Restructurig i SMEs: Estoia Click for cotets Wyattville Road, Loughlistow, Dubli 18, Irelad. - Tel: (+353 1) 24 31 - Fax: 282 42 9 / 282 64 56 email: iformatio@eurofoud.europa.eu - website: www.eurofoud.europa.eu
Cotets Itroductio Relevace of differet types of restructurig for SMEs Drivers of restructurig Distictive characteristics of restructurig i SMEs Mai challeges ad costraits facig SMEs i restructurig Busiess support from public ad private sources Outcome of restructurig evets Coclusios ad policy issues Bibliography 1 5 14 15 19 22 27 28 3
Itroductio Itroductio The restructurig of small ad medium-sized eterprises (SMEs) 1 as a topic for study has bee largely overlooked i recet years. All too ofte the focus has bee o large eterprises, igorig SMEs, which have ofte udertake silet restructurig processes (Voss, 27). I a small coutry such as Estoia, SMEs accout for a large proportio of eterprises, ad it is therefore importat to cosider the effects of restructurig o them. There is a large umber of SMEs i Estoia, accoutig for 99.7% of the coutry s o-fiacial busiess ecoomy (NACE Sectios C to I, ad K) (see Table 1). SMEs, however, are less importat i terms of their cotributio to providig jobs ad wealth: 79.2% of workforce are employed i a SME, while 73.2% of the o-fiacial busiess ecoomy s value-added was geerated by SMEs. Furthermore, while the umber of eterprises is comprised largely of micro eterprises (86.8%), the umber of people employed ad value added is more equally split betwee micro, small ad medium-sized eterprises. Table 1: Key idicators for Estoia eterprises SMEs Micro Small Medium Large Total 1 249 1 9 1 49 5 249 >25 Number of eterprises 56,95 55,932 48,692 6,54 1,186 163 Share i total (%) 1. 99.7 86.8 1.8 2.1.3 People employed 417,281 33,345 114,881 111,556 13,98 86,936 Share i total (%) 1. 79.2 27.5 26.7 24.9 2.8 Value added (EUR millios) 7,264.3 5,315.5 1,531.3 1,769.1 2,15. 1,948.9 Share i total (%) 1. 73.2 21.1 24.4 27.7 26.8 Source: Statistics Estoia The SME sector has ot always bee structured this way. Micro eterprises have dramatically icreased their importace i the share of total eterprises, from 66.6% of total compaies i 1994 to 81% by 24. At the same time, the shares of other SME groups have falle. Micro eterprises doubled their shares i total employmet from 1.7% i 1994 to 2.7% i 24 (Veesaar ad Loomets, 26). This might be attributed to the small size of the Estoia populatio beig reflected i the share of micro eterprises, to may people havig more tha oe compay (ofte iactive), ad to a icrease i etrepreeurship i geeral. Although etrepreeurship i Estoia has developed relatively quickly ad its competitiveess has improved sigificatly, the Estoia ecoomy cotiues to be domiated by eterprises that operate i traditioal (low techology) sectors ad whose productivity ad profitability per employee lag behid busiesses i the developed idustrial coutries (Miistry of Ecoomic Affairs ad Commuicatio, 211). This is also reflected by a low share of high-tech employmet ad exports, a very low busiess expediture o research ad developmet (busiess eterprise research ad developmet is a quarter of the EU25 average), ad a low share of researchers i the busiess sector (Spi, 21). 1 For the purposes of this report, the Europea Commissio defiitio of the SME sector will be used: micro eterprises (1 9 employees; turover or assets of up to 2 millio); small eterprises (1 49 employees, turover or assets of up to 1 millio); medium-sized eterprises (5 249 employees, turover of up to 5 millio or assets of up to 43 millio). SMEs also iclude selfemployed ad family busiesses, irrespective of their legal form, as log as they egage i ecoomic activity ad ca be cosidered as autoomous etities. Large eterprises (ot SMEs) are defied as 25 or more employees, with a turover of more tha 5 millio or assets of more tha 43 millio (Europea Commissio, 23). Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 1
Restructurig i SMEs: Estoia Sice 28, the global fiacial crisis has highlighted the eed for SMEs to restructure i order to survive. Ideed, Estoia was oe of the EU s worst hit coutries with GDP droppig by 5.1% i 28 ad 13.9% i 29 (SBA, 211). Cosequetly, may eterprises udertook widespread restructurig as a way of tryig to overcome the effects of the crisis. The importace of the SME sector as a whole i employmet shows itself most clearly i the research ad educatio sectors (see Figure 1). Sectors which are domiated by micro eterprises also iclude costructio, ad the wholesale ad retail trade sectors. I cotrast, the small eterprise sector comprises the water sector, accommodatio ad costructio sectors. Perhaps usurprisigly, it is the maufacturig ad eergy sectors which have the largest share of employees, i medium-sized eterprises. Figure 1: Share of Estoia SMEs i total employmet, 29 Professioal, scietific ad techical activity 61 27 12 Educatio 4 34 27 Costructio 37 35 21 7 Wholesale ad retail trade; repair of motor vehicles ad motorcycles 34 26 19 21 Accommodatio ad food service activities 27 38 25 1 Iformatio ad commuicatio 27 22 26 25 Trasportatio ad storage 23 24 25 28 Admiistrative ad support service activities 19 18 17 46 Water collectio, treatmet ad supply 11 4 24 25 Maufacturig 11 25 39 25 Electricity, gas, steam ad air coditioig supply 6 16 25 53 % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 1-9 1-49 5-249 25 ad more Source: Statistics Estoia Turig to value added, i Estoia the smaller eterprises accout for more of this i labour itesive sectors, such as research, educatio ad costructio sectors (see Figure 2). I terms of larger eterprises, the ICT, eergy ad water sectors are aturally the highest value added sectors. 