LEONARDO Community Vocational Training Action Programme

Transcription

LEONARDO Community Vocational Training Action
Programme
Work Package 4 – Work Task 1
Comparative Report on SMEs
‘Under Pressure’: Exploring New Trajectories of Development in
the Context of Globalisation
An International Comparison of SMEs
Report version:
Report preparation date:
Authors:
Contract number:
Contract start date:
Duration:
Project Co-ordinator:
Partners:
Belgium:
France:
Germany:
Hungary:
Poland:
Spain:
Slovakia:
UK:
Final version
January 2006
Csaba Makó – Péter Csizmadia – Miklós Illéssy
2003-3448/001-001-LE2_OREF
01. October 2003
36 Months (01. 10. 2003 – 30. 09. 2006)
Csaba Makó, Institute of Sociology, Hungarian Academy
of Sciences
EHSAL, Brussels
Université Paris X, Nanterre
Wismar University; Wismar
Institute of Sociology, Hungarian Academy of Sciences;
Budapest
Institute of Labour and Social Studies; Warsaw
UNED; Madrid
Institute for Sociology, Slovak Academy of Sciences;
Bratislava
University of Luton, Luton
Project founded by the European Commission under the LEONARDO Programme
Research Group for Sociology of Organisation and Work
Institute of Sociology, Hungarian Academy of Sciences
1014 Budapest, Úri utca 49.
Hungary
Contents
List of Figures ........................................................................................................................ 5
List of Tables.......................................................................................................................... 6
List of Boxes .......................................................................................................................... 9
List of Abbreviations............................................................................................................ 10
List of Contributors .............................................................................................................. 14
Summary – Concluding Considerations............................................................................... 16
PART I. INTRODUCTION: DESIGN, THEORETICAL AND METHODOLOGICAL
BACKGROUND...................................................................................................................... 29
1. The purpose of the project and the participants ............................................................... 29
1.1 Comparative e-learning content based on research evidences.................................. 29
1.2 Target groups (business school students, owners/managers of SMEs) ..................... 32
1.3 Exploiting the ‘leading edge’ e-learning experiences of educational institutions
involved in the Project...................................................................................................... 33
2. Theoretical background and the selection of countries participating in the project......... 35
2.1 Research and educational technical criteria shaping the pool of countries
participating in the project............................................................................................... 35
2.2 Creating a sample of countries representing the variety of market coordinating
mechanisms (a mix of CME and LME and a variety of Old and New Member States of
the EU) ............................................................................................................................. 36
3. Methodology: a combination of ‘cross-national’ (functional) and ‘inter-national’
(societal) approaches ............................................................................................................ 43
3.1 Brief overview of international comparative approaches.......................................... 43
3.2. Rationales behind selecting the issues and the levels of investigation...................... 51
4. Research techniques used in the investigation ................................................................. 54
4.1 Three stage research methodology (analysis)............................................................ 54
4.2 Detailed description of the case study methods used in the research ........................ 56
4.3 Combination of desk top research methods with first hand field study techniques
(interviewing) ................................................................................................................... 59
ANNEX I.1 Information about the case studies................................................................... 62
References ........................................................................................................................ 64
PART II. NATIONAL ECONOMIES AND THE LOCATION OF SMEs ............................ 67
5. Profile of the national economies participating in the project ......................................... 68
6. The contribution of SMEs to national economies ............................................................ 84
6.1 Measuring SMEs’ performance at European and country-level ............................... 84
6.2 SMEs in the acceding (NMS) and candidate countries in comparison with the EU-19 87
References ............................................................................................................................ 96
PART III. LEGAL AND ADMINISTRATIVE ENVIRONMENT ........................................ 98
7. General overview of the legal environment of SMEs ...................................................... 98
7.1 Definition of SMEs ................................................................................................... 100
7.2 Legislative/administrative procedures and costs of entry........................................ 104
7.3 Legal forms of business entities and laws concerning SMEs: types of registered
companies....................................................................................................................... 108
7.3.1 Belgium ............................................................................................................. 109
7.3.2 France ................................................................................................................ 110
7.3.3 Germany ............................................................................................................ 111
7.3.4 Hungary............................................................................................................. 114
7.3.5 Poland................................................................................................................ 118
7.3.6 Slovakia............................................................................................................. 119
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7.3.7 Spain.................................................................................................................. 120
7.3.8 United Kingdom ................................................................................................ 121
7.4 Enterprise foundation, company registration .......................................................... 127
7.4.1 Belgium ............................................................................................................. 127
7.4.2 France ................................................................................................................ 129
7.4.3 Germany ............................................................................................................ 131
7.4.4 Hungary............................................................................................................. 133
7.4.5 Poland................................................................................................................ 138
7.4.6 Slovakia............................................................................................................. 143
7.4.7 Spain.................................................................................................................. 144
7.4.8 United Kingdom ................................................................................................ 145
7.5 Termination and dissolution of companies .............................................................. 148
7.5.1 France ................................................................................................................ 149
7.5.2 Germany ............................................................................................................ 149
7.5.3 Hungary............................................................................................................. 151
7.5.4 Poland................................................................................................................ 153
7.5.5 Slovakia............................................................................................................. 155
7.5.6 Spain.................................................................................................................. 156
7.5.7 United Kingdom ................................................................................................ 157
8. Administrative burdens on SMEs: various fields of employment and working conditions
............................................................................................................................................ 160
ANNEX III.1 Criteria of independence ............................................................................. 174
ANNEX III.2 UEAPME Proposal for simplification......................................................... 178
ANNEX III.3 Company legal forms and abbreviations in the participant countries ......... 186
References .......................................................................................................................... 187
PART IV. FINANCIAL FRAMEWORK AND SMEs ......................................................... 189
9. Tax rates and structures.................................................................................................. 189
9.1 Tax on labour ........................................................................................................... 193
9.2. Indirect taxes: VAT.................................................................................................. 193
9.3 Corporate income tax............................................................................................... 195
9.4 Description, evaluation and comparison of the tax systems in the countries
participating in the Leonardo Project............................................................................ 196
9.4.1 Belgium ............................................................................................................. 202
9.4.2 France ................................................................................................................ 205
9.4.3 Germany ............................................................................................................ 214
9.4.4 Hungary............................................................................................................. 218
9.4.5 Poland................................................................................................................ 225
9.4.6 Slovakia............................................................................................................. 231
9.4.7 Spain.................................................................................................................. 234
9.4.8 United Kingdom ................................................................................................ 244
ANNEX IV.1 Administrative burdens as regards financial issues .................................... 270
ANNEX IV.2. General principles for the design of company tax systems........................ 271
ANNEX IV.3 Tax measures to improve labour market performance since the mid-1990s:
individual countries’ experiences....................................................................................... 275
ANNEX IV.4 Reforming VAT: moving from the destination to the origin principle? ..... 277
References .......................................................................................................................... 280
PART V. LABOUR RELATIONS IN A COMPARATIVE PERSPECTIVE – SPECIAL
FOCUS ON THE SME SECTOR .......................................................................................... 282
10. Varieties of patterns in European labour relations ....................................................... 282
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10.1 Actors and institutions: an international comparison at European and country
levels............................................................................................................................... 283
10.1.1. Trade unions and institutions (Works Councils) of employees’ participation283
10.1.2. Affiliations and organisations of employers: European and national level
comparisons................................................................................................................ 292
10.1.3. Collective bargaining and social dialogue: collective bargaining as case in
point............................................................................................................................ 295
10.1.3.1 The role of extension in collective bargaining ......................................... 298
10.1.3.2 Changing forms of coordination in the bargaining process: the case of
wage bargaining..................................................................................................... 301
10.1.4. National level concertation and consultation institutions: a brief overview .. 306
10.1.5. A highly sensitive feature of labour relations: industrial action .................... 308
10.2 Actors and institutions in the SME-sector: an international comparison at European
and country level ............................................................................................................ 314
10.2.1 Collective bargaining: coverage rate and procedures...................................... 315
10.2.2 Collective representation: the case of works councils .................................... 317
10.2.3 Employers’ and trade unions’ attitudes towards labour relations institutions in
the SME sector ........................................................................................................... 318
ANNEX V.1 Varieties of forms of control/supervision in the firms investigated ............. 325
ANNEX V.2 Recent developments in wage bargaining: examples from the countries
involved in the Leonardo project ....................................................................................... 336
ANNEX V.3 Key provisions of EU Directive (2002/14/EC) establishing a general
framework for informing and consulting employees in the European Community........... 339
ANNEX V.4 Labour disputes in the countries participating in the Leonardo project ....... 340
References .......................................................................................................................... 343
PART VI. KNOWLEDGE USE AND INNOVATION IN THE SME SECTOR................. 347
11. Characteristics of SMEs’ Knowledge and Competence Development ........................ 347
11.1 Training and knowledge use practices at a European and national level ............. 347
12. Innovation..................................................................................................................... 370
ANNEX VI.1 Some basic data for measuring training and innovation activities of firms in
Europe ................................................................................................................................ 378
Indicators of Training................................................................................................. 378
References .......................................................................................................................... 389
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List of Figures
Figure 3.1 ‘Cross-national’ Comparison
Figure 3.2 ‘Cross-cultural’ Comparison
Figure 3.3 ‘Inter-national’ comparison or comparison Societal Effect
Figure 5.1 Gender pay gap 2001
Figure 5.2 IT expenditure in 2003
Figure 5.3 Distribution of employment of computer and related activities in
Europe, 2003
Figure 5.4 Distribution of employment in other business activities in Europe,
2003
Figure 5.5 Growth in employment in computer and related activities in
Europe
Figure 5.6 Growth in employment in other business activities in Europe
Figure 6.1 Occupied persons per enterprises, Europe-19 countries* (2003)
and Acceding and Candidate Countries (2001)
Figure 9.1 Tax to GDP ratio in OECD countries
Figure 9.2 Tax mix by source
Figure 10.1 Working days lost through industrial action per 1,000 employees
in countries participating in the Leonardo project
Figure 11.1 Individual and company Internet usage
Figure 11.2 English reading ability in the Leonardo countries
Figure 12.1 Share of enterprises with non-technical change
Figure 12.2 Share of enterprises implementing changed organisational
structures
Figure 12.3 Share of enterprises implementing advanced management
techniques
Figure 12.4 Share of enterprises implementing significant changes in æsthetic
appearance
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List of Tables
Table 1.1 Size Distribution of manufacturing firms: planned versus
capitalist economies (1970)
Table 2.1 Trade union density, level of collective bargaining and days lost
by strike activity: examples of LME and CME countries
Table 2.2 Rationale of the selection of countries participating in the
Leonardo project
Table 4.1 Methodological characteristics of the approaches adopted in the
Leonardo Project practice
Table 4.2 Main data sources used in this report
Table 4.3 Basic information about the firms investigated in the case
studies
Table 5.1 GDP in Leonardo countries
Table 5.2 GDP per inhabitant in Purchasing Power Standards
Table 5.3 Gross value added by economic activity in 2004
Table 5.4 Employment rates in the participant countries
Table 5.5 Unemployment rates in the participant countries
Table 5.6 Unemployment rates in the Leonardo countries
Table 5.7 Average gross annual earnings in industry and services
Table 5.8. Total R&D expenditure as a % of GDP
Table 5.9 Rank of order of countries in R&D expenditure
Table 6.1 The role of SMEs, Europe-19, 2003
Table 6.2 Role of SMEs in European Countries, 2003
Table 6.3 Roles of SMEs in Acceding and Candidate Countries and
Europe-19
Table 6.4. A comparison of employment share between EU-19 and
Acceding (NMS) and Candidate Countries
ANNEX 2.1 Relative performance of the old Member States according to
structural indicators
ANNEX 2.2 Relative performance of the new Member States according to
structural indicators
Table 6.5 Comparison of average European employment costs
Table 6.6 Average enterprise size, Candidate Countries and Europe-19,
1995-1999
Table 7.1 Alternative definitions of SMEs
Table 7.2 Definition of SMEs in the participant countries, 2005
Table 7.3 Entry procedures and costs in the participant countries, average
1998-99 (without Slovakia)
Table 7.4. Comparative table of the definitions of SMEs in Hungary
Table 8.1 Enterprise owners’ perception of the development of
administrative burdens resulting from employment regulations since 1997,
by enterprise size, Europe-19, 2001
Table 8. 2. Obligatory institutions to contact when recruiting the firs
employee
Table 8.3 Fields of employment regulation with highest administrative
burden, by enterprise size, Europe-19, 2001
Table 8.4. Thresholds in employment related legislation, Europe-19, 2001
Table 8.5 Legal forms in the participant countries
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Table 9.1. Personal income tax rates in the participant countries
Table 9.2. Corporate tax burdens in the participant countries
Table 9.3. VAT rates in the participant countries
Table 9.4. Indicators of administrative costs in tax revenue collection and
tax arrears in the participating countries
Table 9.5 Type of insurance and level of specific premiums
Table 9.6 Level of specific insurance premiums and principles of their
financing
Table 9.7 Corporate tax rates in the United Kingdom
Table 9.8 National Insurance contribution (NIC) types in the United
Kingdom
Table 9.9 Tax advantages in the United Kingdom
Table 10.1 Trade union density rates and membership composition, 19952002
Table 10.2. Union structure and affiliation patterns in the EU
Table 10.3. Employees Representation and Employees Rights: Single,
Mixed and Dual Versions of the LRS
Table 10.4 Europe’s business and employers’ association affiliation,
organisation rates and participation in social dialogue
Table 10.5 Collective bargaining coverage, employers’ organisations and
union density
Table 10.6 Legal or administrative extension of collective agreements
Table 10.7 Levels of wage bargaining and duration of collective
agreements, 2003
Table 10.8 Coordination of wage bargaining
Table 10.9 Participation of unions and employers in tripartite bodies
Table 10.10 Working days lost through industrial action
Table 10.11 Patterns of industrial action in the countries participating in
the Leonardo Project (2000-2004)
Table 10.12 Main causes of industrial action in the countries participating
in the Leonardo project
Table 10. 13 Collective bargaining by company size (1998)
Table 10.14 Distribution of works councils, trade unions and collective
agreements by size category of firms in the manufacturing sector in
Hungary (2002)
Table 10.15 Number of disputes referred to arbitration in the countries
participating in the Leonardo project
Table 10.16 Number of disputes referred to mediation in the countries
Table 10.17 Number of disputes referred to conciliation in the countries
Table 10.18 Labour Disputes before and after the Changes in the PoliticalEconomic Transition (the number of debates)
Table 10.19 Attitudes to trade unions and LRS institutions – experiences
based on company case studies
Table 11.1a Hours Spent in CVT Courses by Field of Training, (1999)
Table 11.1b Hours Spent in CVT Courses by Field of Training, (1999)
Table 11.2 Percentage of all enterprises providing Internal CVT courses,
by size class
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Table 11.3 Percentage of all enterprises providing External CVT courses,
by size class
Table 11.4 Rank order of training provider institutions supplying external
CVT courses
Table 11.5 Methods enterprises use to evaluate the effect of CVT courses
by type of evaluation and size class
Table 11.6 Hours in CVT courses per employee in enterprises with and
without ‘new technologies’, by size class
Table 12.1 Innovation activities, product and process innovation of firms
operating in the Leonardo countries
Table 12.2 Enterprises with cooperation arrangements on innovation
activities, as a percentage of all innovation active enterprises, by sector
and size class
Table 12.3 Training of Employees in the NMS and ACC, 2001
Table 12.4 Hours in CVT courses per 1000 hours worked by size class
Table 12.5 Percentage of Internal CVT courses, by size class
Table 12.6 – 12. 13 Percentage of the total hours in External CVT courses,
by training provider and size class
Table 12.14 Percentage of employees (only in enterprises with CVT
courses) participating in CVT courses by sex and size class
courses) participating in CVT courses by sex and size class (Males)
courses) participating in CVT courses by sex and size class (Females)
Table 12.17 Cost of CVT courses per participant (only in enterprises with
CVT courses) in Purchasing Power Standard (PPS) by size class
Table 12.18 Cost of CVT courses as % of total labour cost (all enterprises)
by size class
Table 12.19-12.23 Percentage of enterprises evaluating the effect of CVT
by type of evaluation and size class
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List of Boxes
Box 6.1 Adjustments for differences in industrial sector result in higher
economic performance of SMEs
Box. 7.1 One-stop shops – or one-more-stop shops?
