the period 1979-1985. However, Doi and Cowling (1998) studied the manufacturing sector of the UK for the period 1976-1991, but they found out that the SMEs increased their contribution to employment from 25% to 34.5%. Other authors subsequently approved the thesis that small structures are the major source of job creation vis--vis the larger structures. J. Wagner (1995) found that the German SMEs (with up to 249 employees) showed higher net rates of job creation compared to those of the LEs in the manufacturing sector during the period 1978-1993. Broerman and Gautier (1997) corroborated these findings for the Dutch firms (with 10-99 people) in the manufacturing industry during the period 1978-


1991. In addition, Baldwin (1998) and Picot and Dupuy (1998) observed that small firms (with less than 100 employees) achieved higher net rates of job creation compared to large ones in the Canadian manufacturing sector. Likewise, Mouy (1998) analysed the French manufacturing industry for the period 1984-1995, and found out the same results as the previous authors. This was this for firms with fewer than 50 employees. The OECD presented a report in 1996 and 2005 where it emphasised the importance of SMEs in the share of employment, which reached up to 75% in countries such as Italy, Spain and Portugal (OECD 1996, OECD 2005). [For a summary of various studies published by the OECD in conjunction with other authors, see Schereyer (1996); Segenberger, Loveman and Piore (1990); Storey and Johnson (1987)]. D. Audretsch (2002) surveyed the American industry for the period 1990-1995, and found out that small firms (with 20-499 employees) were those that contributed the larger net rate of job creation compared to large firms. For their part, the small firms contributed a rate of net job creation of 0.57%, and the large firms (with more than 500 employees) reported a negative rate of job creation of 8.57%. Recently, Lopez-Garcia et al. (2009) studied the Spanish economy for the period 1996-2003. The authors provided evidence that small firms (those with less than 20 people) created more than 60% of the net jobs. They pointed that the industrial small firms contributed 20% of the total jobs in the manufacturing sector.

3. Database and descriptive statistics

The Database The database used in this article is STAN, Structural Analysis Database, which is obtained from the OECD website. The manufacturing sector is the object of analysis, and so are all the divisions it involves. The data is available only as metadata (i.e. the variables presented reflect the performance of the overall SMEs). An SME is considered here as a firm that has up to 249 employees, with this being the recent definition accepted by the European Commission and the OECD in 2003 (Document 2003/361/EC). Therefore, all large enterprises (LEs) are those with more than 249 employees. The present work is a study of the period between 1999 and 2007, covering twelve European countries: Austria, Belgium, Denmark, Finland, France, Germany, Portugal, Spain, Italy, the Netherlands, Sweden and the United Kingdom. The divisions taken into consideration in this work are 15 to 37 considering the two-digit sectors from the Classification ISIC Rev. 3: (15) Manufacture of food products and beverages (16) Manufacture of tobacco products (17) Manufacture of textiles (18) Manufacture of wearing apparel; dressing and dyeing of fur (19) Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear (20) Manufacture of wood and of products of wood and cork, except for furniture; manufacture of articles of straw and plaiting materials (21) Manufacture of paper and paper products (22) Publishing, printing and reproduction of recorded media (23) Manufacture of coke, refined petroleum products and nuclear fuel (24) Manufacture of chemicals and chemical products (25) Manufacture of rubber and plastic products (26) Manufacture of other non-metallic mineral products (27) Manufacture of basic metals (28) Manufacture of fabricated metal products, except for machinery and equipment (29) Manufacture of machinery and equipment NEC (not elsewhere classified)


(30) Manufacture of office, accounting and computing machinery (31) Manufacture of electrical machinery and apparatus NEC (32) Manufacture of radio, television and communication equipment and apparatus (33) Manufacture of medical, precision and optical instruments, watches and clocks (34) Manufacture of motor vehicles, trailers and semi-trailers (35) Manufacture of other transport equipment (36) Manufacture of furniture; manufacturing NEC (37) Recycling

Limitations of the database This data is pertinent to getting the big picture of the situation of SMEs in employment in the manufacturing sector. But considering the aggregate nature of the data (not at a firm level), this database does not allow us to know exactly if the firm is independent or subsidiary of another one. Nor does it allow us to know if the firm is subcontracted by another one. Therefore, we cannot test various hypotheses. In fact, Ayyagari et al. (2007) see difficult to carry out a dynamic interpretation of the SMEs' performance from this kind of data, and Storey (1982) notes the difficulty to test divers hypothesis about small businesses because the lack of statistics restrains performing this. So, we will content ourselves with a general analysis of the performance of SMEs.