2 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia Figure 2: Share of Estoia SMEs i total value added, 29 Real estate activities 79 18 Professioal, scietific ad techical activity 5 3 2 Educatio 33 36 31 Costructio 23 32 32 12 Accommodatio ad food service activities 2 37 3 13 Admiistrative ad support service activities 2 24 17 4 Iformatio ad commuicatio 12 13 19 55 Trasportatio ad storage 9 22 4 29 Maufacturig 7 21 42 3 Water collectio, treatmet ad supply 6 3 17 46 Electricity, gas, steam ad air coditioig supply 6 1 25 59 % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 1-9 1-49 5-249 25 ad more Source: Statistics Estoia A 211 atioal SME survey (Kaara et al., 212) cofirmed fidigs from other reports that SMEs trade their products over a short distace ad that SMEs from smaller coutries are more iteratioally active. It also foud that Filad is the mai export target market for SMEs (61%), followed by Latvia (31%), Swede (26%), Russia (16%) ad Germay (15%). The 211 survey also foud that Estoia compaies primarily eter foreig markets through direct cotact with cliets, 69% (Figure 3). This has ot chaged greatly sice 28. However, betwee 28 ad 211 there was a huge icrease i marketig (from 11% to 38%) ad idirect exports (from 6% to 2%). More established forms of iteratioalisatio, such as licesig ad frachisig, or direct ivestmets do ot feature. The reasos for this iclude a lack of exportrelated kowledge ad skills for potetial ad ew exporters. The fact that oe half of exporters are fulfillig ad hoc export orders is a source of cosiderable cocer. Oly every sixth compay has a export strategy or export pla ad export budget. Nearly a quarter of exporters claim that exports costitute a part of their geeral busiess strategy. Radom export orders are mostly take o by smaller compaies (Miistry of Ecoomic Affairs ad Commuicatio, 211). Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 3
Restructurig i SMEs: Estoia Figure 3: Methods by which SMEs etered foreig markets, 28 211 Direct cotact with customers 7 69 Aget or marketer i target market 11 38 Other 6 1 Idirect exports (with help from Estoia itermediary) 6 2 Sales represetative i target market Direct ivestmet to foreig productio uit 3 1 2 9 Licece, frachise 4 1 2 3 4 5 6 7 8 28 211 Percetage of exporters Source: Kaara et al., 212 SMEs are dyamic eterprises, yet their behaviour regardig restructurig is still ot well uderstood. This may be partly because of a lack of public discussio ad policy focus. This report aims to shed light o the fidigs of SME restructurig i Estoia ad the implicatios for the sector. It will iclude the fidigs of various reports, statistical data ad the Estoia surveys o SMEs 2 which provide i-depth iformatio o the dyamics ad characteristics of Estoia SMEs. 2 I 22, the Miistry of Ecoomic Affairs ad Commuicatios (MKM) ordered a large scale survey o Estoia SMEs (hereiafter referred to as the atioal SME survey) to be udertake (Emor, 23). Sice the repeat surveys have bee take i 25 (Saar Poll, 25), 28 (Saar Poll, 28) ad 211 (Kaara et al., 212). Although the surveys do ot have fully stadardised questios, may comparisos ca oetheless be made over time. 4 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Relevace of differet types of restructurig for SMEs Overview Eurofoud s Europea Restructurig Moitor (ERM) has idetified seve mai types of restructurig: relocatio; outsourcig; offshorig/delocalisatio; bakruptcy/closure; merger/acquisitio; iteral restructurig; busiess expasio. Each of these will be discussed i more detail. I Estoia, most of these categories apply, although detailed iformatio o some, such as relocatio ad offshorig, is otably abset. Relocatio Theoretically, SME relocatio is more likely to occur i micro eterprises where the ower/maager moves to a differet part of the coutry due to persoal circumstaces. Other possible reasos iclude movig closer to the capital city or a larger market, or due to busiess expasio. Relocatio is egatively related to eterprise size the larger the eterprise, the fewer proclivities there are to relocate. I Estoia, relocatio is ot a highly visible pheomeo for a umber of itercoected reasos. The relatively small size of the coutry abegates ay eed for relocatio. May Estoias are prepared to commute log distaces to work: 23% of all workers ad 48% of those livig i rural areas commuted i 2 (Hazas, 24). The widespread use of IT solutios i busiess helps overcome may geographical problems, with the icidece of distace workig i Estoia icreasig (Ariko Marketig, 22; Kallaste ad Jaakso, 29). The high share of sole proprietors (as ower-maagers) ad micro eterprises meas their work is usually ear home. Cosequetly, there is ot much itra-atioal movemet, ad i this respect, the treds do ot deviate from Europea orms. Evidece from the 211 atioal SME survey suggests that etrepreeurship activity i Harju Couty, where the capital city, Talli, is located, has chaged sice 25. At the start of the recessio, etrepreeurship (as measured by place of registratio) i large tows outside Talli became more proouced, 3 although by 211 registratios i Talli had rise agai (to 4%), ad decreased for the other tows (to approximately oe third). Despite this, there was a surprisig icrease i etrepreeurial activity i the south of the coutry, as well as a icrease i head offices located i villages, risig from 15% i 28 to 27% i 211. This shows that people are movig from cities to the villages, ad that ew 3 This fidig is iterestig i light of the fact that Talli accouted for over 5% of total Estoia GDP i 29 (Statistics Estoia). Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 5
Restructurig i SMEs: Estoia compaies prefer to locate their headquarters i quieter areas. I the case of small eterprises, particularly micro oes, the address of the head office is the etrepreeur s home address. As people ted to move from Talli to earby villages, their eterprises move with them. This could be take as a aecdotal idicatio of some relocatio takig place, although it is still ot clear to what extet this affects SMEs. Outsourcig Accordig to the EIM/GDCC survey (29), the umber of cotractors across all SMEs i Estoia remais very low, at less tha 3%. However, early 16% of Estoia SMEs are ivolved i subcotractig (see Figure 4). This compares favourably with the EU, where betwee 15% ad 21% of eterprises are subcotractors. I terms of size, small eterprises have the lowest share of subcotractors; 12.9%. Both micro eterprises ad medium-sized eterprises have a larger share (19.7% ad 14.7% respectively), although this could be due to greater flexibility i fulfillig orders (i the case of micro eterprises) ad greater capacity (i the case of medium-sized eterprises). This would seem to corroborate the fidigs of