Box 8.1 Jobs and taxes: No easy choice in Germany
Box 8.2 Licensed Employers’ Social-Accounting Secretariats in Belgium
Box 8.3 URSSAFF: a French Social Security Institution
Box 9.1. Differences between European tax burdens
Box 9.2 Favouring SMEs in company taxation
Box 9.3. Company taxation and globalisation
Box 9.4. The fragmented French tax administration
Box 9.5 Who pays taxes levied on firms?
Box 10.1. Works councils definition
Box 10.2 Council members sacked
Box 10.3 ILO definition of Collective Agreement
Box 10.4 ILO Recommendation on the Extension of Collective Agreements
Box 10.5 Common guiding principle of employers: more possibilities for optouts
(‘hardship clausal’)
Box 10.6 Employers’ organisations and SMEs
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List of Abbreviations
£ – British Pounds
ACC – Acceding and Candidate Countries
AEAT – Central Tax Office (Spain)
AFNIC – French Internet Names and Cooperation Association
AiB – Accountant in Bankruptcy (UK)
APE – Relevant Activity Code (France)
APEH – Tax and Financial Control Administration (Hungary)
BIC – Industrial and Commercial Benefit (France)
BNC – Non Commercial Benefit (France)
CA – Collective Agreement
CB – Collective Bargaining
CDD – Contract of Specified Duration
CDI – Contract of Unspecified Duration (France)
CEDEFOP – European Centre for the Development of Vocational Training
CEFC – State Commission for Continuing Training (Spain)
CES – Economic and Social Council (Spain)
CFE – Centre de Formalités des Entreprises
CGT – Capital Gain Tax (UK)
CIC – Community Interest Company
CIT – Corporate Income Tax
CME – Coordinated Market Economy
CNT/NAR – National Labour Council (Belgium)
CVL – Creditor’s Voluntary Liquidation (UK)
CVT – Continuing Vocational Training
CVTS – Continuing Vocational Training Survey
DGB – German Confederation of Trade Unions
DGCP – Direction Générale de la Comptabilité Publique
DGI – Direction Générale and Direction Générale des Impôts (France)
DUE – Declaration Unique d’Embauche (Single Recruitment Declaration – France)
EC – European Commission
ECB – European Central Bank
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EEIG – European Economic Interest Grouping
EIRO – European Industrila Relations Observatory
ETF – European Training Foundation
ETUC – European Trade Union Confederation
EU – European Union
EUR – Euro
EUROSTAT – Statistical Office of the European Communities
EVA – Simplified Enterprise Tax (Hungary)
FDI – Foreign Direct Investments
GDP – Gross Domestic Product
GUS – Central Statistical Office (Poland)
HGB – Code of Commercial law (Germany)
HRM – Human Resource Management
HSE – Health and Safety Executive (UK)
HUF – Hungarian Forint
IBDF – International Bureau of Fiscal Documentation
IATA – International Air Transport Association
ICT – Information and Communication Technology
IFA – Annual Contractual Imposition (France)
IFA – Invest in France Agency
IHK – Industrie- und Handelskammer (Germany)
ILO – International Labour Organisation
INEM – National Institute of Employment (Spain)
INPI – France’s National Industrial Property Institute
INSEE – French National Statistics Institute
IPT – Insurance Premium Tax (UK)
ISCO – International Standard Classification of Occupations
IT – Information Technology
KSH – Hungarian Central Statistical Office
LFS – Labour Force Survey
LLP – Limited Liability Partnership
LME – Liberal Market Economy
LPC – Low Pay Commission (UK)
LRS – Labour Relations System
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LSC – Learning and Skills Council (UK)
LSE – Large-scale Enterprise
Ltd – Private Limited Company
MME – Mediterranean Market Economy
NACE – Classification of Economic Activities in the European Community
NIC – National Insurance Contribution (UK)
NIP – Treasury Office (Poland)
NMS – New Member States
NUTS – Nomenclature of Territorial Units for Statistics
OECD – Organisation for Economic Co-operation and Development
OÉT – Országos Érdekegyeztetı Tanács (National Council of Reconciliation Interests –
Hungary)
Off-JT – Off-the-Job Training
OJT – On-the-Job Training
OMMF – National Labour Safety and Employment Chief Supervisory Body (Hungary)
OMS – Old Member States
PAYE – Pay As You Earn
PHARE – Poland and Hungary Assistance for Restructuring of their Economies
PIP – National Labour Inspection Authority (Poland)
PIS – National Sanitary Inspection Authority (Poland)
PIT – Personal Income Tax
PLC – Public Limited Company
PLN – Polish Zloty
PME – Petietes et Moyennes Enterprises
PPS – Purchasing Power Standard
PSA – PAYE Settlement Agreement (UK)
R&D – Research and Development
RCS – Company Register (France)
RECON – Official Domestic Register of Entities of the National Economy (Poland)
RHSD – Council for Economic and Social Concertation (Slovakia)
SE – Societal Effect
SIREN – Company identification (France)
SIRET – Local unit identification (France)
SME – Small and Medium-sized Enterprise
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SOC – Standard Occupational Classification
SZOT – Szakszervezetek Országos Tanácsa (National Council of Trade Unions - Hungary)
TVS – Vehicles used for tourism (France)
UEAPME – European Association of Craft, Small and Medium-sized Enterprises
UK – United Kingdom
UNEDIC – Unemployment insurance fund (France)
UNICE – Union des Industries de la Communauté européenne
UNIDO – United Nation Industrial Development Organization
URSSAF – Union de Recouvrement de Sécurité Sociale et d'Allocations Familiales
US – United States
USA – United States of America
USAID – United States Agency International Development
VAT – Value Added Tax
VoC – Varieties of Capitalism
ZUS – Social Security Administration (Poland)
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List of Contributors
Belgium: Lutgart Spaepen, Griet Blieck; EHSAL – Brussels
France: Univeristy of Paris 10 – Paris, Nanterre: http://www.u-paris10.fr/
Denis Abecassis obtained his Doctor of Economic Science degree in 1980. He also obtained
his Master degree in economics (1977) and in mathematics (1979) .He is a permanent lecturer
in Paris X Nanterre University where he was vice-president and director of the economic
department. His key research and teaching interests focus on SMEs management, project
management and on social security and vocational training in companies according to the law
and collective agreements in the sectors.
Germany: Gunnar Prause; Wismar University – Wismar
Hungary: Institute of Sociology, Research Group for Sociology of Organisation and Work,
Hungarian Academy of Sciences – Budapest: www.sow.hu
Prof. Dr. Csaba Makó obtained his Candidate of Sciences degree in 1973 and his Doctor of
Science degree in 1983. He is a Research director (Group of Sociology of Work and
Organisation) at the Institute of Sociology of the Hungarian Academy of Sciences, Professor
at the Debrecen University, and Head of the PhD School in Economics, and Professor at the
Corvinus University, in the Institute of Management Science. His key research and teaching
interests focus on organisational – institutional innovations, changing paradigms in work, role
of SMEs, labour relations in international perspective and new forms of knowledge use and
employment in the context of the network economy.
Péter Csizmadia is currently a Research Associate at the Institute of Sociology of the
Hungarian Academy of Sciences. He holds a degree in Sociology. In the last few years he has
been participated in several international research projects. His research areas are the
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following: new forms of work organisation and organisational innovation, especially in the
SME sector. He is a PhD student at the Corvinus University in Budapest.
Miklós Illéssy is a research associate at the Institute of Sociology of the Hungarian Academy
of Sciences. He holds a degree in Sociology. From 2001 he has been participating in
international projects. His main research areas are the following: social dialogue, sociology of
innovation, work organisation and labour studies. He is a PhD student at the Corvinus
University in Budapest.
Poland: Łukasz Sienkiewicz, Marek Bednarski; IPISS – Warsaw
Slovakia: Zdenek Šťastný, Lubomir Falt’an; Insitute for Sociology, Slovak Academy of
Sciences – Bratislava
Spain: José Lois Morales; UNED – Madrid
UK: Iona Evans, Yazid Abubacar, Estelle Engels, Wiebke Stork; Luton Business School –
Luton
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Summary – Concluding Considerations
The aim of the project supported by the Leonardo programme of the European
Commission was to develop a research-based international comparative training curriculum
about the SME sectors in eight European participant countries: Belgium, France, Germany,
Hungary, Poland, Slovakia, Spain and the UK. This Comparative Report is the result of the
fist project phase; an intensive research period in the participant countries.
The Comparative Research Report starts with presentation of the project design,
rationales behind the issues selected for the common work, including an outline of the
methodology used in the international project. Part II is devoted to the description of
economic profile of the countries and especially SMEs in both European and national level,
based on statistical resources. Part III and IV discuss the legal-administrative and financial
regulatory frameworks of the business organisation, with special focus on the SMEs. Pat IV.
is focusing on the social regulatory mechanisms of the firms using the example of the labour
relations system. The last part of the report is provides a systematic description of the
knowledge development and use practice in an international perspective. In addition, the Part
V. is giving a brief analysis and evaluation of the forms of innovation taken place in the
SMEs.
The tentative experiences and patterns identified in the various parts and chapters of
this report are summarized as follows.
PART I
1. Combination of various approaches used in the international comparative research.
2. This orientation was carried out on the guiding principle of the “methodological
equilibrium” (simultaneous application of both quantitative and qualitative research
tolls).
The Part I. provides an overview on the purpose of the Leonardo project, on the
theoretical foundations of the investigation, including methodology and the research tools
adopted by the eight countries participating in the international research consortium.
After presenting the statistical evidences on the decisive role of the SMEs in the
European economy (e.g. their share in the business organisation, employment generation
capacity etc.) target groups of the e-learning contents were identified (e.g. future and present
owners/mangers in this sector). In selecting the project participant countries, designers of the
international comparative research used the so-called “Varieties of Capitalism” (VoC)
approach which is based on the different types of market coordination. Adopting this view,
the groups of countries were as follows: Coordinated Market Economies (Belgium, France
and Germany), Liberal Market Economy (U.K.), Mediterranean Market Economy (Spain) and
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the Central European Countries (Hungary, Poland and Slovakia). The authors critically
reviewed the mainstream approaches adopted in the practice of the international comparative
research (i.e. cross-national, cross cultural and inter-national or “social effect approach”).
Finally, a combination of cross-national (functional) and the inter-national comparisons were
used during the design and organisation of the data collection. In this methodological
perspective the so-called “three stage date analysis” method was employed in order to locate
the activities of the SMEs in European, national and sector/local dimensions. Precisely, the
European and national level statistical data analysis was completed by an infra-national (i.e.
sector and micro) level. These quantitative methods of data collection and analysis was
combined with such qualitative research tool such as the sector-focused (i.e. manufacturing,
service, ICT) company case studies. The combination of these research methods served to
reach a desirable “methodological equilibrium”.
During the various international workshops organised with the participation of the
consortium members the following issues were selected on the basis of professional consent:
position of SMEs both in the EU and in the national economies of project partners, legal and
financial regulatory environments, Labour Relations System and the control strategies in the
labour process and the practice of knowledge use and development, including the
characteristics of the innovations in the SME sector.
PART II
1. There is a significant asymmetry between the countries belonging to the Euro-zone
and the NMS in terms of economic weight.
2. Adopting varieties by sector, the SMEs have dominant role in the employment
creation and generation.
3. Within the SME sector the micro firms employing less than 10 persons represent the
dominant size-category (90 %).
4. The OMS substantially outperform the NMS in share of R&D expenditures.
5. However, in the NMS the strongest employment growth has been taken place (20002003) in both ‘computer-related activities’ and ‘other business activities’ which
reflects the growing participation of the NMS in the knowledge economy.
Before locating the SME sector in both European and the national economies survey,
the introductory section of the Part II describes the profiles of the national economies
17
participating in the Project. In this respect it is worth noting that there is a strong asymmetry
between the so-called Euro-zone countries participating in the project and the NMS countries,
in terms of economic performance measured in GDP. The former group of the country
produces two-third of GDP in the Euro-zone. Contrary to this pattern the role of the NMS in
generating employment (9.8 %) visibly stronger than their GDP-contribution (3 %).
Comparing the weight of various economic activities, we may say that in the EU 15
countries the service sector dominates (over 50 %), its share is lower in the NMS (Hungary,
41,5 %, Slovakia 38.2 % and Poland 36.5 %). The rate of manufacturing sector is particularly
high in the NMS and Germany. The rate of employment is higher in the EU-15 countries in
comparison to the NMS participating in the Leonardo project. Within the EU-15 countries,
UK has higher employment rate than the average, Germany is around the average and in the
other three countries (Belgium, France and Spain) the employment rate is below the EU-15
average. In the year of the investigation (2004), the rate of unemployment decreased in all
countries (in comparison with the period of 1992-2000), with the exception of Germany. The
most striking differences in the unemployment rates were registered in the NMS: in Poland
and Slovakia the rate of unemployment was two times higher in comparison with Hungary
(18.8 -18.0 per cent versus 5.9 %). Beside the unemployment, there is more complex indicator
of “social exclusion” called ‘at-risk-of-poverty-rate’.1
Among the EU-15 countries participating in the project, this indicator was the highest in
Spain (19 %), UK (17 %) and France (15 %) and the lowest in Germany (11 %) and Belgium
(13 %). In the case of the NMS, Hungary has the lowest rate (10 %), Poland (15 %) and
especially Slovakia (21 %).
