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This book seeks to analyze how small and medium businesses react to the economic and financial crisis. Its focus is on the activities and strategies of SMEs in the areas of innovation, R&D investment, labor markets and finance. The book takes an international perspective and includes both comparative and national analyses and policies, with authors representing acdemia and international institutions such as the ECB, OECD, Kauffman Foundation, Federal Reserve, and US Small Business Administration.



SME and Entrepreneurship Policies After the Crisis

The 2008–2009 financial and economic crisis was the most severe in decades and its costs have been enormous. GDP contracted by about 3.5% in the OECD area as a whole in 2009 and unemployment reached a post-war high of close to 9% on average (OECD 2010a). The longer-term legacy of the crisis is also heavy. Public debt in OECD countries increased to about 100% of GDP at the end of 2011, some 30% points higher than before the crisis. OECD countries may have lost about 3% of potential output. The recovery that seemed to be underway in many OECD countries in 2010 has proved uneven. In several OECD economies, earlier improvements in the labour market have been fading in the course of 2011, and there appear to be greater risks that high unemployment could become entrenched. Economic growth slowed down also in non-OECD countries, including China, where manufacturing production weakened in the first half of 2011. In 2012, world GDP is projected to increase by 3.4%, whereas across OECD countries GDP is projected to rise by 1.6% (OECD 2011a).
Sergio Arzeni, Lucia Cusmano, Jonathan Potter

OECD Countries’ Policy Approach to the SME Crisis in the Recent Recession

Small and medium sized enterprises (SMEs) are a driving force for growth in any advanced OECD economy, yet a weak component in times of economic slowdown. In the period between 2002 and 2007, SMEs were the most dynamic sector of the EU economy.
Salvatore Zecchini

Industrial Policy for SMEs Renewal: The Opportunity of Service Platforms

This work considers the application of a platform strategy in order to promote the adoption of advanced network infrastructures by Small and Medium Enterprises (SMEs). First, we analyse the incentives of industrial players in a context where SMEs playing an important economic role and where traditional rather than high-tech sectors of activity are predominant – with specific reference to the Italian case. Second, we review the contributions of the economic and managerial literature on platforms or two-sided markets. We leverage this by proposing a policy application of the platform concept, showing its potential benefits in allowing the manufacturing sector to gain from access to the service economy. We classify platforms according to their function and identify those types which can serve the purpose of industrial promotion. This leads us to review governance aspects which are paramount to platform functioning given the policy context.
Bruno Basalisco, Guido M. Rey

Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation

Although understandable in light of its traumatic impact, the Great Recession of 2007–2009 may be distracting attention from a more fundamental troubling economic trend. The United States appears to be suffering from a long-term leak in job creation that pre-dates the 2007–2009 recession and has the potential to persist for an unknown time. The heart of the problem is a pullback by newly created businesses, the economy’s most critical source of job creation, which are generating substantially fewer jobs than one would expect based on past experience.
In other recent research, the Ewing Marion Kauffman Foundation pointed to downward trends in job creation economy wide (see Haltiwanger J, Jarmin R, Miranda J (2011) Historically large decline in job creation from startup and existing firms in the 2008–2009 recession. Kauffman Foundation). In this report, part of the Kauffman Foundation Research Series on Firm Formation and Economic Growth, we flesh out these findings by examining job creation in young businesses over an extended period.
E. J. Reedy, Robert J. Strom

The Italian Small- and Medium-Sized Firms in the Aftermath of the Crisis

The outbreak of the recent crisis that began at the end of the last decade eventually uncovered the problems that almost all Western economies had been able to camouflage thanks to economic growth fueled by an unprecedented expansion in the financial industry. Within this context the Italian economy is a special case: its annual growth rate has been lower than that of its traditional partners and competitors for the last 15 years. Even the most optimistic forecasts for the next several years do not indicate significant improvements in the Italian competitive position. The success it enjoyed following its participation in the European Monetary Union brought to the fore the structural backwardness of the Italian economy, which is the main reason behind its low growth rates. The complexity and costs investors face when starting a business, the complexity and inefficiency of the fiscal, credit, and the legal systems, the difficulties associated with investor protection are only some of the obstacles that entrepreneurs face at the time of investing in Italy. More recently, we need to add a new weakness, that – until a few years ago – was considered a key factor in its success, i.e., the size of Italian firms.
Giorgio Calcagnini, Ilario Favaretto

Product Innovation and Corporate Governance in Turbulent Times: Evidence from Italian SMEs

The paper uses longitudinal data from a sample of 142 Italian family firms to examine how a firm’s decisions of strategic relevance – like the introduction of a new product and the founder succession – are affected by short-term external factors and firm-specific factors. The empirical analysis exploits the advantages of a conditional risk set duration model, which allows taking into account the multiple ordered occurrences of similar failures (multiple product introductions and successions) during the company life.
Econometric evidence shows that both product introduction and succession are delayed by a recession and that the probability for these events to occur increases as the negative effect of downturns tend to vanish, but at different rates.
Marco Cucculelli

The Internationalization of Italian SME After the Crisis: New Opportunities or New Threats?