Descriptive statistics The demography of the manufacturing sector of all countries shows that from 90% to 98% of the firms are SMEs, which means that less than 2% of the firms on the market are large ones. It is important to note that these percentages correspond to the mean value of the periods analysed. Figure 1 illustrates the share of SMEs in employment in the manufacturing; this is an average of the period 1999-2007. Looking at the job distribution on the mentioned graph, we note that significant differences exist between countries.

Figure 1: Average share of SMEs in the manufacturing employment during 1999-2007.

We can note that the SMEs in the south European countries make a higher contribution to employment than the rest of the nations. In short, in these countries almost 7 of every 10 jobs are provided by an SME. Moreover, in countries such as Germany, Finland and France, the SMEs contribute only to 5 of every 10 jobs. In order to have a clearer picture of the importance of SMEs in job creation across the manufacturing divisions, we consider pertinent to comment on more precisely this point on the following paragraphs.


Table 1: Share of employment provided by SMEs across the manufacturing divisions.

There are many cases to point out on Table 1. However, we will only focus on highlighting three: First, the SMEs' contribution to employment in some sectors varies widely across the countries. For example, in the S30, the mean share of SMEs in employment of all countries is 62%. That means that 62% of the jobs in this sector are supplied by SMEs. But that is not the case for France (28%) nor Germany (27%), nor the Netherlands (24%). Second, the opposite case is presented in the S23 where on average, most jobs are provided by LEs, but in Denmark about 9 of every 10 jobs are created by SMEs. Third, in the S37, for most countries, SMEs are the entirely job providers, but in the UK this is only true for 81% of these jobs. We can say in a nutshell that there is heterogeneity; the importance of SMEs in jobs creation varies across the divers manufacturing divisions as well as within the countries [as Parker (2001) stressed]. We may affirm that there are different market characteristics and, therefore, firms have different qualities and scope. Likewise, the average size across countries varies. For the overall manufacturing sector, we can note that the smaller SMEs are the Swedish and Italian with a mean workforce size of 10 people, then the Finnish with 11, the Portuguese with 12, the Spanish with 13, the French with 14, the English with 15, then the Danish and Belgian with 16, the Dutch with 18, the Austrian with 20, and finally the German with 23 employees. There is a notable difference between the mean sizes of SMEs among countries. This difference is just as evident within the different manufacturing divisions. Table 2: Mean size of the SME across the manufacturing divisions.

From Table 2, we can first observe that there is a notorious difference between the mean size of the smaller SMEs, that is 7 employees (from the S18 and the S36), compared to the ones with the larger size, that is 38 employees (from the S16). A second element to note is the significant size of the German SMEs across the manufacturing divisions; these SMEs show a larger size with respect to the mean size of the sector. The last point to stress is that, the larger the mean size of the SMEs is the lower the contribution to employment will be in a sector. Calculating the coefficient of correlation of Pearson between the SME's mean size and the SME's share of employment, we obtain a coefficient of -0,341 (significant at the 0,01 level). This coefficient indicates a moderate negative correlation between these two variables behaving these in the sense that we just posed.


The following table shows the percentages of participation of SMEs in the demographics of the manufacturing, turnover and production respectively. The objective of presenting these variables is to have a first picture on the weight that these firms have within the manufacturing sector. We can realize the main importance that SMEs in countries, such as like Portugal, Spain and Italy, have. On the other hand, we note a lower weight of SMEs in the value-added, the turnover and production in countries such as Austria, France or Germany. To get a clearer picture about the divergence of the SMEs' characteristics across countries, a country typology is carried out in the following point. Table 3: Share of SMEs in the overall manufacturing Demography, Value-Added, Turnover and Production.