EU-15 countries outperform substantially the NMS both in the share of Research and
Development (R&D) expenditure and in the growth rate, too. In this relation, it is necessary to
note that for example the ICT related employment is higher in the Nordic and North European
countries, Mediterranean countries (e.g. Spain) have intermediary position and the NMS
1
This is one of the generally used 14 Structural Indicators used by the E.U. and covering the six domains of
General Economic Background, Employment, Innovation and Research, Economic Reform, Social Cohesion as
well as the Environment. The „risk-of-poverty” rate indicator measuring the social exclusion „… is defined as
the share of persons with an equivalised disposable income below the risk-of-poverty thresold, which is se tat 60
% of the national median equivalised disposable income (after social transfers). This share is calculated before
social transfers (original income including penson but excluding all other social transfers) and after social
transfer(total income).In: (http://epp.eurostat.cec.int/portal)
18
(together with Portugal) have below average position. However, in the NMS the strongest
employment growth has been taken place (2000-2003) in both in ‘computer and related
activities’ and ‘other business activities’.
Measuring the SMEs performance at European and country level we have to note that
the vast majority of firms belong into the category of SMEs. Within the SMEs, the micro
firms – employing less than ten persons – represent the dominant size category (by 90 %).
This SME s provided jobs for 70 % of the workforce. In the field of export, their performance
is weaker in comparison with the LSE. They serve mainly local or regional markets. Similarly
the productivity – including all sectors – is one third to the large-sized enterprises. The
patterns of SMEs performance are rather similar in the NMS. However, we have to note that
beside the employment generation capacity, in all other fields (e.g. export, productivity, R and
D) EU-15 countries outperform the NMS.
PART III-IV
1. There is a lack of legal integration within the enlarged EU (EU-25).
2. The cost and flexibility of the services offered by legal and administrative institutions
have become an important factor of competitiveness for SMEs in the recent years (for
example Hungarian firms in growing number are registering their activities in
Slovakia).
Part III and IV are devoted to the analysis of regulatory environment in which the
small and medium sized firms are operating. In relation with the regulatory context of the
SMEs, the following two patterns were identified and evaluated. Firstly, the ‘legaladministrative framework’ related to the various aspects of working and employment
conditions (e.g. health and safety, social security and pension requirements, restriction of
working hours, etc.). Secondly, ‘financial rules’ like tax rates and structures.
Concerning the “legal-administrative” regulatory context we may say, at the European
level that the “size-category of firm” has an important effect on the administrative burdens on
the firm’ functioning. There are significant differences between the countries participating in
the project concerning the administrative burdens of SMEs. The different number of legaladministrative procedures and administrative costs of firms varying country by country draws
19
attention to the phenomenon, that in the globalised economy also national governments and
other institutions compete with each other in order to ensure a favourable regulatory
environment for motivating both foreign and domestic investments. Evaluating a medium
term period (e.g. in the period of 1997-2001), the rate of the firms complaining on an increase
of administrative workload rises steadily with the size of the firm. However, we have to
emphasize that the small and especially the micro firms have lack of the necessary human
resources to cope efficiently with the administrative burden, In this respect, it is interesting to
note that in Europe, on average 3.3 administrative procedures were necessary to administer a
new employee hired. The form, content and costs of this administrative procedures related to
the hiring of new personnel are rather different in the various countries participated in the
Leonardo Project. For example, in both countries, Germany and the U.K. owners/employers
have to go through administrative procedures before and after hiring new personnel, while in
Belgium, France and Spain some recruitment administration process covers both time periods.
If we evaluate the number of institutions (e.g. social insurance office, tax authority,
employment office, accident assurance, etc.) owner/employer has to obligatory (officially)
contact. Among the EU-15 countries, the heaviest administrative burden was registered in
Belgium and the lightest one in the U.K.
The financial regulatory environment is reflecting the social-economic and historicalinstitutional context of the countries investigated in which the economic behaviours of the
SMEs investigated are “embedded”. From the middle of the 1990’s and especially with the
Lisbon strategy (2000) and with its revision (2005) several initiatives were launched in order
to harmonise the various national tax system using the so-called “soft-coordination” or the
“open method of coordination”. This means a non-binding commitment to reciprocal
consultation and benchmarking. However, in the field of integration only modest changes
have taken place. According to many experts, only one substantial advance that can be noted
is the implementation of the Lamfalussy programme for financial services.2 As for both
labour market and tax reforms, the evidence does not support stronger integration in spite of
the intense pressure of globalization and the related fast changes in the global value chain. In
other words, “…no legislation could be proposed as the EU has almost no competence for
labour markets, taxation and social security: those areas primarily belong to the remit of the
member states. Common targets were set instead, together with supporting league fables and a
2
Alexandre Lámfalussy (2005) Challenges ahead for the European Union, Competitio, IV. No. 2. pp. 7 – 11.
20
benchmarking of policies. It was expected that this non-binding coordination would
encourage the adoption of best practices. To that end, the Commission had to draw up
scoreboards on the basis of commonly agreed targets and indicators.” (Pisany-Ferry 2005:4)
Our experiences based on the analysis of on the tax rates and structures in the countries
participating in the Project support well the critical assessment of two pillars of the Lisbon
program such as the “economic integration” and “soft coordination of domestic labour market
and pension reforms”. More precisely, we have to note that in the EU-15 countries, the
average tax-to-GDP ratio was 10 per cent higher in comparison both to the USA and Japan.
Significant differences characterises the EU member states, too. In the countries investigated,
the lowest tax burden was found in Spain, the U.K., Germany and Hungary stand somewhere
in the middle and countries belonging into the group of the “coordinated capitalism” model
are Belgium and France, where the highest tax rates were registered. Finally, in relation with
the tax structure, it is worth noting the “leading edge” initiative of Slovakia. In this country,
from the beginning of the 2004, profits of all business entities (individual entrepreneurs,
foreign firms etc.) are subject to a single-linear percentage, the so-called “flat tax” at 19 per
cent. The same flat rate is applied in the case of the VAT, too.
PART V
1. Collective Bargaining rate has strong relations with the size-category of firms. As the
size of firms is growing, the share of employees covered by Collective Agreements is
increasing, too.
2. In the OMS (EU-15) there is a tendency of concentration of union movements, in the
NMS though a fragmentation trend was identified.
3. There are visible differences in governments’ interventions in the countries
participating in the Leonardo project concerning wage bargaining. The most
‘interventionist’ countries are Belgium and France and the weakest state role was
found in the British practice.
4. Industrial actions indicate rather heterogeneous patterns measured by no. of working
days lost by 1000 employees by strikes. The highest number of days lost by strikes
was registered in Spain and the lowest in Germany and Poland.
5. The SME sector can be characterised by the strong informality of Industrial Relations
Systems. There is a tendency toward the decentralisation of Collective Bargaining,
21
especially the wage bargaining. In addition there is a shift from centralised, explicit
forms of wage bargaining toward the more flexible forms of it.
6. Significant differences were identified in the use of such participatory system as the
works council. One extreme case is represented by Germany, where the threshold is
five employees; the other extreme position is held by Belgium, where the works
council is implemented only in firms employing at least 100 persons.
The presentation of the main actors and institutions of labour relations system (LRS) is
in the focus of analysis carried out in the Part V. Firstly, the authors are providing an
European and country level comparison of LRS. Secondly, in relations with the particular
situation of SMEs, beside the informal and external norms oriented character of LMS in this
sector, the experiences of the company case studies – with some exceptions (e.g. in the
Belgium case) - indicated the dominance of the rather unfriendly attitudes both
employers/owners and employees towards trade union presence in the firm.
Comparing the key patterns of LRS at European level, it is worth noting that: in the
majority of countries – with the exception of the U.K. – the so-called “dual-channel system”
is functioning: in addition to the trade unions a separate institution of employees’ participation
does exist. In relation with the trade union membership (“density rate”) the highest rate was
registered in Belgium (55.8 %) and the lowest in France (9.7 %). For the trade union structure
(“organisational comprehensiveness”) single or dominant peak organisation (confederation)
were found in Germany, Slovakia and the U.K., in the remaining countries fragmented union
structure (by occupation and political divide) was identified. In this relation it is necessary to
mention that in the EU-15 countries’ trade union movement is characterised by the trend of
merger, while in the NMS it is still de-concentration and fragmentation that has taken place.
Similar pattern was observed in the employers’ side in concentrating functions to improve the
quality of services of their member organisations. Collective bargaining (C.B.) is the core
organisation of the LRS which shows stability and the coverage rate of which is twice as high
than the union density rate. The C.B. coverage rate is higher in the EU-15 countries in
comparison with the countries in the NMS. Evaluating the key source of the European wide
industrial dispute we may say that wages or salaries are in the centre of conflicts between
employers and employees and their respective interest representative associations. As a result
of the decentralisation of LRS in the last decades, the “locus” of the wage-bargaining is the
firm. This pattern is similar between EU-15 and NMS, with the exception of Slovakia. Beside
22
the decentralisation of wage bargaining, we have to call the attention to another important
feature of the wage bargaining: its explicit or implicit coordination. In this respect the
following three groups should be distinguished: only Belgium maintained and reintroduced
some forms of explicit coordination at national level, in Germany and Spain – where central
agreements have set guidelines for wage conduct since 2001 – the implicit coordination has
taken place between the social partners. Implicit coordination characterises the French wagebargaining procedures. Finally, in the U.K., similarly to Poland, both national and sector level
coordination are missing.
In relation with the national level concertation and consultation, variety of
institutional arrangements was found in countries surveyed. Regarding the key role of the
wage related issues, we intend to call the attention to the degree of government intervention in
the wage bargaining. Evaluating the degree of this intervention on of 5 – point scale, the
countries’ position participating in the Project is such as: the highest scores were reached in
Belgium (4.1.) and in France (3.1), followed by Hungary (3.0) and the lowest government
intervention was identified in Germany (1.9), Spain (1.9) and in the U.K. (1.2.). The
government, trade unions and employers’ national level representative bodies dealing with
consultation, may take the form of bipartite, tripartite or a wider participation. Concerning
their function, the following roles should be distinguished: advisory, consultative/negotiating
roles and standard setting functions. In the EU-15 countries, the presence of the national
bodies for consultation and representation is general. In the majority of cases, participation in
such institutions is practices by national peak associations of both trade unions and
employers’ organisations. The statutory bodies which could be bipartite, tripartite etc. deal
with general issues (e.g. in Belgium and Hungary) or specific issues such as social security
administration (e.g. in France and Germany) or with the application of labour law and
extension of collective agreements (as in the case of Germany).
The “industrial actions” mentioned above are highly sensible and media favoured
characteristic of the LRS. However, the intensity of industrial actions in itself does not reflect
automatically a malfunctioning labour relations system. The indicator such as number of
working days lost by strikes per 1000 employees expresses functional distortion in this
system. Comparing the available indicators (in the year of investigation: 2004) relating to the
countries participating in the Project, the following rank-of-order was identified: (1) Spain
(219.7 days), (2) Hungary (60.2 days), France (50.5 days), the UK: (27.5 days) and finally
23
Germany (4 days) and Poland (2 days). It is misleading to use data concerning only one year,
when we were comparing the period between 2000 and 2004, we found a rather different
patterns: very low level of industrial actions – even absence in some years – were registered
in NMS (especially in Hungary and Poland) and among the EU-15 countries in Germany.
When comparing countries characterised by the broadly comparable size, the “big four” old
EU countries (France, Germany, Spain and the U.K.) are representing at least two groups of
countries: Spain has a considerably higher frequency of industrial actions in comparison with
France, the U.K. and Germany. However, it is necessary to note that even in Spain, a rapid
decline in working days lost by strikes was registered in the period between 2002 and 2003
and this fall is continuing.
Describing the roles of LRS in the SME sector – both European and country level –
special attention was devoted to issues such as collective bargaining, collective representation
and the attitudes of employers and trade unions towards to the LRS. Firstly, we intend to
stress that there is a direct relationship between the company size and collective bargaining
coverage rate: as the size of firm increases, so does the bargaining coverage rate. In the
smaller firms, especially in those with fewer than 20 employees, collective agreements are
exception. Secondly, in the case of such institution of employees’ collective representation –
with the exception of Sweden – in all EU-15 countries there is a minimum-workforce-size
threshold for establishment of Works Councils (WC). In relation with the countries
participating in the Leonardo Project, the lowest threshold for the creation of WC is in
Germany: 5 employees, followed by France, Hungary and Spain with 50 employees and in
Belgium 100. In the U.K. there is no general or statutory system of information and
consultation. Additionally, it is worth noting that beside the size of the firm, the acceptance of
WC has a close relationship with the presence of trade unions in the firm. Finally, in relation
with the employers’ attitudes towards trade unions, we may say that they prefer the flexible
employment relations – as a main source of their economic success – and have rather
unfavourable opinions. In the company case studies the positive employers’ opinion on the
trade union presence was the exception. Even some cases, employees themselves have rather
ambivalent opinion on the necessity of the trade unions on the workplace. Instead, they
preferred the individual and informal arrangements based social consent with the employers.
PART VI
24
1. The dominant training form in the practice of SME sector are the On-the-Job
Trainings (OJT) in comparison with the Off-the –Job Trainings (Off-JT).
2. Among the enterprises in the countries participating in the project the most time was
spend on training in the fields of ‘computer sciences/computer use’ and ‘engineering
and manufacturing’.
3. Linear relation between the size of the firm and the time spend on training was found
only in Hungary, Poland, Spain and in the UK.
4. Sector-specificity of ‘sill equilibrium’: in sectors mainly operating in the Old
Economy (clothing, manufacturing, etc.) the so-called ‘low-skill equilibrium’ was
identified while in sectors related to the New Economy (software, interactive media,
etc.) the ‘high-skill equilibrium’ was dominant.
5. The size of firms was related to the intensity of innovation activities only in France,
Spain and the UK.
6. The innovation activity of European firm compared to the ones operating in the US is
low in general but there is an unequal share between product and process innovation
with the relative weakness of the later one. In line with this the non-technical
innovations are underdeveloped in the European firms in general and in the SMEs
particular. Among the countries participating in the project Germany and Belgium
represent a relative leading position of non-technical innovation while Hungary,
France and Slovakia are lagging behind in this area.
PART V
In presenting of the key lessons on identifying and evaluating the various features of
the knowledge development, transfer and use, in the Part V we are using the so-called
“Competence Chain Model”. This approach has an ambition to map and asses the input and
output of both the “in-house” and “external” competence development process in the
company practice. On this analysis the following notion of competence was adopted: “ the
synthesis of knowledge what you can learn in education, skills what you can gather in your
job, at your workplace and in social life from your daily experiences and aptitude, which are
abilities to use this knowledge and skill. This view of competence is rather similar to the EU
Commission definition which basically covers the above listed contents or some of them,
when considers it as capacity to use qualification, experience and knowledge efficiently.