the atioal SME surveys, which foud that the level of exporters who are subcotractors has ot chaged greatly over time, risig slightly from 8% i 28 to 9% i 211 (Kaara et al., 212). The level of outsourcig is liked to the ever icreasig level of foreig direct ivestmet that Estoia attracts. Ideed, Estoia is the most attractive Europea coutry to outsource to, at eleveth place, accordig to the A.T. Kearey Global Services Locatio Idex (211). Figure 4: Percetage of Estoia SMEs as subcotractors or cotractors, by eterprise size, 29 25 Percetage of eterprises 2 15 1 5 19.7 15.8 14.7 12.9 13.3 11.8 1.9 7.1 2.6 2.9 2.7 2.7 Micro Small Medium Total Subcotractor Cotractor Both Notes: N=221 Source: EIM/GDCC Survey, 29 Take by sector, oly maufacturig, costructio ad busiess are cotractors, albeit at a very low level, 3.1% (see Figure 5). The largest share of subcotractors comes from the maufacturig sector, where over 18% of SMEs act as subcotractors. The service sector has the lowest share of subcotractors. However, these treds are to be expected give the ature of the idustries. 6 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia Figure 5: Percetage of Estoia SMEs as subcotractor, cotractor or both, by sector, 29 Maufacturig 3.1 18.5 18.5 Costructio 3.1 7.7 12.3 Busiess services 3.1 3.1 1.8 Retail trade 6.2 Persoal services 3.1 4.6 Trasport ad commuicatio 1.5 3.1 Wholesale trade 1.5 2 4 6 8 1 12 14 16 18 2 Subcotractor Cotractor Both Notes: N=65 Source: EIM/GDCC Survey, 29 Offshorig/delocalisatio Whilst offshorig might be the most prevalet form of relocatio for larger eterprises, due to the lure of lower labour costs, this is ot the case for Estoia SMEs. Ideed, very few eterprises have doe this. This may be because of the lack of fiacig available for udertakig offshorig activities, although there is some evidece that outward ivestmet has occurred (Masso et al., 27), the majority of these eterprises havig foreig equity shares. I these cases, it may be that such activity is ot strictly offshorig, but rather represets expasio via local markets or a itraorgaisatioal move or reorgaisatio. 4 Bakruptcy/closure Withi Estoia, the recet global fiacial crisis has highlighted the difficulties i successfully ruig a busiess durig times of adversity. Bakruptcies icreased sigificatly i the aftermath of the ecoomic dowtur, oly easig off i 211 to 243 cases (Figure 6). 5 Despite this, the umber of bakruptcies remais low i compariso to the total umber of eterprises, at oly 15.1 cases per 1, compaies i 211. Cases of isolvecy, although slightly higher tha bakruptcies, have followed the same treds, peakig durig 29 ad subsequetly fallig. I 21, 6,3 jobs were lost due to isolvecies, fallig to 1,5 i 211 (Creditreform, 211, 212). 4 5 For example, i 29 Coca-Cola HBC Estoia closed dow productio after 17 years with a loss of 63 jobs, statig it was movig bottlig productio to Ropaži, Latvia. See http://www.europe.eu/article/coca-cola-shifts-productio-estoia The total umber of eterprises also grew dramatically because of a demad to register all sole proprietors i the Cetral Commercial Register (Äriregister). Formerly it was eough just to register at the Tax Office. Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 7
Restructurig i SMEs: Estoia Figure 6: Estoia bakruptcies ad isolvecies, 27 211 8 6 7 49.6 5 Number of compaies 6 5 4 3 2 1 29.2 14.1 333 161 35.8 2.9 423 247 38.6 693 539 31.9 33.3 482 54 15.1 15.9 243 256 4 3 2 1 Per 1, compaies 27 28 29 21 211 Bakruptcies Isolvecies Bakruptcies per 1, compaies Isolvecies per 1, compaies Source: Author s calculatios based o Cetral Commercial Register, Creditreform The umber of busiesses closig has reflected the macroecoomic situatio, whereby there was a sigificat icrease at the start of the global fiacial crisis (Figure 7). Most busiesses which close are the most volatile, with either o, or betwee oe ad four employees. However, although 63.2% of compaies are still viable three years after registratio, this figure also idicates that more tha oe third of compaies are liquidated withi three years of their foudatio; i this respect Estoia is slightly above the EU average (SBA, 21). Figure 7: Number of busiess closures, 24 29 7, Number of busiess closures 6, 5, 4, 3, 2, 1, 24 25 26 27 28 29 employees 1-4 employees 5-9 employees 1 ad more employees Source: Statistics Estoia 8 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia Disaggregatig the data by sector, the umber of closures of eterprises with zero or betwee oe ad four employees was highest i the eergy sector, followed by several service sectors (Figure 8). Coversely, closures of eterprises with 1 or more employees were most prevalet i the maufacturig sector, health ad social work ad accommodatio ad food service sectors all sectors which traditioally employ the most people. The effect of the global fiacial crisis o busiess closures was see most clearly i a large share of small fiacial ad real estate eterprises which had cotributed to the bubble ad which were hardest hit by the dowtur. Figure 8: Busiess closures i Estoia by sector ad class size, 29 (%) Electricity, gas, steam ad air coditioig supply Fiacial ad isurace activities Real estate activities Iformatio ad commuicatio Professioal, scietific ad techical activities Admiistrative ad support service activities Arts, etertaimet ad recreatio Wholesale ad retail trade; repair of motor vehicles ad motorcycles Costructio Miig ad quarryig Maufacturig Educatio Water supply; sewerage, waste maagemet ad remediatio activities Source: Statistics Estoia Trasportatio ad storage Other service activities Huma health ad social work activities Accommodatio ad food service activities 1 2 3 4 5 6 7 8 9 1 employees 1-4 employees 5-9 employees 1 ad more employees Schrör (27) foud that i Estoia, i 23, larger eterprises (with 5 19 employees ad 2+ employees) that closed accouted for more tha 6% of people made jobless i all eterprise closures, much higher tha the EU average (aroud 37%). However, by 25, the share of other eterprise sizes i the umber of closures had icreased, idicatig a higher prevalece of micro eterprise failure (Schrör, 29). Although the level of busiess closures is coected to the geeral macroecoomic