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Small Business Development policy and innovation support in a transition country: experiences in Hungary. Presentation at the Tshwane University of Technology Peter Futo, Associate Professor Corvinus University Budapest 11. February 2009. Central and Eastern Europe. Became EU member in 2004.
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Small Business Development policy and innovation support in a transition country: experiences in Hungary Presentation at the Tshwane University of Technology Peter Futo, Associate Professor Corvinus University Budapest 11. February 2009
Central and Eastern Europe Became EU member in 2004 Became EU member in 2007
Hungary: regional disparities • Regions of the North-Plain and North-Hungary: • Lowerdensity of enterprises • Higher unemployment • Lower willingness of multinationals to invest here
The transformation crisis After 1989 many new SMEs were created during the crisis years of 1990-1993. State owned firms have been privatised, splitup, outsourced activities, lost their employment and their markets – leading to the creation of many SMEs. Entrepreneurs „out of necessity” started businesses in order to avoid unemployment. Characteristics of this period: it was easy to establish new enterprises, but only few could enter the stage of growth.
(R)evolution of the SME sector Certain forms of entrepreneurship were surviving during the decades of communism and socialism. The activity of independent traders and craftsmen was legal throughout this period. But the political changes of 1989 have brought a real revolution of entrepreneurship.
SME statistics Size distribution: · Hundreds of thousands of micro businesses, · tens of thousands of small companies · thousands of medium sized businesses Two-thirds of Hungarian enterprises: one self-employed person without additional employees.
Challenges of post-socialist transition for SME development Despite spectacular quantitative development of SMEs, deficiencies in entrepreneurial culture: • SMEs serve predominantly local markets • Low productivity, under-capitalization • Low motivation to introduce organizational innovations or innovative business ideas • Low motivation to innovate, to introduce new products or new technologies, • Low motivation to co-operate with other businesses • Survivalism, lacking motivation to grow • Lacking abilities and willingness to employ • High level of non-compliance, informality, tax avoidance • SMEs: Perception of higher level of corruption than what really exists. • Low abilities to build linkages to large firms • Family firms: low level of trust to co-operate with persons who are not family members • If challenged by competition, seeks other local monopoly instead of innovating or growing
Challenge: to bridge the duality of the Hungarian economy Weak ties between - predominantly Hungarian-owned, mostly under-capitalized SMEs - and the predominantly foreign-owned, technologically advanced medium sized and big companies.
Challenge: Growth through networking and subcontracting One of the few possibilities of growth: through developing supplier relations with large companies. Most SMEs find it difficult to become subcontractors to local multinationals. Many problems arise from the fact that potential suppliers are ill-equipped · in financial,· technological, · technical, · quality assurance systems (e.g. ISO 9001)· and logistic terms.
Challenge: EU membership • Expected difficulties in satisfying requirements of the European Union in the following fields: • environment protection • work safety, • work hygiene. • Expected difficulties in acquiring and applying know how on • company management, • marketing, • environmental management • financial management
Actors of Hungarian SME development policy 15 years ago this was a non-existent policy field. SME development organizations: Public sector: specialised agencies of the central and local government Non-profit sector: local SME development foundations, chambers, trade associations, interest representations. Intermediary organizations of aid delivery in the private sector:business consultancies delivering training, consultancy and project managementof supported projects
A selection of instruments of innovation policy in the framework of SME policy • Promoting knowledge transfer from universities to businesses by • (a) supporting university-company linkages • (b) facilitating the creation of spin-off firms • Promoting the diffusion of up-to-date technologies from multinationals to smaller companies by launching programmes for suppliers • Promoting the diffusion of up-to-date technologies among companies of the same sector and the same region by supporting the establishment of regional clusters • Intensifying the innovation activities of small- and medium size enterprises by • (a) launching specific grant schemes for innovative companies • (b) establishing entrepreneurial incubation houses
Project design options for directly supporting innovative SMEs • Support offered by (a) Government authority for innovation policy or (b) Government authority for SME policy or (c) Authority specially established for distributing development aid. • Eligible companies must be small or medium sized. A working definition of SMEs is needed. • Applicants must justify for ex ante evaluators that they will use the support for innovation purposes. A working definition of innovation is needed. • Professional content and design of supported grant projects must be defined in advance by applicant firms. These are the projects to be implemented at the level of the firm. Examples: product or technology development, introduction of new technology, • The nature of support • Option 1: Financial support: (a) non-returnable subsidy, (b) soft loan or (c) equity (e.g. venture capital). • Option 2: Non-financial business development service support: (a) consultancy (b) training • Beneficiaries must justify for monitoring and auditing experts that they have used the support according to the existing rules. • Beneficiaries must demonstrate for interim evaluators and ex post evaluators in what ways the project was successful or has failed. Working definitions of success criteria are needed.