25
Assessing the rank of orders of time spent on the Continuous Vocational Training
(CVT) course in the countries participating in the Project, the following hierarchy was
identified: “computer sciences/computer use” (1), “engineering and manufacturing” (2),
“personal skill development” (3), “management and administration” (4) and at the bottom-end
position was occupied by the “languages” (8). The rank of order o various fields of CVT
reflects clearly the importance of the IT skills for the SMEs, however, in spite of the “hype”
of the Knowledge Economy both in the public and the academic discourse, such traditional
training as “engineering and manufacturing” is still playing leading role. These findings
supports those views, which are stressing the intimate relations between the “Old” and “New”
economies. In relation with effects of the size category of the firm, it is interesting to not that,
with the exception Hungary, Poland, the U.K. and France there is no linear relations between
the size of the firm and the time spent on training. In relation with the various fields of CVT,
it is worth noting the largest amount of time spent in Hungary for the training in “accounting,
finance”, due not only to the complicate but unstable character of financial environment of the
firms. Hungary is followed by the German and Polish firms. There is a general consent in the
community of the business studies, that within the context of the globalization and the
emerging role of the “network” paradigm” in comparison to the “economy of scale”
paradigm, beside the IT competence, the “language” skill is a “sine qua condition” for SME to
participate in the international economy or to be “global player”. The firms in the Project
countries are aware the importance of the language skill and are spending more time than the
EU average – especially the Spanish firms – for language training.
Evaluating the practice of the “in-house” training, we may say that the size does matter more:
firms employing 250 or more persons are using more actively their training courses. This type
of training courses are organised in higher rate than the EU average in Germany and in the
U.K. Hungary, Spain and Poland represent the bottom-end of the scale. Whilst France and
Belgium are located between the two groups of the countries mentioned.
Looking at the evaluating-monitoring practice (e.g. satisfaction of participants,
certification-validation of skill acquired, etc.) of the various training programs, this practice is
diffused in higher than the EU (both in EU-15 and EU-25) average rate in the British practice.
Choosing among the evaluation methods the tool of “measuring the satisfaction of
participants”, we may have a rather different company practice. The firm’s size effect was not
found both in the case of the British and French firms. However, this measurement tool was
more extensively used in the large firms in comparison with the SMEs in Germany, Hungary,
26
Spain and Poland. The visible effect of size-category of firm on the application of variety of
evaluating-monitoring of training was identified only in Belgium.
Beside the detailed review of the time spent on CVT courses, the company case
studies conducted in various sectors (e.g. manufacturing, service, IT ) helped us to map the
rather informal characteristics of the knowledge development, share and transfer in the firm
practice. In the Project’s countries surveyed, the On-the-Job Training (OJT) is functioning
together the Off-the-Job (Off-JT) described above. In other word, in the everyday life of the
firms investigated, there are mutual relations (interactions) between the coded-formalised and
the non-coded/tacit forms of knowledge. In this respect it is worth noting such forms of OJT
as “learning by doing”, “learning by interacting”, “learning by using” mapped in the practice
of firms functioning in both in the “old” and the “new” economies. However,
owners/managers operating in the “knowledge economy” sectors (e.g. IT firms, new media
companies, etc.) have stronger “awareness” on the importance of the “life-long-learning” than
their counterparts participating in the “old” economy. The first group of entrepreneurs have an
ambition to create “high-skill” equilibrium in comparison with the owners/managers of the
“old” economy sector, who are satisfied with the creation of “low-skill” equilibrium. In this
relation it is necessary to call attention to the key role of the new technology in the knowledge
generation process. Firms, operating in both the EU-15 or EU-25 countries, employing “new
technology” are spending more attention to the CVT compared to the firms without “new
technology”. Due the importance of the level of technology, finally, it is necessary to give a
brief presentation on the “state of the art” of innovation in the SME sector.
Reviewing the Project countries’ position in relation with the innovation activities the
following rank-of order was identified. The highest rate of (aggregated) innovation activities
were found in Germany, Belgium and France, the lowest ones in the New Member States
(Hungary, Slovakia and Poland). Comparing the “product” versus “process” innovation, it is
interesting to note that the “product innovation” more frequent in comparison with the
“process innovation” in all countries, with the exception of Spain. As concerning to the “sizecategory effect” - with the exception of France, Spain and the U. K.- there were no clear
relations between the size of the firm and the rate of product or process innovation. The
relative weakness of process innovation compared to the product innovation, indicate an
underdeveloped nature of non-technical innovations in the European firms in general and in
the SMEs in particular. It is by no chance that according to the results of the latest (2003)
27
European innovation scoreboard report, the US firms are advance over Europeans not only in
the field of technological innovations but have “leading-edge” position in the case of the
“non-technical innovations”. As concerning the Project countries, such countries as Germany
and Belgium are belonging into the “club” of “leading” non-technical innovators, while
Hungary, France and especially Slovakia are representing the so-called “trailing-edge”
country group.
References
Pisani-Ferry, J. (2005) What’s Wrong With Lisbon?, Munnich Economic Summit, Munnich,
June (Revised July)
28
PART I. INTRODUCTION: DESIGN, THEORETICAL AND
METHODOLOGICAL BACKGROUND
1. The purpose of the project and the participants
1.1 Comparative e-learning content based on research evidences
According to information from the Observatory of European SMEs more than 90 % of
enterprises in Europe belong to the category “small- and medium-sized enterprises’,
employing less than 250 people. These companies account for two-thirds of total European
employment. In 1998 the contribution of the European SMEs to GDP was 48 % on average
(Observatory 2003). There is no doubt that SMEs play a crucial role not only in sustaining the
adaptability, dynamics and competitiveness of European economies but, through significant
employment generation, they also improve the cohesiveness of European societies. The
dominance of SMEs in employment and economic performance is far from being a new
phenomenon: since the mid 1980s there has been a continuing interest on the part both of
policy makers and the academic community in the role SMEs play both in economic and
social development.
The growing importance of SMEs must be particularly stressed in the case of the
former state-socialist countries. In these countries one important phenomenon of the postsocialist economic and social transformation process was the radical change of the sizestructure of economic organisations. The state-socialist economy was dominated by stateowned large firms, but since the collapse of this political and economic regime the number
and proportion of small- and medium-sized enterprises has dramatically increased. For
example, in Hungary, as a result of an extremely rapid transformation process the number of
SMEs grew by 50 % between 1990 and 1995 until it stabilized at the end of the 90s (Román
2002:8). See Table 1.1 below:
29
Table 1.1 Size Distribution of manufacturing firms: planned versus capitalist economies
(1970)
All manufacturing firms
1. Average number of
employees per firm
2. Percentage of those
employed by large firms3
Textile industry
employees per firm
employed by large firms
The ferrous metal industry
employees per firm
The chemical industry
employees per firm
The food-processing
industry
employees per firm
Planned economies1
Capitalist economies2
197
80
66%
32%
355
81
61%
28%
253
82
61%
28%
325
104
79%
35%
103
65
39%
16%
Source: Kornai 1992:400.
1
The sample includes Czechoslovakia, East Germany, Hungary and Poland.
The sample includes Austria, Belgium, France, Italy, Japan and Sweden.
3
Large firms employ more than 500 people.
2
There are other additional issues which directed attention to SMEs. The first one is the
so-called “tertiarisation’ of the economy, which means the transformation from an industrial
to a service economy. SMEs have always played a dominant role in the service sector; that is
the growth of the service sector upgraded the position of the SME sector. Another important
reason for a revaluation of the SME sector is related to outsourcing and networking
tendencies. Empirical evidences show that skills are becoming increasingly specialized and as
30
a consequence large firms outsource their non-core competencies, which creates new
opportunities for smaller enterprises that can become suppliers to larger ones. In line with this
“the downsizing waves in large enterprises have turned attention towards the SME as an
engine of economic growth and employment.” (Dejonckheere – Ramioul – Van Hootegem
2003:7) These trends are greatly facilitated by the emergence and extensive use of the new
information and communication technologies (ICT). A third characteristic of SMEs related to
the above-mentioned outsourcing practices is the creation of more flexible organisational
solutions.
Another important factor, which may explain why SMEs deserve special attention, is
the revaluated role that knowledge plays in economic development and global jobcompetition. Clear evidences suggest that SMEs have a strong impact on the diffusion of new
knowledge (the ‘spill over mechanism’), above all through their flexibility, adaptability and
absorptive capacity (Observatory 2003:14). In the processes connected to the creation, sharing
and use of knowledge one of the most important resources SMEs exploit is undoubtedly
human capital. This recognition has led the project participants to compile a research-based
international e-learning curriculum intended for present and future SME owners and
managers. The aim of the project was not just to reproduce existing knowledge but to create
new one. Therefore the first phase of the project consisted of an intensive research period
focused on the current status of SMEs within the national economies of the participant
countries and on the analysis and comparison of similarities and differences between the
various SME systems, under the coordination of the Institute of Sociology of the Hungarian
Academy of Sciences. The outcomes of this phase of joint work involving the Leonardo
consortium members were the national curricula (National Research Reports), available both
in English and in the national languages, and the comparative curriculum (Comparative
Research Report) in English. In the second phase of the project, coordinated by the Budapest
Business School, an e-learning curriculum was developed, based on the results of the research
period of the joint work.
To summarise, the project intended to identify the different sources of knowledge and
competence needed for SMEs and to describe the interplay between them (e.g. what kind of
knowledge serves as a basis of competence and vice versa) and how the fast changing content
of knowledge and skills can be upgraded continuously. The final aim of the project was to
help the SMEs in their trans-national mobility within the European economic space based on
31
the systematically collected information on the legal and financial regulatory environment
characterising the countries participated in the Leonardo project. The Report provides
information about the legal-administrative environment of SMEs which is based on data from
2004 and 2005.
1.2 Target groups (business school students, owners/managers of SMEs)
The project has multi-layered target-groups. The first layer comprises national SMEs,
beneficiaries of the different training courses and the regular student population who will be
reached by the project through the undergraduate or graduate training courses offered by
educational institutions involved in the project. The second strand is European and national
decision makers who will be helped in that the project will supply them with a more
differentiated knowledge on the European SME sector, thus improving business-to-business
relations (i.e. the project contributes to an intensification of business ties and cooperation
between firms belonging to the EU15 and New Member States /NMS10/). The third strand of
the target group is made up of the academic communities of the participating countries and
the national employers’ associations invited to be partners in the project who will debate and
criticise the outcomes of the project, contributing in this way to the improvement of the
activities undertaken and to the evaluation process.
32
1.3 Exploiting the ‘leading edge’ e-learning experiences of educational institutions involved
in the Project
The consortium was set up following the ‘doubled character’ of the project, i.e.
research activities combined with the development of training materials. Since the target
group of the project was partly comprised of adult entrepreneurs it was necessary to involve
universities with experience in the field of distance learning in order to ensure the quality of
training material development. Therefore five members of the consortium were educational
institutions: Budapest Business School (Hungary), UNED (Spain), EHSAL (Belgium),
Université Nanterre (France), University of Wismar (Germany) and Luton Business School
(UK). In order to complete the comprehensive experience these institutions have in teaching
and developing e-learning curricula, three research institutes with extensive experience in
the field of comparative research in social sciences were invited to collaborate in the project
as well: the Institute of Sociology of the Hungarian Academy of Sciences (Hungary), the
coordinator for producing content (national and international comparative research reports),
the Institute of Sociology of the Slovak Academy (Slovak Republic) and the Institute of
Labour and Social Studies (Poland). In order to represent the special needs of user groups
the Confederation of Hungarian Employers and Industrialists participated in the project
together with employers’ associations representing the SME sector in the other countries in
the consortium.
Other country selection criterion was the type of capitalism – or more precisely the
model of the market coordination3. In this relation the following varieties of capitalism were
distinguished:
“Coordinated Market Economy” (CME): Germany and Belgium are corporate welfare
states (financed primarily through contributions and providing a high level of
benefits),
“Liberal Market Economy” (LME) the United Kingdom is a model of liberal market
economy (universal but low benefits),
3
For the detailed description of this model see Section 2.3 in this Part.
33
“Mediterranean Market Economy” (MME): France and Spain represent the
Mediterranean model of market economy,
“Transitional Market Economies” (TME): Hungary, Poland and Slovakia, the
emerging Central European market economies or former state-socialist economies. .
34
2. Theoretical background and the selection of countries participating in
the project
2.1 Research and educational technical criteria shaping the pool of countries participating in
the project
Due to the unique character of the research proposal, which aimed to develop original
knowledge (partly accessible in international publications) based on theoretically founded
empirical research on SMEs, and to transform the results of the research into training material
(“international curriculum’) using leading edge educational technology (e-learning), when
selecting countries for the Leonardo research consortium, the research proposal designers had
to find partners satisfying the following two criteria at the same time:
(1) Firstly, the potential partners had to be familiar with international comparative
research in the social sciences. This is not just limited to the necessary research skills
of individual participants (e.g. language skills, familiarity with carrying out case
studies, conducting interviews, etc), but requires such “collective’ skills as setting up a
temporal research team, coordinating the progress of work, the capacity to monitor the
progress of the various work packages, etc. In other words, the successful participation
of various national teams in the project required the combination of these individual
and organisational skills described above, together with the related learning capacity
during the project.
(2) Secondly, they had to have either first hand experiences in transforming empirical
research results (content) into technologically advanced training material (e-learning)
or to have ongoing working relations with educational institutions capable of
developing e-learning material.
35
2.2 Creating a sample of countries representing the variety of market coordinating
mechanisms (a mix of CME and LME and a variety of Old and New Member States of the EU)
In deciding on the member-countries of the project consortium, beside the above
briefly presented criteria, other theoretical and methodological arguments were used as well.
In this respect, we should note that comparative social research dealing with the developed
economies has a long history. In the last half century of research aimed at describing and
interpreting the differences in the economic and political institutions in different countries
various perspectives can be identified.4 From the 2nd World War until the 1960s the so-called
“modernisation approach’ was the mainstream view in comparing the developed market
economies. Followers of this view focused on institutional forms that ensured the leading role
of the state (e.g. using the planning system as a key tool in modernising the national
economy) over the actors of the private sector of the economy. Protagonists of this view often
classified countries into the following dual categories: ‘strong’ vs. ‘weak’ states, representing
the intensity of economic organiser activity of the state.
In the 1970s when high inflation became a key concern of economic and social actors
in the developed market economies, issues related to neo-corporatism became the focus of
interest in comparative research. Although there is a plethora of definitions, this term
basically refers to the capacity of the state to reach a more or less stable consensus with
organisations representing employers’ and employees’ interests, not only on working
conditions and wages but on social and economic policy too. In international comparative
research practice a particular role was assigned to the trade unions and the best performer
countries were the small and open economies of the Nordic region.
In the 1980s and 1990s the flexible production systems, national innovation regimes
and the various reorganisation attempts related to technological change and globalisation
became the focus of interest in international comparative studies. This approach was labelled
as the social systems of production. Due to the strong sociological content of this view, this
school of comparative analysis paid particular attention to the role of institutions which
4
This brief outline of the economic comparative literature is based on the seminal work of Hall-Soskice 2001:
.2-4. and completed by Sapir 2005.
