Introduction

This paper reviews the definitions of Micro and Small Enterprises (MSEs) across the European Union, USA, and Russia and the role of MSEs in mature market economies. It then compares them with MSEs in the Russian Federation. This review also focuses on the value creation mechanisms for growth and the challenges faced by MSEs. It recognizes both the roles and the issues faced by MSEs and the importance for legislative bodies to recognize them at the legislative policy levels.

While this paper concludes a study of MSEs in the EU, US, and in Russia, the findings substantiate our beliefs and perspectives within the SBDC about the impact and challenges faced by high-growth technology based businesses in the US, specifically as they relate to the legislator's perspective of the small business.

Key Findings

While macro level legislative policy measures are necessary conditions for reform, they are not sufficient to spur economic growth. They must also be complemented and supported by parallel efforts focused on educating the population at the micro level about the new economic system, and on generating a free flow of information in order to build up enterprises and economic development.

When considering Micro & Small Enterprises, particularly the high-growth technology based MSEs, there are a number of common challenges to be kept forefront.

From a funding perspective, the key risk factors of high-growth MSEs are that:

• The business value is linked to longer-term growth potential derived from scientific research, personal experience, and intellectual property.
• During their startup phase, they have few tangible assets to be used as collateral.
• There is no track record for their type of products or services, and they are being deployed in untested markets and have a very short product life cycle.

Potential investors may face difficulties assessing:

• The viability of the new technology
• Uncertainties and risks over the likely costs of R&D
• Estimating prospective demand for a new product or service
• Strength of the management team

Additional financing issues of high-growth SMEs also arise:

• Lack of collateral and lack of market presence generally makes equity finance more appropriate than debt.
• Investors preferring later-stage over early-stage investments.
• Substantially high fixed costs, such as underwriting and advisory fees, make it impractical for SMEs to raise small amounts of public equity capital through IPO's and stock offerings.
• Their lack of size and trading record generally exclude them from the listing on public stock exchanges.
• Management and growth become critical during all the stages of the life cycle of these firms.

There are three main types of risk that technology-based SMEs have to overcome:

1. Where the product is subject to high front-end development costs, e.g. the biotechnology industry
2. Where market entry and product development occur over an extended period of time and involve large R&D expenditure, complex regulatory compliance, and approvals, e.g. medical/life sciences
3. Where front-end development costs are lower but are offset by short lead times from product to market launch, e.g. the computer and IT industries

Value Creation Mechanisms:

• Technology-based SMEs are heavily dependent on internal funds (including the owner's) at the startup phase.
• Early-stage costs are generally higher for technology-based SMEs because of the more complex product development process.
• The financing requirement at the start-up and early-growth stages is mainly for equity risk capital. Due to the higher risks and longer product development times second and third round funding may be required before break-even and subsequent profitability is established.
• As they grow, technology-based SMEs financing needs tend to become more similar to other SMEs, and bank debt takes on a bigger role as a source of external finance.
• The rate at which they progress will depend not only on its access to adequate financing but also such inter-related factors as the type of product, the type of market, the firm's planned growth objectives, and the ability of the firm's management.

The short story is that the technology-based SMEs generate additional risks compared with the traditional SME.

Barriers to investments in high-tech firms include:

• The difficulties, time, and cost of evaluating the commercial potential of the technology owned by the firm.
• The problems of attracting finance in advance of profitability, especially given the typically long “time-to-market”.
• The short product life cycles in other related high-tech sectors.
• The perceived poor risk-reward track record of investments in high-tech start-ups.

To be successful, high-growth SMEs would need to overcome these challenges:

• Economic business environment
• Technical risks of introducing new technologies
• Costly investment in R&D activities and long time to market
• Wide scope of potential markets and competing markets
• Missing the mark due to technology and market mismatch.

To meet these challenges, the firm will also depend on the management team's ability to:

• Manage growth effectively
• Manage and acquire scarce resources including people, facilities, equipment, materials, and cash flow
• Implement systematic organizational learning
• Successfully obtain staged funding
• Manage and leverage inter-organizational relationships
• Achieve product endorsements
• Increase the firm's valuation for an IPO exit

Roles of the MSE in the community:

• To add value – wealth creation through increased production and improved quality
• To provide higher quality jobs with better pay and longevity
• To produce affordable goods and services that are appealing to a broad base of customers
• To improve the life skills of the employees and provide a cohesive community

Conclusion

The paper concludes by stressing the importance of developing the Micro and Small Enterprises sector, including high-tech MSEs, as critical in transforming economies in transition such as in Russia, from a centrally planned economy (the communist perspective) into “market based” economies. This involves fundamental social change as well as economic restructuring, in which MSEs can have a major role. Presumably, the role of MSEs, particularly the high-technology MSEs, can also have a profound effect on small local economies.

The potential role of MSEs includes: generating employment; contributing to the development of a diversified economic structure (including their roles as suppliers to larger companies); and, in some cases, as a source of innovative activity that drives changes in the market.

Micro and Small Enterprise development in transition economies, and in small local economies, can also contribute to the process of privatization and the reduction of poverty. This may involve bringing privatized assets into productive use which would otherwise lie dormant.

While macro-economic legislative policy and micro-level performance is a desired goal in both transition economies and in small local economies, mature market economies like the UK and the EU generally would need to align their micro and SME definitions in order to stimulate the growth they are seeking.

Link to full study