eviromet i which the eterprises operate, the attitude of the populatio towards etrepreeurship should also be take ito accout. The relatively low umber of failures could be due to the geeral risk aversio of Estoias. Negative attitudes to etrepreeurial activity are also prevalet. A Eurobarometer survey (Europea Commissio, 21) foud that, i Estoia, the percetage of respodets who felt that etrepreeurs who had failed should be give a secod chace fell from 82% i 27 to 69% i 29, oe of the largest drops i Europe. This figure compares ufavourably with the EU average of 81% for 29. Similarly, i 29, the percetage of respodets who felt that oe ought ot start a busiess if there was a risk of failure, was much higher tha the EU 25 average (63% versus 49%). This ca be traced to a cultural itolerace of failure. This attitude meas may Estoias reorgaise their eterprises rather tha face bakruptcy. This is possibly due to the Reorgaisatio Act, adopted i 28 to create a alterative to filig for bakruptcy that, as a rule, results i the liquidatio of isolvet compaies. The ew type of proceedigs eables compaies to survive if they have temporary solvecy problems. Compromises ca be also reached withi the scope of bakruptcy proceedigs, but realistically, uder these, compaies facig solvecy problems could oly rarely be saved (SBA, 29). Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 9
Restructurig i SMEs: Estoia Merger/acquisitio Weitzel ad McCarthy (29) fid that mergers ad acquisitios are positively related to eterprise size, ad, i SMEs, they are more ofte foud i services ad maufacturig, ad least ofte i trasportatio ad utilities. SMEs i Estoia have ot egaged i mergers ad acquisitios, with this kid of activity beig primarily a preserve of larger eterprises. SMEs have udertake etworkig istead, although there have bee quite a few cases of of high-tech start-up compaies beig acquired by private equity ad veture capital compaies. 6 Although o iformatio o mergers ad acquisitios i Estoia SMEs exists, UNCTAD has published geeral data o the umber of mergers ad acquisitios which has bee very low sice 2, at uder 3 (Figure 9). This level is coected to the relatively low activity of the stock exchage i Estoia, 7 which does ot cotribute to creatig a climate for mergers ad acquisitios. This might partly explai why the level of mergers ad acquisitios by purchaser is lower tha the level of this kid of activity by seller. Figure 9: Mergers ad acquisitios i Estoia ad the EU, 2 211 25 2 Number of deals 15 1 5 2 21 22 23 24 25 26 27 28 29 21 211 (Ja-May) Source: UNCTAD Estoia by seller Estoia by purchaser EU average by seller EU average by purchaser 6 7 The Estoia Veture Capital Associatio has stated that of 12 portfolio compaies, 18% have reached the buyout stage (as of September 211). See http://www.estvca.ee See, for example, http://www.balticbusiessews.com/article/212/1/16/talli-stock-exchage-goes-ito-hiberatio 1 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia Iteral restructurig Of all the differet types of restructurig, iteral restructurig is ofte the most uder-reported pheomeo, give that it is frequetly liked to secretive eterprise strategic plaig ad takes place out of the media spotlight. This is also particularly true of Estoia SMEs where it has bee oe of the most prevalet forms of restructurig (Nurmela ad Võrk, 21). I terms of employmet dowsizig, there has bee some job destructio i recet years, which may be attributed to the fiacial recessio. It is clear, though, that the loss of jobs has mostly bee cofied to medium ad large eterprises (Figure 1). Ideed, micro eterprises cotracted oly slightly compared with other class sizes. Oe explaatio for this is that, i times of dowtur, smaller eterprises ted to maitai employmet above a efficiet level as they have fewer opportuities to lay off persoel ad stroger persoal ties with their employees (Voss, 27). Figure 1: Growth rate of Estoia SMEs, 26 21 15 1 5 Growth rate (%) -5-1 26 27 28 29 21-15 -2-25 1-9 employees 1-49 employees 5-249 employees 25 ad more employees Source: Author s calculatios based o data from Statistics Estoia Oe factor that led to employmet restructurig i recet years has bee a chage i the law. Durig the recessio, a ew Employmet Cotracts Act took effect o 1 July 29. It made redudacy easier ad faster to effect by reducig the advace otice time to 3 days, reduced redudacy beefits ad divided the fiacial burde betwee employers ad the Uemploymet Isurace Fud (Eesti Töötukassa) (Nurmela ad Võrk, 21). Cosequetly, may eterprises took the opportuity to shed labour i a effort to reduce costs. I terms of busiess trasfers, it is possible to alter the legal form of a eterprise ad facilitate the trasfer process (Europea Commissio, 211). Furthermore, there is a favourable taxatio policy to provide icetives for reivestmet of profits made o the sale of a busiess to aother eterprise ot quoted o the stock exchage. Despite this, accordig to Eurobarometer surveys (Europea Commissio, 27a, Europea Commissio, 21), Estoias geerally prefer to start up a ew compay rather tha take over a existig oe. This is i lie with EU treds, although the level is much lower (Table 2). Whe takig ito accout the level of respodets who have some busiess experiece, the results are Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 11