36
generated trust and improved individual, and especially collective, learning capacity both at
national and regional levels. In this context, we would like to stress the particular economic
success, as a result of strong networking activity, achieved by the Central Italian SMEs (Third
Italy).5
At the turn of the 20th and 21st century the “Varieties of Capitalism’ (VoC) approach
became the mainstream view among scholars, representing both communities of business
studies and comparative political economy.6 Compared to the previous approaches briefly
presented above, this framework locates business organisations at the centre of analysis,
attributing a more active role to the relevant actors such as individuals, firms, producer
groups, governments, and various organisations representing interest groups etc. in shaping its
internal and external environments. The core concept of this approach can be summarised in
the following way: “(…) this is a firm-centred political economy that regards companies as
the crucial actors in a capitalist economy. They are the key agents of adjustment in the face of
technological change or international competition whose activities aggregate into overall
levels of economic performance.”7
This concept of the “relational view’ of the firm investigates the following dimensions of
inter-firm relations which play a core role in their dynamic capacity to solve the problems of
coordination in market economies:
(1) Labour Relation Systems aimed at coordinate bargaining – between employers and
employees or between the organisations representing their respective interests – over
working and employment conditions and wages in particular.
(2) Vocational training and education systems aimed at regulating the patterns of use,
development and investment of workforce skills. The outcome of the coordination
problems related to the previously mentioned features of these skills has a decisive
impact both on the competitiveness of the firm and the national economy.
5
Simonyi, Á (1989) A kisvállalkozások fellendülésének társadalmi hátterérıl: Az olasz példa. (Social
dimensions of the economic development of SMEs: the Italian case.) Közgazdasági Szemle, 1989/5.
6
In outlining the main features of the VoC approach, we used the framework elaborated by Hall-Soskice 2001:
6-68.
7
Hall-Soskice 2001: 6.
37
(3) The outcomes of the coordination are influenced by the forms of corporate
governance. This sphere of the firms’ relationships conditions the firms’ access to
finance and represents a guarantee of returns for investors/stockholders.
(4) It is also worth stressing the crucial importance of the coordination problems of interfirm relations (e.g. the relationships a firm has with its clients or suppliers, etc.). In the
context of global competition pressure, these types of coordination (collaborative
R&D) have gained greater importance in the last decade.
(5) The questions of these coordination problems also arise in the terrain of the firm’s
own employees. In this relation, the core problem is how to create consensus between
the firm and the employees in order to visualise and mobilise the knowledge (tacit
skill) owned by the workers.
Using the basic elements of the VoC concept briefly outlined above, Hall and Soskice
(2000) made a distinction between two main types of coordination mechanisms functioning in
the developed market economies. The first one is the so-called Coordinated Market Economy
(CME) in which non-market structures and regulations play visible roles. In this type of
economy, the relations between firms and other economic actors are regulated by the socalled non-market relations (e.g. the importance of ‘relational’ contracting; the importance of
relations based on cooperation are in many cases more important than relations based on
competition, etc.). Contrary to the CME, in the Liberal Market Economy (LME) the
equilibrium of the firms is guaranteed by market (supply and demand) and hierarchical (firm
organisational or intra-firm) regulation. The literature of classical political economy has
analysed the forms and mechanisms of the LME in depth.
There are significant differences in the patterns of company structures and hierarchies
according to the models of market coordination. Moreover, the creation of cooperation
between the economic actors requires network-type regulations which complement both
market and hierarchical ones. In addition, developing and maintaining collective coordination
mechanisms in the economy limits the “marge de manœuvre’ of the firms. For example, the
degree of autonomy of firms’ management is strongly influenced by the forms of
coordination. These forms of coordination (e.g. labour relation systems, inter-firm relations,
38
corporate governance, vocational training and education, etc) constitute the institutional
context of business organisations.
In this perspective, firms’ reactions (e.g. production and sales strategy, employment
policy, etc.) to the same type of social, technological and economic challenges (increased
global competition pressure, extensive use of outsourcing and off-shoring, implementation of
ICT, liberalisation of air traffic, etc.) differ according to the institutional context. For example
British firms operating in the context of LME (e.g. British Airways) have reacted differently
in comparison with German firms operating in the institutional conditions of CME to the
challenge generated by the liberalisation of air traffic which began in the second half of
1980s.8 In relation to issues to be analysed in the Leonardo project (e.g. location of SMEs in
the national economy, the regulatory framework and SMEs, the labour relation system,
knowledge use and innovation activity, etc.), using the example of labour relations and the
level of unemployment, we would like to illustrate the impact of the LME and CME
institutional contexts. See in detail in Table 2.1.
8
Mark Lehrer (2001): Macro-varieties of Capitalism and Micro-varieties of Strategic Management in European
Airlines. In: Hall-Soskice 2001: 361-386.
39
Table 2.1 Trade union density, level of collective bargaining and days lost by strike activity:
examples of LME and CME countries
Working days lost due to
strike activity: (N° of days
Trade union density (%)
Bargaining level*
lost per 1000 employees)
**
Countries
1950-73
1985-92
1950-73
1985-92
1991-2000
Australia
54
49
3.0
3.0
108.2
Canada
30
32
1.0
1.0
189.0
UK
45
51
1.7
1.0
23.1
USA
39
40
1.3
1.0
51.3
LME
39
40
1.7
1.5
n. d.
average
Austria
Belgium
Denmark
Finland
Germany
Japan
Netherlands
Norway
Sweden
Switzerland
CME
average
63
48
59
41
38
34
40
58
71
37
55
68
81
88
37
25
28
63
95
29
2.2
2.0
4.0
3.2
2.0
1.4
3.7
3.8
3.7
2.0
2.0
2.5
2.8
2.8
2.0
2.0
3.7
3.6
2.9
2.0
3.8
30.9
169.2
82.2
9.3
2.0
18.3
97.1
30.4
1.5
49
57
2.8
2.5
n. d.
Source: Hall, P. A. – Soskice, D. 2001. Varieties of Capitalism, (The Institutional Foundations of Comparative Advantage),
Oxford: Oxford University Press, an edited version of the tables on pp. 20 and 59
* 1= plant-level wage-setting; 2 = industry-level wage-setting; 3 = central wage-setting without sanctions, 4 = central wagesetting with sanctions. Value recorded is the average for the period indicated.
** The source of the data is the following: Institut für Arbeitsmarkt- und Berufsforshung (IAB), quoted by Inotai, E. (2005)
Ha jól megy, több a sztrájk. (More strikes when the economy works well) Népszabadság, 16th August, p. 13.
The data presented in the table above draws attention to the following inconsistencies
of the VoC model. Firstly, the CME and LME do not represent the two extreme points of the
same scale of variety in the coordinating mechanisms of market economies. Rather, they form
two separate scales of market coordinating mechanisms and within each scale we can identify
various sub-models. This is well illustrated by the empirical evidence on the working days
lost due to strike activity. For example, Denmark is formally located on the scale of CME and
produced almost the same high level of working days lost as Canada, a country situated on the
40
LME scale.9 Secondly, there is a group of countries which belong neither to the LME group
nor to the CME group of countries and are called by Hall-Soskice (2001:20-21)
‘Mediterranean Market Economies’ (MME). According to the authors, this class of countries
is characterised by the importance of agriculture, and the strong role of the state in the
economy, and in this context it is necessary to point out the special intervention of the state
(i.e. a kind of non-market regulation) in the field of the financial support system of firms.
However, in these countries (Italy, Greece, Portugal and Spain) the labour market is fairly
deregulated and shows visible similarities with the institutions of LME countries.
Unfortunately, during the planning period of the Leonardo project proposal (2001) and
even now, we have to cope with the ‘knowledge deficiency’ on classifying the economic
development trajectories of the candidate countries, the majority of whom are referred to from
1st May 2004 as New Member States (NMS). However, on the basis of our previous research
experiences10 and the fragmented knowledge based on, many cases, incomparable
international research findings; we anticipated that the ten NMS countries do not constitute a
homogenous block from the point of view of market coordination mechanisms. In this
perspective, the NMS can be placed in the following groups of countries:
(1) Baltic republics: Lithuania, Latvia and Estonia.
(2) Mediterranean countries: Malta and Cyprus.
(3) Central European Countries: Czech Republic, Hungary, Poland, Slovakia and
Slovenia.
Using the tested model for the developed market economies (CME, LME, MME) and the
geographical classification of the NMS, the following country sample was constructed:
9
Makó, Cs.- Illéssy, M. (2005) Interplay of technological and organisational innovations: the case of eWork
diffusion in NMS, In: Ramioul, M.-Huws, U. – Bolen, A. (eds.) The Measuring Information Society, Leuven:
HIVA
10 Makó, Cs. – Warhurst, C. (1999) The Management and Organisation of Firm in the Global Context,
Budapest: University of Gödöllı – Budapest University of Economic Sciences.
Makó, Cs. – Simonyi, Á. (1997) Inheritance, Imitation and Genuine Solutions, (Institution Building in
Hungarian -Labour Relations), Europe -Asia Studies, Vol. 49. No. 2. March, pp. 221-244.
Szelényi, I. – Kostello, E. (1996) The market transition debate: toward a synthesis?’, American Journal of
Sociology, Vol.101, No.4, January, pp.1082-1096.; Jacot, J.-H. (1990) Du Fordism au Toyotism? (Les voies de
la modernisation du system automobile en France et au Japon). Paris: La Documentation Francaise
41
Table 2.2 Rationale of the selection of countries participating in the Leonardo project
Group of Countries
CME
LME
MME
Countries selected for the Leonardo project consortium
EU 15
Belgium, France, Germany
UK
Spain
NMS 10
Baltic republics
Central European Countries
Mediterranean Countries
Hungary, Poland, Slovakia
42
3. Methodology: a combination of ‘cross-national’ (functional) and ‘international’ (societal) approaches
3.1 Brief overview of international comparative approaches
In the last decade, under the pressure of globalization and increased competition, we
have witnessed a growing interest in international comparative research in the social sciences.
However, despite the increased interest there is a visible shortage of work dealing with the
theoretical foundations of comparative research. There are only modest theoretical efforts to
better understand the advantages and disadvantages of the various approaches used in
international comparative research. This situation is rather surprising, firstly because there is a
strong theoretical tradition in the social sciences which stresses the key role of ‘comparison’
as a basis for all scientific approaches in the social sciences, as Durkheim frequently
observed.11 Secondly, policy makers, both at a national and a supra-national level rely
extensively on evidences drawn from international comparative research when positioning
their countries or cluster of countries (e.g. ranking NMS in attracting FDI, the positioning of
OECD or EU-25 countries in terms of innovation, ICT diffusion, international
competitiveness, working conditions, quality of life etc.). The extensive use of comparative
data may serve as an external legitimating factor both in the success of the ruling policy
makers or in helping the forces of the opposition use unfavourable comparative data which
justify their confrontations with their political enemies. In this sense, international
comparative research literature continually produces data and analyses which serve the
interests of the political elite.12
Due to the extensive use of comparative data in our present analysis, it is worth briefly
reviewing the mainstream approaches of international comparative research. When
identifying the various types of international comparative approaches we can distinguish the
following criterion (Maurice 1989):
11
Benoit-Guilbot, 1989, quoted by Théret, 1997: 164
Théret, B. (1997) Méthodologie des comparaison internationales, approches de l’effet sociétal et de la
régulation: fondements pour une lecture structuraliste des systemes nationaux de protection sociale, L’Année de
la régulation, Economies, Instutions, Pouvoirs, Vol. 1, Paris: Éditions La Découverte & Syros, p. 164.;
Schienstock, G. (2005) From path dependency to path creation: Finland as a case in point; Paper prepared for the
37th World Conference of the International Insitute of Sociology, Stockholm, Sweden, 5-9. July
12
43
1. Level of analysis, in this sense we make a distinction between macro and ‘infrasocietal’ levels (e.g. mezo, micro) indicating the locus of the objects investigated.
(status of society)
2. Continuous or discontinuous character of the objects investigated from one country to
another. (status of comparison)
A combination of these dimensions (e.g. vertical relations between the society and the
object studies and the horizontal relation between objects investigated) creates a scale of
analysis on which each type of comparative approach could be located, according to Maurice,
who elaborated the so-called ‘societal’ or ‘inter-national’ approach. This approach redefines
the status of the notion of ‘nation’ or ‘society’ as well as the status/preconditions of continuity
and discontinuity in international comparison. This means that there is a continuity if the
object studied is comparable from country to country, while there is a discontinuity when this
is not the case (i.e. the object studied is not comparable term by term from country to
country). (Maurice 1989:177).
Using the two criteria or dimensions, the following types of international comparisons
should be distinguished:
1. the ‘cross-national’ or functionalist approach,
2. the ‘cross-cultural’ or cultural approach,
3. the ‘inter-national’ or ‘societal approach comparison
In the case of the ‘cross-national’ approach, the comparison is based on the principle
of ‘rationality’, which asserts continuity between the phenomena compared ‘term by term’ or
‘item by item’. Rationality and the related principle of continuity of phenomena imply that
various economic or social indicators (e.g. the rate of unemployment) are comparable by
countries and such social-institutional contexts as the labour relations system, training and
education, labour market institutions etc. only play a residual role. The notion of ‘functional
equivalence’ often used in this type of comparative work indicates that the categories
compared (e.g. ‘on-the-job’ training) have the same meaning in different countries
participating in the comparative research.
44
Enterprises (or their various structural elements such as the technology or architecture
of organizations etc.) are treated as a ‘culturally free’ phenomenon; history or the local
characteristics of organisations are treated as a ‘residual’ problem. The ‘nation’ has a rather
neutral contextual meaning and does not represent any discontinuity of the structural
dimensions of organisations compared by countries. The ‘culture free’ synonym or label of
the ‘cross-national’ approach well illustrates its universalistic character, reflecting the
influence of the ‘convergence of societies’ theory.
Figure 3.1 is a stylised presentation of the direction of relations between various levels of
analysis and the degree of continuity between the phenomena compared by countries.
Figure 3.1 ‘Cross-national’ Comparison (Maurice 1989:179)
Cross-nationalComparison
Level of analysis
Country (B)
Country (A)
Macro
Micro
(1) Lack of interaction between the macro and micro level.
(2) Strong continuity between phenomena investigated, comparison ‘by item’.
The ‘cross-cultural’ approach represents the other extreme point on the scale of
international comparative research. In opposition to the ‘cross-national’ or ‘functionalist’
view, the ‘cross-cultural’ approach stresses the great variety of the objects surveyed due to the
strong influence of the national culture, and, according this view, it is impossible to make a
mechanic comparison country by country and term by term. In addition, in contrast to the
‘functionalist’ view – which presupposes a continuity of phenomena compared between
countries – the ‘cross-cultural’ approach stresses the strong discontinuity of objects compared
in various national cultures, therefore its power of generalisation is rather weak. However,
this method of comparison – in contrast with the functionalist view – helps us to better
understand the various dimensions of the national contexts13. In this context is worth noting
13
In this context it is necessary to mention such emblematic work carried out in the perspective of the ‘crosscultural’ approach as Hofstede, G. (1980) Culture’s consequences; International differences in work-related
values, London: Sage; D’Iribarne, Ph. (1989) La logique de l’honneur, gestioin des enterprises et traditions
nationales, Paris: Le Seuil
45
the ‘renewed attempt’ within the ‘cross-cultural’ approach which is designed to fill with
content the principle of comparison by suggesting ‘intermediary’ concepts between the
national culture and the objects or phenomena compared in different countries. (e.g. strategy
or power in the case of Crozier or Friedberg or ‘habitus’ in the work of Bourdieu14). The next
figure presents the main characteristics of the cultural approach in the social sciences.