4. A typology of the European manufacturing SMEs The fact of proposing a typology of SMEs involves the use of different variables that could represent parsimoniously the characteristics of the mean firm. For this work, we build a typology making use of the following variables: the mean size of the firm, the mean value-added, the mean turnover level, and the mean production level. The following table presents the mean values of the four variables already mentioned. Table 4: Averages SMEs values of some indicators of economic performance.

Basic interpretation: A mean manufacturing Swedish SME has 10 employees, and it creates on a value-added of 500,000 Euros, a turnover level of 1.84 million Euros and a production level of 1.73 million Euros. We may note that these statistics are expressed in real terms; these were deflated by the CPI. A first point to note on the table above is the fact that the German SMEs present higher values for the four coefficients. Not only are the German SMEs bigger in size, but also they perform better in comparison with the SMEs of the other nations. On the other hand, we find that the Portuguese SMEs have a lower size and lower performance compared with the other countries. We may note that the average turnover is close to the average production; computing the coefficient of partial correlation (Pearson), we find that these coefficients are highly correlated. The value of the correlation is in the order of 0,98, meaning that both variables have a high positive correlation (quite close from the perfect correlation value of 1,00).


In order to get the picture of the relationship between those variables and the same for the characteristics of the firms, I propose the next two charts.

Figure 2: Average SME's size (persons) and Average SME's value-added (per firm)

Figure 3: Average SME's size (persons) and Average SME's value-added (per firm)

We may note in both Figures the performance of the German SMEs; that is the larger the size, the higher the value-added, and the same is for the turnover level. On the other hand, other nations show a lower size in its SMEs and so lower values on the indicators of performance of countries such as Italy, Sweden and Finland. For these Figures, we can say in short that the south European countries as well as the Nordic ones show the lesser performance on the mentioned coefficients.

5. The place of SMEs in the manufacturing employment During the period of study, there was greater destruction of jobs than creation. Both SMEs and large firms destroyed more jobs than they created. Even so, large firms were those which destroyed the larger number of jobs. In short, SMEs destroyed about 950,000 jobs, while large ones destroyed almost one million and four hundred thousand jobs. Table 5 summarizes the creation-destruction across the countries. Table 5: Balance of the job creation-destruction in the manufacturing sector for SMEs and LEs.

However, if we look closer at the performance of SMEs from different countries, we will find that the creation and the job destruction occur with different magnitudes. For example, the SMEs of the United Kingdom destroyed nearly half a million jobs, the French ones destroyed almost a quarter of a million


jobs. On the other hand, SMEs in countries such as Spain or Sweden created about 40,000 jobs. For their part, the German SMEs destroyed barely 5,000 jobs. Turning our sight to the right side of the table, we see that large firms have higher job destruction than the SMEs. We may note the destruction of nearly 700,000 jobs in the English LEs, 250,000 jobs in the German LEs, and 150,000 jobs in the French LEs. If we consider the percentage changes, we can see that in the UK, more than one-fifth of the jobs in SMEs disappear, and one-third of those in large enterprises. Likewise, the Portuguese large enterprises remove one-third of the jobs in the sector. In short, during the period 1999-2007, manufacturing SMEs destroyed fewer jobs than the large ones did. In countries such as Finland, the Netherlands, Spain and Sweden, SMEs are net job creators. On the other hand, in Austria and Spain, large firms are presented as net job creators. One question that could arise is about the percentage of the jobs created by new firms entering the market among those jobs created by manufacturing SMEs. To address this dilemma, the following Figures show the evolution (%) in the number of new SMEs entering the market, measuring at the same time the evolution of the SMEs manufacturing employment. In parallel, a similar Figure is presented, but in this case for the LEs; this in order to perform a comparative analysis between the two structures.

Figure 4: Annual evolution in the number of firms firms and jobs in the SMEs

Figure 5: Annual evolution in the number of and jobs in the LEs.

