MittelstandsMonitor 2006: Economic Upswing Accompanied by Sustained Pressure

Since summer 2005 small and medium-sized enterprises (SMEs) have increasingly benefitted from economic recovery and thus ended the past year in good spirits as in the boom year of 2000. 2006 also promises to be a good year for mid-tier firms.

These are the central findings of the Mittelstandsmonitor 2006 presented today in Frankfurt by KfW Bankengruppe, the information service provider Creditreform and the research institutes IfM Bonn, RWI Essen and ZEW Mannheim. The joint annual report on economic and structural issues of mid-tier firms addresses "SME business climate" and "Start-up and liquidation activity". This year’s MittelstandMonitor focuses on the topics "SMEs and professional qualification" and "Financing SMEs in the light of the financial market change".

The MittelstandsMonitor combines exclusive, complementing data sets of Creditreform, IfM Bonn, KfW Bankengruppe, RWI Essen and ZEW Mannheim into an extensive, empirical data base. The joint publication aims at providing public with comprehensive information on the current situation and prospects of the mid-tier business sector. Here is an overview of the main results of the MittelstandsMonitor 2006:

Economic situation of small and medium-sized enterprises

Despite the dragging start, the economic situation of SMEs has improved constantly since last summer. In the final quarter of 2005, mid-tier firms enjoyed the best business climate in five years. They almost caught up economically with large-scale enterprises. Last year’s upswing did not only accelerate but also broadened its foundation: Order situation and business climate improved in both Eastern and Western Germany. Principal beneficiaries were the three main sectors of manufacturing industry, wholesale trade and service providers. The retail sector and construction industry, which have a strong domestic focus, further dwell on the downside of the economy but have gained momentum, as well. Another economic upturn for mid-tier firms is expected in 2006. The economic policy decisions made by the Federal Government may partly contribute to this development.

The research institutes participating in the MittelstandsMonitor assume that 2006 will be the best business year for the overall economy and the mid-tire business sector since 2000.

Business fluctuation - Current Start-Up Activity Trends

The positive turnaround in start-up dynamics, which began in 2003, continued throughout 2004. Like in the previous year, the 2004 increase in start-up intensity (new businesses per 10,000 people capable of work) was driven by start-ups out of unemployment. In 2005, however, the number of start-ups out of unemployment decreased slightly, probably as a result of stricter qualifying requirements for funding (start-up allowances). According to the first preliminary analysis, the overall start-up intensity slightly dwindled in 2005. Over the last two years, corporate insolvencies fell whereas the number of consumer insolvencies grew considerably.

The special evaluations of start-ups out of unemployment show that these new business are primarily established in sectors with low capital intensity and low barriers to market entry and exit such as the construction industry or corporate services. Only a few of these founders employ staff. That is why the economic effects of start-ups out of unemployment on economic growth, structural change and employment can be assessed as rather small. In order to enhance the quality of start-ups out of unemployment and the efficiency of the financing, stronger (self-) selection mechanisms should be considered, such as assigning the amount of funding based on an (at least partly) repayable allowance.

SMEs and professional qualification

Germany's dual education system, the combination of vocational training and general/specialised theoretical education at a vocational school, enjoys a high reputation worldwide and contributes significantly to the low rate on youth unemployment as compared to international trends. Mid-tier businesses, particularly in the industrial and commercial sectors, still play an essential role in the initial vocational training. Recently, however, the share of young people choosing vocational training has decreased. School-based training is gaining importance. At the same time, fewer companies provide training opportunities as on the one hand, they intend to save costs and on the other, they fear training obstacles such as the numerous administrative or formal requirements.

It is thus reasonable to provide incentives that make the training young people more attractive. In this context it would be possible to , for instance, better adapt the coordination between vocational schools, inter-company vocational training centres and training enterprises to the companies’ interests. It may also be beneficial to reduce the regulations on professional profiles. Furthermore, vocational training in a company network could become a key element for higher training rates. SMEs are expected to soon face an increasing shortage of skilled labour. Constantly educating employees might be a possible way out. There is a pressing need to turn the catch phrase "lifelong learning" into a viable concept. High costs, a lack of time or the loss of earnings are frequently-named obstacles for continuous training activities. SMEs find it particularly difficult to provide their employees with adequate training opportunities. For this reason, public authorities should support measures that enrich the training provision for employees of small and medium-sized enterprises.

Financing SMEs in the light of the financial market change - Problems, challenges and opportunities

Available data sources have shown that recently the financial climate and financial structure of mid-tier businesses have improved considerably. Especially larger companies were able to strengthen their equity base substantially, but smaller mid-tier firms also participated in this development. The companies’ access to financing has improved.

In Germany, the financing of medium-sized enterprises is still based on two pillars: on the one hand, internal financing through retained earnings and write-offs, and on the other hand, bank borrowings. The financial market change made it more difficult for SMEs to access credit, and increased the pressure to find alternative funding sources and strengthen equity base. In recent times, mid-tier firms increasingly take into account equity investment financing and particularly Mezzanine financing. Credit institutions respond to the SMEs rising demand for alternative financing; especially the supply of mezzanine capital has grown substantially over the past two years. Mezzanine products do not only increase the equity base but also hardly interfere with corporate decision-making rights. Other sources of equity procurement have improved as well such as financing through the stock market or equity participation. The financing market is changing and moving – an end of this development is currently not in sight.

Mittelstandsmonitor 2006 - Executive Summary (in German language)

Mittelstandsmonitor 2006 - Long Version (in German language)

Contact

Dr. Michaela Niefert, Phone +49(0)621/1235-171, E-mail niefert@zew.de