Figure 3.2 ‘Cross-cultural’ Comparison (Maurice 1989:180)
Cross-cultural Comparison
Level of analysis
Country (A)
Country (B)
Macro
Micro
(1) Strong influence of the national culture
(2) Strong discontinuity between the phenomena investigated.
To describe the special features of the ‘inter – national’ comparison or the so-called
‘social effect’ approach (SE), it is worth remembering the key features of the previous
approaches to indicate the visible contrasts among them. “If the functionalist (‘cross-cultural’)
approaches asserts universalism (i.e. continuity of phenomena compared in various countries)
in the name of rationality and if the cultural approach (‘cross-cultural’) stresses the particular
nature of the objects investigated (i.e. their discontinuity between countries compared) in the
name of belongingness to the national culture, the SE approach has certain similarities more
with the second (i.e. ‘cross-cultural’ view) than with the first approach (‘cross-national’);
however the SE belongs in another category of comparative methods.” (Maurice 1989:182)
The SE approach is a special form of structural analysis in stressing the intimate or
inseparable relations (‘reciprocity relations’) between the actors and the system. In this case
the comparability principle does not apply directly to the particular phenomena or items
(objects) compared ‘term by term’ but is applied to a certain model constructed by a particular
“(…) structuration of spaces and actors being mutually interdependent. If one in each case
recognizes the same basic elements of structuration (general education, occupational training,
seniority, hierarchical position …), differences between them spring from the relations that
14
Crozier, M. – Friedberg, E. (1997) L’Acteur et le systeme, Paris: Le Seuil, Bourdieu, P. – Wacquant, L. J. D.
(1992) An invitation to reflexive sociology, Cambridge: Polity Press
46
these elements have with each other; not in an isomorphic (or identical) sense as is the case in
systemic or functionalist models (…)”.15 In other words, the interdependency of the objects
within this ‘structuration of domains and actors’ represents the so-called ‘national coherence’
varying from country to country. Therefore, the SE approach has a paradoxical characteristic:
it attempts to ‘compare the incomparable’. The exclusion of the comparison ‘term by term’
reflects the discontinuous character of this approach and, paradoxically, there is continuity in
comparing the ‘particular societal coherence’. The content of this key notion of the SE
approach has recently been well summarised by the creator of the concept himself: “Societal
analysis tends to reach beyond this rhetoric by giving comparability a new status. In so doing,
it conceptualises the macro/micro antithesis differently, problematising it as ‘sets’ of
interdependent relations in which ‘actors’ and ‘spaces’ are perceived in their relationships to
the wider society. (…) The construction of such sets of structural and relational
interdependencies gives them a ‘coherence’ that excludes any term-for-term comparison
between their various constituent elements.”16
The logic behind this type of comparative analysis is not ‘rationality’ (as in the case of
the ‘cross-national’ view) or ‘national culture’ (as in the case of the ‘cross-cultural’ method),
but the ‘construction of actors in their relations with the wider society’. The following figure
indicates the mutual relations or interdependencies between the levels of analysis and national
coherences (societies).
15
Maurice, quoted by Korsnes 2000: 72.
Maurice, M. (2000) The paradoxes of societal analysis – A review of the past and prospects for the future, in:
Maurice, M. – Sorge, A. (eds) (2000) Embedding Organizations, Amsterdam/Philadelphia: John Benjamins
Publishing Company, p.16.
16
47
Figure 3.3 ‘Inter-national’ comparison or comparison SE (Maurice, 1989:182)
Level of analysis
Macro
Societale (inter-national) Comparison
Country (A)
Country (B)
Micro
(1) Strong interaction between macro and micro composites of national coherence.
(2) The comparability of national coherences is based on the paradox of the non-comparability ‘term by term’ of
the composite elements of the national coherence.
As we can see from the above figure, the SE approach can be characterised by
discontinuity and continuity at the same time. Discontinuity refers to the denial of
methodological universalism and ‘term by term’ (simplified) comparison of objects
investigated in different countries (i.e. there is a discontinuity between countries). However,
the SE approach can also be characterised by continuity as long as national coherences (as
characterised earlier) are at the centre of comparison. The SE approach tries to go beyond the
methodological limits of both the functional and cultural approaches by shifting the logic of
the analysis, while the functional (‘cross-national’) approach de-contextualises the objects or
phenomenon investigated (this is an implicit theoretical methodological consequence of the
underestimated importance attributed to national contexts and of the universalism postulated).
Contrary to the functionalist approach, the ‘cross-cultural’ view stresses the
discontinuity of phenomenon investigated in different countries, stressing the unique character
of each society. However, in spite of a formal similarity in the principle of discontinuity, we
must stress the significant differences in both the content and consequences of this
discontinuity. In the case of the ‘cross-cultural’ approach, the content of discontinuity refers
to the unique character of each national culture compared. Therefore, the representatives of
this approach rely on various intermediary categories of analysis (objects or concepts) in order
to describe the relations between the national culture and the organisational phenomenon
investigated. Conversely, the content of the discontinuity principle of the SE approach refers
to the interactive construction of actors and spaces in their relationship to the wider society
(these are the three key concepts of the SE approach: social spaces, actors and their
48
relations17). In other words, the SE approach aims to socialise the objects of investigation
whereas other paradigms (e.g. ‘cross-national’ and ‘cross-cultural’) tend either to de-socialise
or de-contextualise them in order to make them comparable (as is the case with cross-national
approaches) or do not really problematise it, presuming that differences emanating from the
cultural diversity of countries are evident and do not need any further investigation.18
Finally, it is necessary to mention several critics of the SE approach. Recently, researchers
belonging to the SE approach school have been drawing attention to the following weak or
underdeveloped features of the approach19:
(1) The notion of reciprocal conditioning (Giddens 1984 – Structure and Actor Duality)
interprets the duality in such a way that boundaries between actor and structure/system
are blurred. The ambiguous view of actors and their roles becomes more evident when
we turn to the analysis of social changes in the SE approach. “A weakness here is that
actors are viewed as only affected by structural features internal to the sub-system
under review and extraneous sources of influence emanating from a different society
or from a global system, are given no consideration.” (Lane 2000:191)
(2) “(…) The notion of reciprocal conditioning implies that mutual shaping is of the same
intensity in any actor within the system constellation and that the general process
occurs in the same manner in all such constellations. Such an understanding obscures
important structural differences between societies.” (Lane 2000:193) We share those
approaches in which the degree of social embeddedness of an action is better
described by Granovetter (1985)20 who draws a contrast between over-socialised and
17
Korsnes, O. (2000) Situated Creativity of Economic Actors. in: Maurice, M – Sorge, A. (eds) (2000)
Embedding Organizations, Amsterdam/Philadelphia: John Benjamins Publishing Company, p. 82.
18
For example, when the SE approach stresses the social construct character of various national models of work
organisation, this indicates a relativisation of its meaning. As for the fordist or taylorist model, empirical studies
conducted in various countries have revealed that it took different forms in each case, with each society
‘digesting’ fordism on its own way, depending on the availability of resources and the particular pattern of
labour relations. On this subject see: Makó, Cs. (2005) Neo- instead of post-Fordism: the transformation of
labour processes in Hungary, International Journal of Human Resource Management, 16:2 February 2005, pp.
277-289.
19
Lane, C. (2000) Understanding the globalization strategies of German and British multinational companies: Is
a ‘societal effects’ approach still useful? In: Maurice – Sorge 2000: 189-208.
20
Granovetter, M. (1985) Economic Action and Social Structure: the Problem of Embeddedness. American
Journal of Sociology 91 (3): 481-510.
49
under-socialised forms economic behaviour or by Whitley (1994)21 who introduced
the notion of tight vs. loose ties between organisations and social institutions. (Lane
2000:193.)
(3) “(…) any change in structural patterns is attributed mainly to unforeseen consequences
of actions, rather than being a result of conscious strategic choice.” Intensifying
globalisation processes have rather problematic consequences for the SE approach.
Actors under the pressure of globalisation are exposed to multiple and conflicting
systemic constraints and opportunities with no guarantee that societal effects of the
home base (e.g. international HRM practices of Japanese firms) of a business
organisation (i.e. Transnational Corporations) will always prevail. In this view the
possible impacts of globalisation “(…) are not of the same order as say, the impact of
new technologies which are adopted by one distinctive set of actors in one pre-existing
social system.” (Lane 2000:192.)
(4) The SE approach overfocused on labour-related issues and neglected the fact that
capital serves as an impediment to an understanding of internationalisation processes
now impinging on national industrial systems.
In spite of the briefly presented weaknesses of the SE approach, we would like to
stress the following positive features of the ‘sociological institutionalism’ of the SE
comparative method. “This framework has not only helped to understand the continued
reproduction of national diversity in the face of supposedly strong homogenizing influences,
such as rapid technological change and much increased international competition, but has also
illuminated the nature of incremental societal change. By positing the notion of strategic fit
between certain technological contingences and certain social syndromes (Sorge 1991) the
approach also explains industrial specialization between societies and, in the absence of
specialization, differing degrees of competitiveness in the same market segment.” (Lane
2000:191)
21
Whitley, R. (1994) The internationalisation of firms and market: Its significance and institutional structuring,
Organizations, (1) pp. 101-124
50
3.2. Rationales behind selecting the issues and the levels of investigation
In the general practice of international comparative research on SMEs, the so-called
‘cross-national’ (functionalist) method represents the mainstream approach. (Román, 2002).
Using this approach – its main characteristics were described in comparison with the ‘crosscultural’ and ‘societal’ approaches in the previous section – researchers have to confront the
problems of the lack of and inconsistencies in statistical data concerning the activity of SMEs.
In many cases, even a ‘term by term’ comparison is impossible due to the limited availability
of data and due to the use of different data collection techniques in the countries surveyed. In
this context, it is worth mentioning the weakening activity of international statistical and/or
monitoring agencies in collecting and publishing statistics on the economic and social
importance of this sector. (For example, in spite of the ‘evergreen’ rhetoric on the SMEs role
both in economic performance and employment generation, such international statistical
agencies as Eurostat or the Observatory of European SMEs have published less statistical data
and analysis on the activities of firms belonging to this size-category in recent years in
comparison to previous period.)
In spite of the shortcomings of comparative data analyses on SME activities, the Leonardo
Project Consortium selected the following issues for comparative purposes:
(1) The general economic situation of countries and the particular position of SMEs in the
national economies participating in the project.
(2) The legal and financial regulative framework in a both descriptive and comparative
perspective.
(3) The institutions of social regulation: the impact of the Labour Relations System and
the control strategies in the labour process.
(4) The practice of knowledge use and innovation activities.
To overcome the shortcomings of the ‘term by term’ statistical analyses or ‘crossnational’ versions of the comparative research, special attention was devoted to putting the
51
SME sector-related statistical analyses into their national, social and cultural context. In
‘socialising’ the objects or phenomena investigated (e.g. taxation, the creation and termination
of small firms, innovation capacity, etc.), we intend to enlarge the scope of comparison. The
statistical analysis of the European and national-level data was completed by an infra-national
(i.e. sector- and micro-) level of analysis. The multilevel statistical (quantitative) data analysis
was combined with qualitative methods such as company case studies and descriptions of the
position of various sectors (manufacturing, services, ICT-industries) in the national economy
through experiences learned from interviews with key stakeholders (experts, representatives
of employers’ associations, chambers and other business organisations, etc). In analysing
company practices through case studies and by assessing and interpreting the views of
important social actors operating in the sectors investigated, we made an attempt to ‘resocialise’ the evidence sgained from statistical data analysis for the eight countries surveyed
in the Leonardo project.22 The core ambition of this methodological exercise was to better
understand the everyday practice of organising and managing SMEs operating in the group of
countries we selected, belonging both to the EU (15) and the New Member States (10).
Due to the unsatisfactory circumstances of data collection and evaluations indicated
above, the research consortium partly succeeded in collecting and securing the planned
dataset of empirical knowledge based on the combination of quantitative and qualitative data.
Equipped with this knowledge, we tried to go further than the ‘term by term’ comparison of
objects and to construct patterns of reciprocal relations between structures and actors that
would ensure higher value-added knowledge rather than just a simple statistical data analysis.
Summarising the key dimensions of our methodology, we stress that the issues presented
briefly in this section represent the comparison of objects and phenomenon on a horizontal
scale (e.g. relations between actors and structures) while the vertical scale is indicated by the
interactions between macro (national), meso (sector) and micro (company) levels of analysis
(i.e. the same objects should be studied at various levels).
22
In relation to the preparation of the case study, we should note one shortcoming of this comparative project. In
spite of the significant number of company case studies (28) carried out in 3 sectors mentioned above, due to a
lack of resources and the fact that the project participants were not equally familiar with the case study method,
we did not succeed in conducting a sufficient number of interviews with employees of the firms studied.
52
Based on the considerations presented above the structure of the Comparative Report is
built up as follows:
PART 1 provides a general overview of the theoretical and methodological foundations of the
research and gives details about the design and targets of the LEONARDO project.
PART 2 describes the economic profile of the countries surveyed in this project; particular
attention was paid on the SMEs’ contribution to the economic development and on their role
in employment generation.
PART 3 and 4 offer a systematic analysis of the legal and administrative institutional context
influencing the establishing and every-day practice the SMEs. In addition the key role of the
financial institutional environment was analysed and evaluated.
PART 5 presents a general overview about the key actors and institutions of the Labour
Relations System in describing the institutional structure, the roles collective bargaining and
the forums of employees’ participation were analysed and compared both at European and
individual (LEONARDO) country levels.
PART 6: in spite of the lack of available comparable data (both in quantitative and qualitative
terms) on knowledge demand and supply in the sectors investigated, this Part provides a
description of the knowledge-use and training practice in the LEONARDO consortium
countries. Besides the analysis of the various types of knowledge-use and development, the
authors review briefly the key characteristics of the innovation activities in the SMEs.
53
4. Research techniques used in the investigation
4.1 Three stage research methodology (analysis)
Although the core role of SMEs in economic growth, employment generation and the
stabilisation and strengthening of social cohesion is evident, there is a shortage of research
which concentrates on the special problems they have to face in different economic sectors.
That is why the Leonardo project consortium agreed to carry out research within the sectorfocused framework using the methodological approaches outlined above. The description and
analysis of the economic and social environment of SMEs is a complex task and it is
extremely difficult if we want to investigate this segment of firms in the perspective of an
international comparison. In line with this consideration the consortium agreed to use a
research approach based on a combination of various research methods.