The aim of the work is to investigate processes of internationalization followed by Italian firms, as a path of sustainable growth after the recent economic and financial crisis. However, the facets of such a process are numerous, complex and often closely related: delocalization, fragmentation of the productive process, technology and innovation transfers and globalization of production chains, are just some of the most significant aspects. Production delocalization is one of the most frequent answers to the growing pressures of globalization: if many micro-enterprises have been blown away by the crisis, for many others the process of qualitative upgrading of products, as well as the strategic one, are proceeding. The most dynamic growth of outgoing productive investments has to be ascribed to companies of medium size, so confirming the relationship between size and complex organization of activities. As far as internationalization and innovation are concerned, empirical evidence for Italy highlights that modes of being present in international markets makes a difference: firms resorting to cooperation agreements, are able to generate more innovation compared to their colleagues localized in national markets and this is due in part to massive knowledge input, but also to greater access to external ideas. The right investment mix in innovation, organizational and technological improvements, as well as the participation to a network and an active role in the global value chain, are essential because the strategy of internationalization becomes an opportunity and not a threat.
Rosalba Rombaldoni

The Great Recession of 2008–2009, Conventional and Non-conventional U.S. Federal Government Responses and Their Impact on U.S. Small Businesses

This paper provides a general background on the events that lead to the financial crisis and Great Recession of 2008–2009 in the United States. A strong argument can be made that the origins of the crisis can be traced to a fundamental imbalance between house prices and personal income. This imbalance resulted in a pronounced drop of inter-bank confidence, leading to a dramatic rise in the relative cost of capital for financial institutions, and a sharp reduction in lending. As a result, the economy experienced a pronounced recession, hitting small businesses particularly hard.
The U.S. federal government responded with enormous conventional and non-conventional measures to assist the financial markets and stimulate the economy. In addition, the federal government undertook numerous actions to address the sharp drop in the small business sector by providing additional incentives to (1) stimulate small business lending and (2) fortify small businesses’ balance sheets. The U.S. Small Business Administration (SBA) played a critical role in increasing access to capital for small businesses.
The SBA’s Capital Access Programs experienced an approximate 60% decline in its lending volume. The SBA addressed this challenge by providing additional incentives to financial institutions and by assisting in the unfreezing of the secondary market for SBA loans.
Giuseppe Gramigna

Access to Finance in the Euro Area: What Are SMEs Telling Us About the Crisis?

Access to finance is widely perceived to be a crucial factor for firms – especially SMEs – to maintain their day-to-day business as well as to achieve long term growth and investment goals. Hence, experiencing major financing obstacles can be a considerable challenge for enterprises, which in turn can increase credit risks in the corporate sector and also negatively affect productivity in the economy. This seems to be of even more relevance today when, during the current financial crisis, sources of firm financing have become scarcer and the availability of financing instruments has deteriorated.
Annalisa Ferrando

Examining the Impact of Credit Access on Small Firm Survivability

This paper examines the effects of credit availability on small firm survivability over the period 2004–2008 for non-publicly traded small enterprises. Using data from the 2003 Survey of Small Business Finances, we develop failure prediction models for a sample of small firms that were confirmed to have been in business as of December 2003, with particular attention to the impact of credit constraints. We find that credit constrained firms were significantly more likely to go out of business than non constrained firms. Moreover, credit constraint and credit access variables appear to be among the most important factors predicting which small U.S. firms went out of business during 2004–2008 even though an extensive set of firm, owner, and market characteristics were also included as explanatory factors.
Traci L. Mach, John D. Wolken

Internal Capital Market and Investment Decisions in Small and Medium-Sized Groups

The main hypothesis of this paper is that firms belonging to business groups are expected to be less financially constrained in their investment policies because they can rely on the transfer of resources from other affiliated companies. This is specifically relevant for small firms and in the presence of external real and financial shocks. The presence of an internal capital market in small and medium-sized groups is tested by comparing the cash flow-investment sensitivity between affiliated and non-affiliated companies. This hypothesis has already been empirically tested. However, up to now empirical studies have referred to large groups in emerging economies. Overall the results confirm the main hypothesis. To the extent that cash flow-investment sensitivity is interpreted as the presence of financial constraints, the results of the paper show that belonging to a business group reduces the financing constraints when raising funds to finance investment.
Donato Iacobucci

Guarantees and Bank Loan Interest Rates in Italian Small-Sized Firms

The paper analyzes the role of guarantees on interest rates before and during the recent financial crisis in small-sized firm financing. The novelty of this work is the distinction between real and personal guarantees, and the potential different role they could have played in the bank-borrower relationship during the recent financial crisis.
This paper draws from individual Italian bank and producer households data taken from the Central Credit Register at the Bank of Italy over the period 2006–2009.
Our analysis demonstrates that collateral affects the cost of credit of small business by systematically reducing the spread of secured loans, once we control for borrower and loan risk. Personal guarantees reduce the loan interest rate only during the crisis.
Giorgio Calcagnini, Fabio Farabullini, Germana Giombini
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