In the Figure 4, we observe that, the countries where the number of firms increases at the same time as the number of jobs does are the Netherlands, Sweden and Spain. On the other hand, Finland reduces the number of firms, but increases the number of jobs. Again, we note the fact that in the United Kingdom there is a decline in the number of firms and jobs. The German SMEs have marginal destruction of jobs and a reduction of almost 2% in the number of firms. If we turn to the Figure 5, we note that, on average, for most of the countries during the period 19992007, the number of large firms as well as the employees disappeared. The exception to this last fact is found in countries such as Sweden, Spain and Austria, where the number of large firms and the amount of jobs increase marginally; that is a rise in less than a half percentage point. The Italian LEs increase their number marginally, but this is accompanied by a decrease in the number of jobs of nearly half a point.


What about the employment changes across the divers manufacturing divisions? The next table summarizes the evolution in the SMEs' employment level from 1999 to 2007. We can stress the fact that in 11 divisions (from a total of 23), there is a declining tendency; especially in the S17-19 and the S36 [with a mean decreasing rate going ranging 21% to 41%]. On the other hand, there are 11 divisions with a low growth employment rate (S16, S24, S25, S27-S30, S32-S34 and the S37); oscillating the SMEs employment growth rates from 2% to 9%. Table 6: Employment evolution (%) across the manufacturing sectors from 1999 to 2007.

Finally, there is one division with a mean growth rate of the SMEs' employment in the order of 134%. That is the S37: Recycling. Looking closer at this division, we may note that the SMEs of several countries have a higher growth rate in comparison to the mean value. It is important to point out the fact that two south European countries such as Spain (365%) and Portugal (204%) and two Nordic countries such as Finland (272%) and Sweden (190%) report the most significant rate in employment growth.

What factors could explain the increase in employment in the manufacturing SMEs? To answer this question, an analysis of the coefficients of correlation of Pearson is proposed for the variables that we have been discussing throughout this article. The following table presents the results of these coefficients. Table 7: Correlation of Pearson of the average size of the SME with the value-added, the turnover and the production.

According to the output, the variable that has a higher correlation with the average size of the SME is the value-added. This finding may be applicable to all countries on the empirical picture. We note that the correlation is stronger for SMEs in countries such as Austria, Belgium, Denmark and Sweden. Moreover, this correlation is less important in countries such as the United Kingdom, France or Portugal. The results of the correlation coefficient for the value-added or production are not constant across countries; that is, its relevance varies among them. In some countries, both ratios have a high correlation on the size of the SMEs; for example, on the firms in countries such as Austria, Denmark, Finland and Sweden. For other countries, one of these coefficients has a higher impact on the firm size (i.e. for Belgian and Spanish SMEs, the production is over the turnover). In other nations such as


the United Kingdom and Germany, the turnover level has a low correlation with the mean SMEs' size. Paradoxically, for the SMEs of the United Kingdom, the production level has a null correlation with their mean size. One possible exit to this issue is the fact that the SMEs and the LEs of the United Kingdom show a clear decrease in the employment levels.

6. Conclusions As a matter of conclusions, the main findings of the present research work are recapitulated. 1) SMEs provide from 48% to 71% of the manufacturing jobs. Where the SMEs from the south European countries contribute 7 of every 10 jobs. 2) The smaller SMEs come from the south European countries as well as from the Nordic ones. On the other hand, the Germanic SMEs report the bigger size. 3) There is a coefficient of correlation of Pearson of -0,341; stressing this, a moderate negative correlation between the SMEs' size and their share in employment in the overall divisions. 4) The Germanic SMEs not only show a robust size, but also the better value-added. 5) During the period 1999-2007, there was net job destruction in the employment of the sector. The LEs destroy more jobs than the SMEs do. In countries such as the United Kingdom, the LEs destroy more than 700,000 jobs, in Germany 250,000, and in France 150,000. The SMEs of countries such as Spain and Finland create more than 40,000 jobs. 6) The countries that increase the number of SMEs as well as the size of the SMEs' employment are Spain, Sweden and the Netherlands. Most of the number of LEs decreases in firms number as well as the amount of employments. 7) The division 37: Recuperation showed an employment growth for the SMEs in the order of 134%. 8) The coefficients of correlation of Pearson between the SMEs mean size and the value-added shows a high value correlation. This value reported is more important than those showed by the turnover and the production one.

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