As we mentioned above, the research was carried out in three stages. The aim of the
first stage was to give a general overview and a comparison of the position of SMEs within
the national economies of the participant countries. In this stage the logic of the ‘functional’
or ‘cross-national’ approach was followed. Secondary analysis of existing statistical data was
also carried out. In this process, we relied mainly, but not exclusively, on the datasets of the
EUROSTAT, the European Observatory of SMEs, OECD yearbooks, etc. and national
statistical offices in the participant countries. The key aim was to identify the economic and
social locus of SMEs in the participant countries based on an ‘item-by-item’ comparison of
the main statistical indicators such as their share in GDP, exports and employment. This
approach is only able to provide a general overview of SMEs, without including the socialinstitutional context in the analysis by presuming a ‘functional equivalence’ between the
individual indicators.
On the other hand the ambition of the research consortium was not just to provide a
general picture of the economic performance of the SME sectors in the countries surveyed but
- following the logic of the societal approach (SE) presented in the earlier section - to identify
and compare the institutional contexts of the enterprise and the mutual interrelations between
them and the other actors in the SME sector. The second stage of the research was undertaken
54
in accordance with this aim. The main purpose of the second stage of the research was to
identify the institutional framework designating the fields of action in which SMEs operate.
As a result of globalisation and the recent European enlargement, new economic and
social spaces are complementing existing ones. However the legal and financial regulatory
environment which strongly influences the SMEs’ room for manoeuvre still remains
embedded within the national institutional framework. Recognising the importance of the
national systems, descriptive research was carried out at this stage in order to analyse and
evaluate the legal and financial environment of the SME sector. This analysis involved
reviewing existing laws, studies, research reports and other relevant documents concerning
these issues and comparing the different legal and financial systems of the participant
countries. In this context we must stress that the intention is to identify patterns of regulation
instead of simply presenting information on frequently changing rules. This research was
partially based on an ‘item-by-item’ comparison where possible, but we also tried to evaluate
the dynamics of the different systems, especially focusing on the way they influence the
economic and social processes within the SME sector.
As mentioned earlier strong empirical evidence shows that knowledge plays a crucial
role in economic growth and SMEs operating in the knowledge-intensive sectors have a great
impact on the creation and sharing of knowledge. In addition to the second stage, a
comparative analysis was carried out on the knowledge use and innovation practices of SMEs.
This was focused partly on the institutions providing training courses for entrepreneurs and
firms (supply side), and partly on the training practices of SMEs (demand side).
As we have repeatedly pointed out, despite the growing interest in the SME sector,
there is a shortage of systematically collected knowledge about their everyday practices.
Therefore the third stage of the research was based on company case studies. The aim of this
stage was not to collect information on the separate individual company cases but, in line with
the methodological perspective of the aforementioned societal approach (SE), to analyse and
to make issues comparable. For this purpose the team of the Institute of Sociology of the
Hungarian Academy of Sciences as coordinator designed a special case study research
methodology, which will be presented in the next section.
55
4.2 Detailed description of the case study methods used in the research
Critics of qualitative research, including case studies, often emphasize that the small
number of cases investigated cannot offer statistically valid and generalized findings. Another
critique is that case studies question the objectivity of researchers and they are not an
appropriate way of explaining correlations between the phenomena investigated. Without
questioning the above briefly outlined criticism of the methodological weakness of the case
study method, we intend to stress the value-added character of it.
The ‘societal effect’ approach (SE) (Maurice 2000) stresses on the double function of
the case study method: firstly, it illuminates the relations between actors, structures and
spaces at various levels (macro- and infra-societal), which cannot be achieved by the
exclusive application of statistical analysis widely used in the social sciences. Secondly, in
accordance with the above-mentioned method of data analysis, the case study is an
irreplaceable tool for describing and understanding the dynamic and reciprocal relations
between the actors and the institutional context (‘reciprocal conditioning’).
In order to understand a case (e.g. functions, firms, labour process) embedded in its
social and economical/institutional context, a multi-level analysis should be carried out. The
case study method generally used in our work consists of the following levels:
1. A national and sector level statistical analysis of objects or phenomena selected
for investigation was carried out. For example, when the object of investigation is
the new forms of work organisation (i.e. project type working arrangements) of the
new interactive media firms, in order to understand this issue in its complexity, we
have to locate the interactive media sub-sector within the national and sectoral
(ICT industry) context. The aim of this level of analysis is to characterise this
sector (sub-sector) within the national economy through the secondary analysis of
selected economic indicators (the economic performance of the sector: its
contribution to GDP, exports, etc) and the relevant employment indicators
(employment relations, composition of labour by gender, age, education, etc). This
level of analysis follows the logic of the cross-national or functional approach
extensively used in the practice of international comparative projects.
56
2. The second level of analysis consists of various types of research tools: “problemcentred qualitative interviews” (Flecker – Kirschenhofer 2002) and semi-structured
in-depth interviews with the most important social actors/stakeholders, secondary
analysis of relevant document/action plans, and participation in important forums
of social actors. This level of analysis aims to understand the social/organisational
and economic characteristics of the sub-sector (i.e. interactive media or tourism)
through the views of stakeholders operating in this area (e.g. representatives of
chambers, professional associations, employers’ and employees’ organisations,
functionaries-specialists from ministries and various government agencies, etc.).
3. The third level of analysis represents the company case study itself, which is based
primarily on interviews with owners/managers and employees and other
stakeholders of the firm examined in order to analyse business functions or the role
of customers, etc. The aim of the company case study is to identify the mutual
interplay between the economic actors and their institutional context described in
the previous level of analysis.
Summing up the contribution of the three-level analysis in relation to the mainstream
comparative research approaches, we would like to stress the following. The national- and
sector oriented statistical data analysis (i.e. the first level) reflects the logic of the crossnational (functional) approach, while the sector (sub-sector) and company focused analysis
(2nd and 3rd level) together represent the perspective of the societal approach. Our intention
with the combination of the above briefly presented comparative research methods was to
overcome the weaknesses of the exclusive use of either of them and to reach a desirable
‘methodological equilibrium’.
The following table illustrates the various characteristics of the combined use of the
mainstream comparative approaches.
57
Table 4.1 Methodological characteristics of the approaches adopted in the Leonardo
Project practice23
Levels of data
collection and
Approach(es)
Methods and sources of
Analytical
data collection
purposes
analysis
To locate the object
(1) Macro- and sector
Functional
Statistical data collection
level
(cross-national)
and processing
Interviews with
stakeholders and
(2) Macro and sector
level (mapping the
views of stakeholders)
Societal (international)
processing relevant
documents concerned
with business functions
and occupational groups
surveyed
of analysis within
the national
economy
Description and
assessment of the
institutions and the
key programs
shaping the ‘room
for manoeuvre’ of
the actors surveyed
Identifying and
(3) Micro-level
(company case
studies)
describing the forms
Societal (inter-
Interviews with various
and content of
national)
actors
relations between
actors and
institutions
23
This method was developed by the Research Group for Sociology of Work and Organisation, Institute of
Sociology – HAS, and tested in the Leonardo and SMALL (EU 5th Framework) projects.
58
Before presenting the methods designed for international comparative work, it is
necessary to note that the frequency of the organizational surveys is rather low in the SME
sector. In this respect we share the following opinion: “The cost to question a small
organisation is similar to that of questioning a large organisation in most surveys. However,
questioning a large unit covers a larger portion of jobs. Confinement to larger organisations
therefore makes it possible to chart a large proportion of jobs based on research on into a
relatively small number of units. A second argument is the unavailability of database which
also includes (qualitatively adequate, reliable information about) small organisation. Thirdly,
operationalisation problems are also quoted. In this context, it is pointed out that variables
related to organisation structures, teamwork, industrial relations, etc. are more difficult to
uncover in small organisations, due to the lack of formal and sufficiently stable structures and
forms of work. Finally, it is often more difficult to identify a respondent in small
organisations. In most surveys, the questionnaires are addressed to the head of personnel. In
small organisations, this kind of separate post is often missing.” (Huys 2005:9).
4.3 Combination of desk top research methods with first hand field study techniques
(interviewing)
As we outlined above, a combination of research tools was used in the project
according to the research stages and proper methodological considerations. During the project
both quantitative and qualitative research techniques were mixed. At the first stage of the
research (statistical analysis of SMEs), desk top research was carried out through secondary
analysis of existing statistical datasets. At the second stage (description of the legal and
financial environment and knowledge-related issues) desk top studies were set up as well,
based on reprocessing statistics and available strategic documents related to the issues
investigated. At the third level (company case studies) desk top research and interview-based
field work were combined. This stage of the research was based on an analysis of sectorfocused statistical sources and semi-structured, problem-oriented in-depth-interviews with
stakeholders and owners/employers and employees of SMEs.
59
While compiling this report, four types of source were considered:
Theoretical studies in the fields of international comparative research (cross-national,
cross-cultural and societal approaches), sociological-institutional approaches (for
example: varieties of capitalism views, regulation school, and delocalisation of generic
business functions (lessons from the eighteen-country employers’ survey of
EMERGENCE project).
Several international quantitative studies (European Observatory for SMEs,
EUROSTAT, OECD, World Bank, European LFS, various surveys of European
Foundation for the Improvement of Living and Working Conditions, EIRO thematic
surveys, etc.)
Quantitative sources: comparative analysis both at European and national levels on the
economic position of the SME sector surveyed in the countries participating in the
LEONARDO project, data collection and analyses based on the data sets of National
Statistical Offices of the various countries involved in the project, use of the existing
comparative studies on the taken under the aegis of the European Commission (EC)
Directorate-General for Employment and Social Affairs.
Original research reports based on both desk-top studies (for example analysis and
evaluation of documents concerning the legal-administrative and financial regulatory
frameworks of establishing and operating practice of SMEs), statistical analysis of the
position of SMEs in the national economies prepared by the participants, 28 research
reports based on company case studies carried out in the following economic
activities: manufacturing, service/tourism and ICT-sector.
60
Since we had several problems with the available statistics, the following table shows
the most important data sources that were used in the research.
Table 4.2 Main data sources used in this report
Data source
Period
Data base
covered
Further information
European Foundation for
Improvement of Living
Working conditions
2001
www.eurofound.eu.int
and Working Conditions
Eurostat or “SMEs in
Europe’ (Competitiveness,
Continuing Vocational
innovation and the
Training Survey (CVTS)
1996 - 2001
www.europa.eu.int/comm/euros
tat/
knowledge-driven society)
Description of the legal
LEONARDO project
and financial
2003-2004
environment of SMEs
http://www.bgf.hu/en/content/?f
aculty=bgf&c_Id=88
Case Studies in the
LEONARDO project
following sectors: ICT,
clothing, tourism and
2003 - 2004
aculty=bgf&c_Id=88
health care
LEONARDO project
LEONARDO project
Observatory of European
SMEs
Statistical analyses of the
SMEs
National Reports on
1990-2003
2003-2004
SMEs
aculty=bgf&c_Id=88
aculty=bgf&c_Id=88
http://europa.eu.int/comm/enter
SMEs in Europe in 2003
prise/enterprise_policy/analysis
/observatory_en.htm
SMEs and access to
SMEs
finance
Competence development
SMEs
in SMEs
/observatory_en.htm
/observatory_en.htm
61
France
Belgium
Country
ANNEX I.1 Information about the case studies*
Table 4.3 Basic information about the firms investigated in the case studies
Number Name of the Sector (Activity) Numbe Number of
Position of
of cases
company
r of
interviewees interviewees in
employ at company
the firm
ees
level
1.
2.
1.
Effisoft
2.
Arthur&Marie
3.
Ragni SA
4.
Germany
1.
2.
3.
4.
Lassalle et
Cie
Seehotel
BINZTHERME
Click
Solutions
Krassow Bau
Rathgeber &
Partners
Construction
Tourism (Travel
agency)
ICT (Software)
Manufacturing
(Toys)
100
1
owner/CEO
2
1
owner
25
1
executive director
Manufacturing
(Lightning
apparatuses)
49
1
owner
Service (Road
transport)
48
1
head manager
Tourism (Hotel)
130
1
owner/CEO
ICT (E-business)
2
2
owners/managers
1
owner/CEO
1
owner/CEO
Construction
Service (Business
games)
56
5
Kowalsky Co.
ICT (Interactive
media)
58
4
2.
Tours Ltd.
Tourism (Travel
agency)
6
2
1. owner,
2. office leader
Manufacturing
(Clothing)
6
2
1. owner/managing
director,
2. employee, sewer
Hungary
1.
1. owner/head of
new media
division,
2. digital media
manager,
3. digital media
manager,
4. senior developer
3.
Hungarment
Ltd.
*
This table provides information only about the number of interview at enterprise level. Please note that it does
not contain information about the stakeholder-interviews. In the case of missing company names the
owners/employers of firms requested explicitly anonymity of the firm investigated.
62
Country
Number
of cases
Name of
the
company
Poland
1.
2.
3.
4.
2.
M. S.
3.
M. F.
1.
Decom
2.
3.
Scalastours
4.
Gruas Gil
Cadiz Co.
1.
Mobil City
UK
2.
3.
Number of
employees
Number of
interviewees
at company
level
Position of
interviewees in
the firm
110
1
managing director
64
1
owner
23
1
owner/manager
37
1
owner/manager
1
1
owner
10
1
executive director
10
1
managing director
30
1
general manager
165 on
average, but
320 in the
summer
1
manager
3
1
owner
54
1
manager
2
1
owner
16
1
marketing
manager
1
commercial
director
Manufacturing
(Pasta)
Service
(Funeral
services)
Tourism
ICT (Software
and hardware)
ICT (Internet
café)
Tourism
(Operating ski
lifts)
Service (Retail
trade)
ICT (Virtual
reality)
Rural Sant Manufacturing
Vincent
(Citrus)
Spain
Slovakia
1.
Sector
(Activity)
Tourism
(Travel
agency)
Service
(Logistics)
ICT (Mobil
phone services)
Manufacturing
Radio(Radio
Tech Ltd.
industry)
Wild
Service
Track
(Training)
63
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66
PART II. NATIONAL ECONOMIES AND THE LOCATION OF
SMEs
The description of the contribution of SMEs to the national economies (countries)
participating in the Leonardo project was carried out in the following two steps. Firstly, we
intended to describe briefly the economic profile of the countries. In this context we tried to
compare changes in GDP, employment, unemployment, GDP per inhabitant in PPS
(Purchasing Power Standards), etc. Secondly, we wanted to assess the performance of SMEs
in such fields as employment generation, exports and productivity. In this analysis, we relied
on the following data sources:
1. Statistical economic analyses elaborated by each national team involved in the Project.
2. The latest edition of the Eurostat yearbook (2004) and other statistics published by
international institutions (e.g. the European Central Bank).
3. The latest publications of the Observatory of European SMEs.
4. Other research reports dealing with the economic development (i.e. Foreign Direct
Investment) of the countries surveyed.