Restructurig i SMEs: Estoia eve more proouced, droppig to 19% agaist 24% for the EU. The effects of the global fiacial crisis may be see i a geeral drop i etrepreeurial activity as the level i 27 was previously much higher tha i 29. Table 2: Percetage of respodets startig a busiess or takig over a existig oe, 27 29 Estoia EU Startig ew compay (%) Takig over existig compay (%) Startig ew compay (%) Takig over existig compay (%) All respodets 29 4 21 5 25 Respodets with some busiess experiece 29 54 19 61 24 All respodets 27 51 2 52 28 Respodets with some busiess experiece 27 61 23 59 27 All respodets 24 43 15 53 29 Source: Europea Commissio, 27a, 21 Evidece of eterprise owership chage i Estoia shows that the most predomiat chage occurs from employee (isider) owership to maager or domestic (outsider) owership (Rozeik, 28). This would also seem to cofirm aecdotal evidece that busiess trasfers are takig place. Furthermore, the atioal SME surveys foud that the share of maagers over 6 years old has decreased from 16% i 25, to 1% i 28 (Saar Poll, 28). Cosequetly, it may be surmised that the umber of busiess trasfers will ot grow i the foreseeable future. Busiess expasio SMEs have bee crucial i geeratig further employmet. The umber of jobs i the Estoia ecoomy is set to icrease after a few years of egative growth. The Bak of Estoia (211) predicted that employmet growth would recover, but that it would be short-lived due to the subdued growth i exteral demad ad icreasig isecurity. Yearo-year, domestic employmet growth is expected to decrease from 7.1% i 211 to 1.1% i 212 ad to.6% i 213. There have bee some cases of Estoia eterprises expadig ad creatig further jobs, although sice the global fiacial crisis this has become a less commo form of busiess expasio. This has bee cofied to the micro eterprise sector, which grew at 4% i 21 (Figure 1). I terms of iteratioalisatio, Estoia, as a small ope coutry, is draw towards becomig export-orieted due to the costraits of the domestic market. Cosequetly, the share of Estoia compaies which export rose from 7% i 1999 to 15% i 23 (Veesaar ad Loomets, 26). Accordig to the 22 atioal SME survey, oe i five SMEs were ivolved i sales, by sector this raged from 17% of very small firms, to 35% of small firms to 55% of medium-sized eterprises (Smallboe ad Veesaar, 26). The 211 atioal SME survey cocluded that SMEs ivolved i exportig had decreased sigificatly, from 32% i 25 to 3% i 28 ad 23% i 211 (Kaara et al., 212). Furthermore, i 211, 6% of eterprises did ot export at all, whilst 11% o loger export. These treds ca be explaied by the fact that, durig the ecoomic boom, eterprises did ot export because they were satisfied with their domestic market (Saar Poll, 28). However, as the ecoomic crisis was affected by exteral demad, the umber of exportig eterprises was evidetly affected (Kaara et al., 212). Other reports have also highlighted the large share of exports. Ideed, the Europea Commissio (27b, p. 14) reported that, i 25, 23% of compaies had some turover from exports, compared with 8% for the EU average. Furthermore, oly 3.7% of compaies gaied ay turover from subsidiaries or joit vetures abroad, lower tha the EU average of 4.8%. 12 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia These fidigs are echoed by the EIM/GDCC Survey (29) which foud that over half of all Estoia SMEs udertook direct exports durig 26 28 (Table 3). There, a positive relatioship betwee eterprise size ad exports was foud. This would seem to highlight the role of Estoia SMEs withi the global ecoomy ad value chai as beig somewhat limited, especially i light of the low share of subcotractig ad cotractig. Table 3: Percetage of Estoia SMEs ivolved i iteratioal busiess, 26-28 Micro Small Medium All SMEs Direct exports 51.3 57.1 6. 56.1 Ivestig abroad 9.2 1. 17.3 12.2 Techological cooperatio with eterprises abroad 25. 21.4 33.3 26.7 Source: EIM/GDCC Survey, 29 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 13
Drivers of restructurig There is very little evidece to idicate that the drivers for restructurig i Estoia differ greatly from other coutries. However, they seem to be liked to, ad predomiatly stem from, two mai sources: market fudametals ad govermet policy. Udoubtedly, a sigificat driver is the limited (that is, restrictive) scale ad scope of the domestic market. I may sectors there are a few eterprises which moopolise the market, crowdig out the smaller oes. Cosequetly, this has pushed may Estoia etrepreeurs to set up export-orieted eterprises from the start ( bor globals ), or focus more o export-orieted sales, which provides them with further market opportuities. This is of particular sigificace to policy-makig ad is see as vital to elimiate old depedecies ad stimulate ecoomic developmet (Smallboe ad Veesaar, 1998). Curret govermet policy, which specifically targets high-growth, export-orieted eterprises, has reiforced this tred by forcig may eterprises ito restructurig to adopt this profile, i order to beefit more from govermet support. (Miistry of Ecoomic Affairs ad Commuicatio, 211). I recet years oe of the mai causes for restructurig has bee the global fiacial crisis, which has caused compaies to seek ew ways to geerate further icome ad improve efficiecy. Small ope markets suffer the most durig times of ecoomic dowturs, ad Estoia has proved to be o exceptio. There is decreased demad i the domestic market, further pushig SMEs to iteratioalise as a way to maitai their sales levels. The mai reasos for compaies goig bakrupt, recorded by the courts, were chaged markets, maagemet problems, uprofitable operatios, a particular evet or the geeral ecoomic crisis (Lukaso, 21). Beyod this, Estoia eterprises have suffered from a lock-i to low value-added activities for may years (Miistry of Ecoomic Affairs ad Commuicatio, 211). The ecoomic structure does ot coform to that of a kowledge-based ecoomy, which is a goal of govermet policy. Idustry ad services are still heavily based o cheap labour, primarily through costructio, commerce ad hotel services, rather tha maufacturig, busiess services or fiacial itermediatio (Tiits, 27). Combied with icreasig global competitio ad a small domestic market, this has provided yet aother cause for SMEs to reoriet their busiess activities. This is aother reaso why the govermet has targeted raisig exports as a meas to circumvet this problem (Miistry of Ecoomic Affairs ad Commuicatio, 211). Estoia is facig a acute demographic chage, which will shape societal treds i the ear future (Lauristi, 211). The specific effects are the ageig populatio ad high levels of emigratio compared with other EU coutries. Although the ageig rate is ot as high as other EU coutries, it will still have a effect, amogst other thigs, o the busiess successios of SMEs. The high rate of emigratio, ad i particular a brai drai, is a more pressig issue. A cosequece of this demographic chage is that, aside from a decrease i potetial GDP, the labour supply will become scarcer for SMEs. This will, i tur, exacerbate the relative lack of skilled labour, as despite the high qualificatios of the Estoia workforce overall, the skills required by employers are typically i short supply. Cosequetly there has bee much iteral restructurig of huma capital i a effort to raise the stadard of skills (see also the above sectio o iteral restructurig). Fially, it should be oted that restructurig is mostly caused by the eed to overcome certai barriers. For example, may surveys poit to the iability to access to fiace as beig a major barrier to restructurig (see chapter o mai challeges). 