Supporting innovative SMEs indirectly Indirectly: this means through intermediary organizations. No direct selection of „winning” enterprises, less intervention into the markets. Examples: • Offering tax breaks for company-level research, development, investment, employee training etc. • Developing regulations and institutions on patents, standards, product safety, etc. • Supporting service providers of business development, e.g. quality consultants, technical consultants • Supporting business incubators • Supporting regional and sectoral clusters
Project case study: E-commerce as a Tool for the Development of SMEs • Project co-financed 50% by the EU and 50% the Hungarian Government • Project worth of 4 Million Euro. • Implemented between Nov 2003 and Oct 2005 • Project Aim: familiarising a selected group of SMEs with the advantages and functions of e-commerce, electronic marketing. • Project management by National Agency for Enterprise Promotion. • All business development services offered by a private consortium. These services are: • e-Commerce Portal for SMEs developed • e-Commerce related training (1000 SMEs) • Customised consulting (200 SMEs)
Subcontracting subsidy Aim: Developing relations between large and small enterprises in the fields of production, innovation and information. Support types: • Subsidies for purchasing of equipment, • Just-in-time • Quality assurance • Technical consultancy • IT development • licence purchasing.
Support for financing SMEs Micro Credit Széchenyi Card Europa Credit Credit Guarantee Co. Agrarian Credit Foundation Guarantee Coopeations SME Financial Co. Hungarian Development Bank Equity Scheme Credit schemes Guarantee Schemes Development Equity
Support to regional clusters of enterprises • In Hungary a regional cluster is a Government-subsidized regional network of co-operating companies, SME-support institutions, local governments, trade associations and technology transfer institutions such as University departments or technology consulting firms. Clusters are as a rule not legal entities, have no legal forms (such as companies or associations). In 2004 there are some 20 clusters in the country. Cluster establishment and development projects are as a rule subsidized by funds • of the EU and • of the Hungarian Government.
Activities of cluster organizations • Training, transfer of know-how in order to become subcontractors, joint quality management, spreading information on European Union standards • Product family marketing • Regional marketing • Interest representation (competition to existing trade associations and to regional lobbies) • Web pages • Conferences, joint participation on fairs, organisation of business meetings • Preparation of Hungarian and European Union tender documents
Cluster Case Study: Pannon Automotive Industry Cluster (PANAC) Sectoral subcontracting network of the automotive industry in North West Hungary, established: December, 2000. Based on a network which was already supported by the government's former Subcontracting Development Programme (1995-2000) Members: · 12 multinational or foreign owned firms of the automotive industry e.g. Audi, Opel. · 46 smaller component manufacturers · 18 service providers, e.g. banks, consultancies, developers, traders, logistic companies etc. Aims · Integrating multinationals in the Hungarian automotive sector, · Network building, focus on „bridging function” between SMEs and the major companies in the industry.
Activities of PANAC Cluster Training, sharing of best-practices, spreading know how · Seminars for active and potential subcontractors on needs of buyer companies · Benchmarking Club: monthly programmes, events (Logistic Day, Technology Day) · Internet: portal-site, mailing list. · Surveying management and technological abilities of member firms. International relations · Austrian-Hungarian business meetings, · International Pannon Automotive Forum in Raab · Compillation of Automotive Industry Dictionary in 3 languages,
The interrelationship between policy, programme, project and their target groups
Evaluation of support programmes generally, i.e. in any policy area • Question: in what respect and to what extent was the programme a success or a failure? The evaluation report consists of the following major parts • Identification of the examined programme: (a) name of programme (b) donor agency (c) dates of implementation (d) declared aims (e) overall expenses (f) number of benefited enterprises or intermediaries. • Administrative procedures of decision making in (a) selecting beneficiaries (b) financing beneficiaries (c) contracting with external service providers (d) monitoring the implementation of the programme, etc. • Opinion of evaluators according to pre-defined criteria, such as Relevance, Efficiency, Effectiveness, Impact, Sustainability. • Recommendations of the evaluators.
Sources of evaluation • Documents • Policy documents • Project documents • Interviews with • policy makers • project managers implementing the programme • Questionnaire based survey among • beneficiaries • control group
Examples for evaluator’s questions for each criteria Relevance • Is the design of the evaluated programme properly adjusted to the declared aims of innovation policy and SME development policy? • Does the programme fit well into the existing procedures and institutions? Efficiency • Were there delays in programe implementation and if yes, why? • Did the implementing organizations, contractors and beneficiaries co-operate smoothly, and if not, why? Effectiveness • Did the supported grant projects deliver the expected results? • Was the selection procedure successful in finding those enterprises that belong to the declared target groups of the programme? Impacts beyond the immediate beneficiaries • Did the positive impacts of the grant project extend beyond the benefited enterprises and reach a wider range of stakeholders, such as their clients, subcontractors, coworkers, and the settlements in which these enterprises operate as well? Sustainability • Will the supported enterprises able to maintain the results of the programme after the closure of the financial support?
Specific questions to companies in the context of innovation • What are the characteristic features of the innovative activities in small enterprises? • How do companies interpretthe concepts of innovation, development, research, new technology, high technology, the quality, functionality, safety and environmental compatibility of products/services, etc.? • What is the attitude of the enterprises towards investment, company growth, the costs associated with research and development activities, the application of Information and Communication technologies, the employment of highly skilled persons, training and education within the company, etc.? • What are the entrepreneural attitudes towards innovation oriented subsidies?