14 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Distictive characteristics of restructurig i SMEs Aticipatio, plaig ad preparatio of restructurig evets Busiesses i Estoia operate primarily i the short-term, which results i SMEs geerally beig more reactive towards restructurig, rather tha proactive. For example, immediately after the ecoomic crisis started, compaies reduced jobs at a huge level, as a iitial reactio to the worseig macroecoomic situatio. Forward plaig plays some role i the skills upgradig of SME employees. The atioal SME survey asked whether traiig was eeded withi eterprises. The results showed that there is a positive relatioship betwee eterprise size ad desire to udertake traiig for maagers ad employees (Figure 11). However, it is apparet that employees are more i eed of traiig tha maagers. The differece betwee the eed for traiig maagers ad traiig employees is greatest i medium-sized eterprises (19% for maagers ad 38% for employees), ad less so i smaller eterprises. Figure 11: SMEs employee or maager traiig eeds i the ext 12 moths, by eterprise size (%), 211 5-249 38 43 14 1 4 Maagers Employees 1-49 1-9 5-249 1-49 1-9 2 2 13 19 14 14 16 27 22 4 3 25 41 31 28 23 4 31 2 6 1 12 23 36 13 7 11 16 17 1 16 24 24 25 2 4 6 8 1 Yes, defiitely Yes, probably Probably ot Defiitely ot Caot say Source: Kaara et al., 212 I terms of iteratioalisatio, Estoia SME exporters ofte fulfil sporadic radom export orders (Miistry of Ecoomic Affairs ad Commuicatio, 211), which is i lie with fidigs from other coutries (Jakobse ad de Voss, 23). Furthermore, accordig to the EIM/GDCC Survey (29), may SMEs which have ot previously udertake differet forms of iteratioal cooperatio plaed to do so. The highest percetage opted for makig direct exports, at over 81%, whilst the lowest was for techological cooperatio, at just uder 58% (Table 4). It is otable that ivestig abroad ad techological cooperatio is egatively correlated with eterprise size. Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 15
Restructurig i SMEs: Estoia Table 4: Estoia SMEs plaig iteratioal busiess activities, 29 211 Micro Small Medium All SMEs Direct exports 81.1 76.7 86.7 81.4 Ivestig abroad 78.9 77.1 56. 7.6 Techological cooperatio with eterprises abroad 61.8 61.4 5.7 57.9 Source: EIM/GDCC Survey, 29 The 211 atioal SME survey asked eterprises about the sources of extra fiacig they would seek durig the ext two years (Kaara et al., 212). Roughly oe third of respodets said they plaed o takig extra fiacig. Oe half did ot pla o doig so. A quarter did ot say aythig about their plas. 42% hoped to receive state support. Geerally, there is a higher share of medium-sized eterprises i the maufacturig sector, which is accustomed to receivig such support. Just over oe third of eterprises hoped to secure leasig or a bak loa (37% ad 39% respectively). This is cosidered more for small ad medium-sized eterprises which operate primarily i sectors such as costructio, wholesale trade ad trasportatio ad storage. Eterprises pla to expad their busiess with the help of domestic ivestors (39%) ad foreig ivestors (31%). I terms of strategic plaig, Estoia eterprises rely o fiacial rather tha market factors such as size, demad, products. Ecoomic idicators ad opportuities are the most cited reasos for chagig strategic plas, ad future market factors have a smaller effect. This shows that realistic opportuities are more importat to busiesses tha visio ad techological treds. Thus, whe plaig, past idicators are take ito accout; a reactive process. However, it is ot possible to say whether this is the eterprise s reactio to the ecoomic crisis or whether it is a loger tred which characterises Estoia eterprises i geeral. Most plas are very short-term (oes for more tha three years are very rare). Ideed, i may fields plas are otably abset: iteratioalisatio ad export plas are missig i half of the eterprises, with o labour ad marketig plas i more tha oe-fifth of the eterprises (Vadi et al., 211). Maagig restructurig Labour restructurig is a log process, ivolvig may actors (Nurmela ad Võrk, 21). Smaller eterprises are less ecumbered by legal commitmets to their employees ad ca therefore respod much quicker to chagig coditios. SME iteratioalisatio is usually a staggered ad sequetial process, takig may years (Jakobse ad de Voss, 23). SMEs ofte first udertake sporadic exports, the export via idepedet represetatives, the establish their ow sales subsidiaries abroad, followed by productio facilities abroad. The fidigs from the atioal SME surveys ad other reports would seem to suggest that Estoia is i the iitial stages of SME iteratioalisatio developmet. Actors ivolved Advice for SME restructurig comes from self-sought sources. May compaies do ot hire a cosultat, partly because they lack the ecessary capital. Ideed, the atioal SME surveys foud that the majority of eterprises do ot use 16 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia busiess cosultatio, fallig from 39% i 22 to 28% i 211 (Figure 12). Perhaps usurprisigly, there is a positive relatioship betwee the use of busiess cosultatio ad eterprise size, from 23% for eterprises with zero employees to 51% for medium-sized eterprises (Kaara et al., 212). The fields that have most used cosultatio are trasport ad commuicatio, costructio ad maufacturig. However, the eed for cosultatio is higher tha actual use, icreasig betwee 25 ad 28 (27% ad 33% respectively). The most popular cosultatio fields are accoutig, sales ad marketig, ad legal advice. I 211 the eed for cosultatio rose across all fields sice 28, idicatig possible effects from the global recessio. I terms of eterprise size, a positive relatioship is also foud betwee the eed for cosultatio ad SMEs (Saar Poll, 28). Although Estoia busiesses are prepared to use cosultatio services, actual use is still ifrequet because etrepreeurs are ot used to cosultats ad have had o experiece with them (Ariko Marketig, 25). Figure 12: Cosultatio i Estoia SMEs (percetage of respodets), 22 211 Has your compay used cosultatio or advice durig the past 12 moths? 211 28 25 22 28 3 33 39 7 69 65 6 2 1 2 1 Does your compay eed advice or cosultatio? 211 28 25 22 27 33 33 61 52 66 61 18 11 15 6 6 % 2% 4% 6% 8% 1% Yes No Do ot kow Source: Emor, 23; Saar Poll, 28; Kaara et al., 212 Top maagers are usually i charge of plaig. If it is middle maagers who have this resposibility the other parties also ted to become ivolved, such as top maagers, specialists, low-level workers, ad cosultats. If owers are i charge the middle maagers are ot usually ivolved. I smaller eterprises plaig has a more modest role tha i large eterprises ad usually the owers play a big role i plaig. It is commo for the owers participatio i plaig to be doe i isolatio from the maagers. I eterprises where owers make decisios, they do it aoymously without ivolvig ay other parties (Vadi et al., 211). Trade uios ad workers coucils do ot play a big role i SME restructurig give their decliig share of membership, especially i smaller compaies (Eurofoud, 211). The mai sources of advice are from uofficial sources such as frieds ad family (33%). Surprisigly, idustry associatios, the Chamber of Commerce ad Idustry, ad baks are all less approached for advice. Reasos for this iclude: they are too expesive; they prefer to represet larger compaies rather tha SMEs; Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 17
Restructurig i SMEs: Estoia their membership is very small ad hece they are weak; they have relatively few resources, ad little ability to give soud advice. Over the years there has bee a large chage i the use of cosultatio services by private compaies, risig from 5% i 25 to 64% i 28, before fallig to 44% i 211. Figure 13: Mai sources of cosultatio i SMEs, 25 211 Exteral cooperatio parters 3 45 51 Private cosultatio compay 44 5 64 Frieds or family members 11 19 33 Other eterprise orgaisatios 8 11 25 Couty developmet cetres 7 8 15 Baks 14 12 16 Somewhere else 7 7 1 Chamber of Commerce ad Idustry 7 5 1 Idustry associatios 6 5 11 1 2 3 4 5 6 7 211 28 25 Percetage of respodets Source: Saar Poll, 25, 28; Kaara et al., 212. 18 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Mai challeges ad costraits facig SMEs i restructurig A Eurobarometer report (Europea Commissio, 21) foud that etrepreeurs i Estoia raked amogst the lowest i Europe i agreemet to the questio, If I see somethig I do ot like, I chage it. This would seem to suggest that Estoias are somewhat averse to chage. I Estoia, the atioal SME surveys have cotiually foud that the most predomiat costraits have bee coected to the exteral, or macroecoomic, eviromet. The mai barriers are: a high tax burde; the eed to deal with a lot of legislatio ad bureaucracy; customers ot payig bills; shortage of employees ad their low competece (Table 5). Each of these factors were idetified by at least 23% of respodets. Furthermore, there has bee a icrease i the perceptio of barriers, although his could be partly attributed to the effects of the recessio. Eve the perceptio of barriers which should be relatively uaffected by the recessio, such as admiistratio, icreased. The largest icrease i the barriers durig the recessio has bee i the ability to access loas, ad taxatio, although this is to be expected. Oly crime levels, product developmet, techology trasfer ad quality of products have cotiuously improved sice 22. Take by eterprise size, i 28, the high tax burde was less problematic for larger eterprises. This is due to the fact that they have a greater share of qualified labour. Customers ot payig the bill was more of a problem less for small eterprises. This ca be attributed to the ecoomic crisis, which brought about reduced liquidity, costraiig the potetial for further restructurig. The shortage of employees ad their lack of skill was mostly a problem for mediumsized eterprises. 8 Self-employed ad micro eterprises do ot see this as a very big problem as they rely o their owers persoal qualificatios. Access to loas is a bigger problem for smaller eterprises. The percetage of compaies for whom access to capital is the biggest obstacle to developmet dropped from 34% (22) to 21% (25), but icreased agai to 25% by 28 (Kaara et al., 212). These problems have cotributed to the relatively iactive etrepreeurial midset i Estoia (Miistry of Ecoomic Affairs ad Commuicatio, 211). 8 Aother survey (Europea Commissio, 27b) reported that i Estoia, i 26, fidig appropriate co-workers for vacat positios was a sigificat challege 12% of job opeigs remaied vacat, compared to 5% for the EU. Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 19
Restructurig i SMEs: Estoia Table 5: Selected barriers to Estoia SME developmet (%), 22 211 Barrier 22 25 28 211 High taxatio 36 47 46 56 Marketig product/services 42 3 34 43 Delayed ad missig paymets - 41 43 39 Burdesome legislatio ad bureaucracy - 42 44 38 Access to loas 34 21 25 34 Lack of skilled labour - - 41 27 Uskilled labour 26 23 33 24 Low productivity compared to salary raise - - 4 17 Product developmet ad techology trasfer 17 15 13 11 Poor quality of products 18 13 13 11 Poor ifrastructure 12 12 14 1 Laguage-culture related problems - - 1 9 Poor workig eviromet 15 12 13 - Note: Not all barriers were metioed i all years (-). Numbers i red idicate the top 5 barriers for each year Source: Emor, 23; Saar Poll, 25, 28; Kaara et al., 212 Two sigificat ad itercoected issues affect the procedures for busiess closures. Firstly, the time ecessary to close a eterprise (three years) is much loger tha the EU average of two years (SBA, 21). This is caused by the iadequate procedures for debt recovery uder the Debt Restructurig ad Debt Protectio Act of November 21, as well as a lack of sufficiet expertise by judges ad short supply of liquidators. Therefore, it could be surmised that the high level of bakruptcies i 29 ad 21 could be attributed to earlier troubles. Secodly, it is extremely expesive to brig about a bakruptcy aroud 5% of the residual value of a eterprise is spet i formal debt recovery procedures, compared with less tha 1% i the best performig OECD coutries (OECD, 211). It could also mea that the umber of reported bakruptcy cases is much lower tha the actual umber of failig eterprises, give their reluctace to udertake debt recovery procedures. I terms of iteratioalisatio, the EIM/GDCC Survey (29) foud that, i Estoia, the greatest barrier is price of products, followed by their quality (Figure 14). It is clear that these barriers to iteratioalisatio do ot decrease with eterprise size. There is a positive relatioship betwee compay size ad copig with laguage barriers, ad a lack of sufficietly qualified persoel. Oe cause for this is that a larger compay size idicates icreased bureaucracy. Estoia compaies are very quick to react to ay chages. It is easier to fid qualified labour i smaller compaies as their skills are ofte more aliged to the work tasks, while large compaies employ more geerically skilled workers. 2 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia Figure 14: Importace of iteral barriers for SME iteratioalisatio, average score from 1 (uimportat) to 5 (very importat), 29 Price of our products ad/or services 3.5 3.4 3.8 3.6 Quality of our products ad/or services Specificatios of our products ad/or services 3.2 3.1 3.3 3 3.3 3.2 3.2 3.7 High cost of the iteratioalisatio process Lack of sufficietly qualified persoel Other barriers related to the eterprise Copig with laguage barriers 3 2.8 3. 2.7 2.9 3. 2.8 2.4 2.8 2.6 2.6 2.3 2.7 2.8 2.6 3.4..5 1. 1.5 2. 2.5 3. 3.5 4. 4.5 5. Micro Small Medium SME Notes: N=221 Source: EIM/GDCC Survey, 29 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 21
Busiess support from public ad private sources Supply There are some policy support measures for SMEs, although they are ot explicitly targeted ad are therefore somewhat piecemeal. The key orgaisatios ivolved here iclude MKM which makes policy, ad the public agecies Eterprise Estoia (EAS) ad the Credit ad Export Guaratee Fud (KredEx) which implemet policy support programmes. MKM rus a geeral atioal strategy for the support of etrepreeurship ad the kowledge based ecoomy, Eterprise Policy 27 213 (Figure 15). 9 At the same time, there is a actio pla for supportig the developmet of exports ad foreig ivestmets Estoia Foreig Ivestmet ad Export Actio Pla 29 211, Made i Estoia (Miistry of Ecoomic Affairs ad Commuicatio, 29). A iovatio policy documet ( Kowledge-based Estoia II ) outlies the key targets (Miistry of Educatio ad Research, 27). Access to fiace, a importat issue for micro eterprises, is ot particularly well covered, although KredEx offers several loa ad guaratee istrumets for export-orieted eterprises with high growth potetial. 1 Figure 15: Liks betwee eterprise policy ad other atioal strategies ad developmet plas Estoia Natioal Budget Strategy 211 214 Natioal Strategy Referece Framework 27 213 Estoia Actio Pla for Ecoomic Growth ad Jobs Estoia Rural Developmet Pla 27 213 Eterprise Policy 27 213 Kowledge-based Estoia II Estoia Natioal Developmet Pla for Tourism 27 213 Eterprise Policy 27 213 Implemetatio Pla Made i Estoia: Estoia Foreig Ivestmet ad Export Actio Pla 29 211 Source: Miistry of Ecoomic Affairs ad Commuicatio, 211 9 I 22 MKM implemeted a policy desiged specifically for SMEs (Eterprisig Estoia: Natioal Policy for the Developmet of Small ad Medium-sized Eterprises i Estoia i 21 26), although this was ot reewed i subsequet years, beig replaced istead by the more geeral Eterprise Policy 27 213. 1 See http://www.kredex.ee 22 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213
Restructurig i SMEs: Estoia EAS, as the policy implemetig body, has log had objectives to promote etrepreeurship, to create ew jobs ad to ehace the competitiveess of Estoia eterprises. It does so through a umber of support programmes, such as the: start-up ad developmet grat; product developmet grat; competece cetre grat; iovatio voucher grat; export marketig grat. I 21 211, EAS orgaised four cotests for projects aimed at busiess developmet, raisig busiess awareess ad creatig positive attitudes towards etrepreeurship (SBA, 21). Nearly all of the EAS grats are cofiaced by various Europea developmet fuds. Ideed, Estoia etrepreeurial policy is based o the distributio of supports from the Europea Uio, but the state does ot ivest moey i eterprises from its ow reveues. I 21 moey from the Europea Uio costituted 9% of eterprise supports (Natioal Audit Office of Estoia, 21). The recet recessio did ot really chage the policy stace towards SMEs, although it did itroduce some extra busiess support measures. The mai problem was access to fudig ad thus the state support package focused o measures aimed at facilitatig this. The measures were targeted at exporters, as promotig exports is cosidered crucial for Estoia's ecoomic survival. The limits for export guaratees ad busiess loa guaratees i the support package were icreased by approximately 128 millio ad 45 millio respectively. Three ew measures were itroduced: a subordiated loa with iterest depedig o the success of the eterprise; a credit lie; a project-based loa facility for baks (Miistry of Ecoomic Affairs ad Commuicatios, 211). However, the extet to which these support measures beefit SMEs, especially smaller oes, is debateable give the theoretical icrease i competitio this creates. Furthermore, the support package developed durig the crisis was targeted at eterprises which were already exportig ad had cosiderable growth potetial, thus excludig the smaller domestic orieted eterprises. I August 29, EAS itroduced a measure specifically targeted at micro ad small eterprises: support for traiig i micro ad small compaies. The aim was to icrease their competitiveess by eablig better access to traiig services. The support covered job-related traiig expeses to a maximum of EEK 15, (about 959) per compay. Although this measure proved successful, it eded i August 21. Major problems with these support policies iclude their: relative lack of ex-post aalyses; descriptio of ratioale; idepedet exteral evaluatio; trasparecy. Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 213 23