Unfortunately, in some countries, especially in the New Member States, there are
hardly any data available concerning the performance of SMEs. For example, in the latest
publication of the Observatory of European SMEs (2004), presenting the statistical analysis of
SMEs in Europe in 2003, we found only one figure using aggregated data and one table of a
similar kind of data aggregation on (at that time) Acceding and Candidate Countries. Despite
the fact that the Observatory of European SMEs published a very interesting detailed
statistical analysis not only on an aggregated level but also country by country, we could not
compare them with the data related to the New Member States. These problems were only
partly counterbalanced by the statistical analysis of the national economies provided by the
project partners24.
24
In this context, it is worth mentioning the following syndrome: in spite of the standard structure and the
obligatory character of the questionnaire of the European Labour Force Survey (LFS), due to the financial
difficulties of the national statistical office, the LFS carried out for example in Poland did not cover all issues.
67
5. Profile of the national economies participating in the project
For the comparison of macroeconomic data, we selected such indicators which offered
us an ‘item-by-item’ comparison between the countries involved in the Project. This practice
of statistical comparison fits well with the characteristics of the ‘cross-national’ or
‘functional’ comparative research approach (for a detailed presentation of this, see the first
part, section 3.1). For this purpose we selected the following indicators:
•
GDP,
•
GDP per inhabitant in PPS,
•
Gross value added by economic activities,
•
Employment and changes in employment,
•
Unemployment,
•
Average gross annual earnings in industry and services,
•
Gender pay gap in 2001,
•
Total R&D expenditure,
•
Share of foreign companies in corporate R&D expenditure,
•
The distribution of ICT services in Europe.
Evaluating the economic performance of the countries participating in the Leonardo
project in terms of their contribution to the European-level GDP, we can state that there are
huge differences between the Old and New Member States. The share of GDP by countries in
2003 indicates that three countries participating in the Leonardo project produced almost
2/3rd of the GDP of the Euro-zone. On the other hand, the three New Member States
represent less than 1/5th of the GDP of the UK. However, evaluating average GDP annual
growth between 1996 and 2000, we can say that all of the New Member States involved in the
Project have higher GDP growth in comparison with the EU-15 countries (Table 5.1). The
indicator of ‘Gross Domestic Product per inhabitant in PPS’25 shows the visible inequalities
and the significant variations in the rate of growth between 1994 (for the EU-25 from 1998)
and 2005 in the economic performance of the national economies surveyed. It is not at all
surprising that the differences between the lowest and highest level of GDP per inhabitant in
25
Expressing GDP in PPS (purchasing power standard) eliminates differences in price levels between countries,
and a calculation on a per head basis allows the comparison of economies significantly different in absolute size.
68
PPS is almond threefold: the lowest level is represented by Poland (11,600) and the highest
level of the same indicator is registered in the UK (29,010). The table illustrating the growth
of GDP per inhabitant in PPS draws attention to the significant variations in the growth rate in
the countries surveyed. In spite of the fact that from 1998 to 2005 there are no noticeable
differences between the average growth rates of EU-15 (134%) and EU-25 (131%), among
the individual countries we identified marked differences. In this context, it is worth noting
that all the three New Member States (Hungary: 157%, Slovakia: 146%, Poland: 141%) have
a higher growth rate than both EU15 and EU25 countries. Within the EU15 countries, only
Spain (141%) and the UK (138%) have a higher growth rate than either the EU15 or the EU25
average. See in detail Table 5.1 and 5.2.
Table 5.1 GDP in Leonardo countries
(annual percentage volume changes, unless otherwise indicated, quarterly data working day
adjusted)
Share
Average
Average
2003
2004
(in %, 2003)
1996-2000
2001-2003
Belgium
3.7
2.7
1.0
1.3
2.7
France
21.4
2.8
1.3
0.6
2.6
Germany
29.8
2.0
0.4
0.0
1.6
Spain
10.2
3.9
2.5
2.5
2.7
Euro area
100.0
2.6
1.0
0.5
2.1
Hungary
0.8
4.0
3.5
3.0
4.0
Poland
1.9
5.1
2.1
3.8
5.3
Slovak Rep.
0.3
3.7
4.3
4.5
5.5
UK
16.3
3.2
2.1
2.2
3.1
EU 25
100.0
2.7
1.2
0.9
2.4
Source: ECB (2005), p.36.
69
Table 5.2 GDP per inhabitant in Purchasing Power Standards (in euro)
Country
1994
1998
2005
2005/1998 (%)
(forecasts)
EU 25
No data
18,470
24,120
131
EU 15
17,060
20,330
27,160
134
Belgium
18,510
21,430
27,860
130
France
17,890
21,160
27,180
128
Germany
18,520
21,130
25,770
122
Hungary
7,900
9,510
14,940
157
No data
8,210
11,600
141
7,740
8,820
12,860
Spain
13,420
16,460
23,260
141
UK
16,960
21,010
29,010
138
Poland
Slovak
Republic
146
GDP (gross domestic product) is an indicator of a nation’s economic situation. It reflects the total
value of all goods and services used for intermediate consumption in their production.
Expressing GDP in PPS (purchasing power standard) eliminates differences in price levels
between countries, and a calculation on a per head basis allows the comparison of economies
significantly different in absolute size.
Based on the table in Eurostat 2004:118
The aggregated version of GDP does not indicate the structure of economic activity in
the countries investigated. Comparison of the gross value added by economic activity informs
us of the relative importance of the various sub-sectors of the economy. In this context, it is
interesting to note that the in majority of the EU 15 countries involved in the Project – with
the exception of Germany – the service (business and other services) sector and the sub-sector
of ‘trade and transport’ are the dominant sectors. (Beside the service and transport sub-sector,
manufacturing activities are more important in the New Member States. However, substantial
differences can be identified within the two groups of countries, too. In the case of New
Member States, Poland and Slovakia have a visibly higher share of ‘trade and transport’
within their economic activity in comparison with Hungary. In the case of EU 15 countries,
the construction industry and ‘trade and transport’ in Spain represent double the share within
economic activities compared to the other countries. Contrary to the previous pattern,
financial and business services are the least important in Spain, while in the remaining EU 15
countries this is the most important sector.)
70
Table 5.3 Gross value added by economic activity in 2004 (percentages of total)
Agriculture
Manufacturing Construction
and fishing
Trade
Finance
Other
and
and
services
Transport business
20.6
29.0
24.5
Belgium
1.4
19.6
4.9
France
2.4
19.0
5.2
18.2
31.3
24.0
Germany
1.1
25.1
4.0
18.1
29.1
22.6
Hungary
3.3
25.4
5.2
21.0
21.0
24.1
Poland
2.9
26.6
5.6
28.3
16.4
20.1
Slovakia.
3.9
26.5
5.6
25.8
21.3
16.9
Spain
3.0
18.3
10.2
27.3
20.5
20.7
UK
1.0
19.1
6.3
23.5
29.5
20.7
Source: ECB 2005:37.
The comparison of tables 5.4 and 5.1 highlights the following striking patterns. The
EU 15 countries participating in the Leonardo project represent, in terms of both employment
and GDP contribution, almost the same weight. For example, France, Germany and Spain
have a 59.7% share of employment and a 60% share of GDP contribution. Similarly, the UK –
which does not belong to the euro area – has a 15.5% share in employment and a 16% share
in GDP of the EU 25. In the case of New Member States, a radically opposite pattern was
registered. The share in employment of the three countries surveyed (Hungary, Poland,
Slovakia) is 9.8% but their contribution to the EU 25 GDP is only 3%, which reflects to the
differences between the economies of the Old and New Member States in terms of
productivity.
Table 5.4 shows a significant gap in the level of employment between EU15 and NMS
countries surveyed in the project. Countries belonging to the first category (Belgium, France,
Germany, Spain and the UK) have without exception a higher employment rate in comparison
with the New Member States (Hungary, Poland and Slovakia). Looking at the differences
within these two groups of countries, visible inequalities were registered in the EU15
economies. In this context, it is worth noting that the UK (71.8%) exceeded the EU target for
both 2005 (67.0%) and 2010 (70%). In the EU15 countries involved in the project, only
Germany (65.0%) produced around the EU average (64.4%), while all other countries
underperformed
(Belgium:
59.6%;
France:
71
63.2%;
Spain:
59.7%).
Table 5.4 Employment rates in the participant countries
(annual percentage volume changes, unless otherwise indicated)
Share
(in %,
2003)
3.1
Average
19962000
1.3
Average
20012003
0.4
France
18.5
1.4
Germany
28.8
Spain
Employment
rate (%)*
2003
2004
59.6
0.1
-
0.8
63.2
-0.1
0.0
0.8
-0.4
65.0
-1.0
0.4
12.4
3.0
1.9
57.0
1.8
2.1
Euro area
100.0
1.5
0.7
51.2
0.2
0.5
Hungary
2.0
1.1
0.8
57.7
1.3
-0.5
Poland
6.7
0.4
-
59.7
-
-
Slovakia.
1.1
-0.8
0.6
71.8
-0.3
0.1
UK
15.5
1.2
0.9
64.4
1.1
-
EU25
100.0
-
-
62.9
-
-
Country
Belgium
*The employment rate indicator was created on the database published in ‘Facing the Challenge’ (2004:49-50)
Reviewing the unemployment statistics between 1996 and 2000 (Table 5.5 and 5.6)
and the year of investigation (2004) in the euro area and EU25, the following patterns could
be summarised. During the period of 1996-2000, in the euro area, Belgium (8.7%) and
Germany (8.3%) had a lower, while France (10.7%) and Spain (14.9%) a higher
unemployment rate than the average (9.7%). In the same period, among the EU25 countries
Hungary (8%) and UK (6.5%) had a lower unemployment rate than the average (9.8%). In the
year of investigation (2004) with the exception of Germany, the rate of unemployment
decreased. In the bloc of EU25 countries, two phenomena were registered. Firstly, the
unemployment rate in the UK further decreased (from 6.5% to 4.9%). Secondly, there are
shocking differences among the New Member States (e.g. Poland: 18.8%, Slovakia: 18% vs.
Hungary: 5.9%).
In the case of long-term unemployment, the following differences were identified:
both EU15 (3.3%) and EU25 (4.0%) average rates were surpassed in all countries with the
exception of the UK (1.1%) and Hungary (2.4%). In this context, we must point out that while
in the EU15 countries, the differences between the lowest (the UK: 1.1%) and the highest
72
(Germany: 4.6%) rate is four-fold, for the New Member States, with the exception of Hungary
(2.4%), the rate of long-term unemployment is double digit (Slovakia 11.1%; Poland: 10.7%)
compared to the one digit rates of the EU15 countries (Germany: 4.6%; Spain: 3.9%;
Belgium: 3.7%; France: 3.5% and finally the UK: 1.1%).
Beside the rate of unemployment, the Wim Kok Report 2004 used an interesting
measure which informs us about the degree of social exclusion in the countries investigated.
Measuring the ‘social exclusion rate’, the above-mentioned report used the indicator ‘at-riskof-poverty rate’. Among the EU15 countries participating in the project, the highest rates were
registered in Spain (19%), UK (17%) and France (15%) and the lowest in Germany (11%)
and Belgium (13%). For the New Member States, Hungary has the lowest rate (10%) even if
we compare it with the previous group of countries, but Poland (15%) and especially Slovakia
(21%) are nearer to the countries included in the highest ‘at-risk-of-poverty rate’.
73
Table 5.5 Unemployment rates in the participant countries
(% of labour force, unless otherwise indicated)
Share
Average
Average
(in %, 2003)
1996-2000
2001-2003
Belgium
2.8
8.7
France
20.8
Germany
Country
2003
2004
7.4
7.9
7.8
10.7
9.1
9.5
9.7
29.8
8.3
8.5
9.1
9.5
Spain
17.1
14.9
11.0
11.3
10.8
Euro area
100.0
9.7
8.4
8.7
8.8
Hungary
1.2
8.0
5.7
5.7
5.9
Poland*
17.0
12.7
19.1
19.2
18.8
Slovakia**
2.4
18.4
17.5
18.0
UK
7.8
6.5
4.9
5.0
4.6
100.0
9.8
8.8
8.9
9.0
EU25
13.1
18.6
* Average unemployment rate between 1996-2000 for Poland is not available in ECB (2005); the table shows
our own calculation based on Sienkiewicz – Bednarski 2004:8.
**Average unemployment data between 1996-2000 for Slovakia is not available, therefore we had to use the
unemployment rates of the years 1995 (13.1%) and 2000 (18.6%), source: Zajac 2004:6.
Table 5.6 Unemployment rates in the Leonardo countries
Belgium
8.7
7.9
7.8
3.7
At-riskofpoverty
rate
(%)**
13.0
France
10.7
9.5
9.7
3.5
15.0
Germany
8.3
9.1
9.5
4.6
11.0
Hungary
8.0
5.7
5.9
2.4
10.0
Poland
-
19.2
18.8
10.7
15.0
Slovakia
-
17.5
18.0
11.1
21.0
Spain
14.9
11.3
10.8
3.9
19.0
UK
6.5
5.0
4.6
1.1
17.0
EU15
9.8
8.9
9.0
3.3
15.0
EU25
n. d.
n. d.
n. d.
4.0
15.0
Average
19962000*
Long-term
Unemployment Unemployment
unemployment
(2003)*
(2004)*
rate (%)**
*Source: ECB 2005:40.
**Source: ‘Facing the Challenge’ 2004:49-50.
74
In the context of global competitive pressure, the gross annual earnings in industry and
services and employment costs in general are one of the most important competitive
advantages. Therefore, it is necessary to look at the gross annual earnings increase in the
countries surveyed and especially the average cost of employment across these countries.
Concerning the average gross annual earnings in industry and services, the latest EUROSTAT
Yearbook (published in 2004) unfortunately only contains data from 2002 (Table 5.7).
Table 5.7 shows that in the New Member States’ economies the growth rate of average
gross annual earnings in industry and services is substantially higher (Poland: 173%;
Hungary: 159%; Slovakia: 139%) than both the EU15 average (119%) and that of the EU15
countries investigated in the project. In this group of countries, only the UK (138%) has a
higher – and a significantly higher – average rate. In all other countries (Spain: 117%;
Belgium: 116%; Germany: 109%; France: 107%), between 1998-2002, the rate of annual
increase in gross average earnings was lower.
Table 5.7 Average gross annual earnings in industry and services (of full-time
employees in enterprises with 10 or more employees; in ECU/EUR)
1998
1999
2000
2001
2002
2002/1998
Belgium
29,616
30,701
31,644
33,109
34,330
116
France
25,519
25,947
26,521
27,319
n. d.
107*
Germany
36,033
36,862
37,253
38,204
39,440
109
Spain
16,528
17,038
17,432
17,874
18,462
117
Hungary
3,686
3,770
4,172
4,898
5,871
159
Poland
4,156
5,310
n. d.
7,509
7,172
173
Slovakia
3,292
3,125
3,583
3,837
4,582
139
UK
29,370
32,269
37,677
39,233
40,553
138
EU15
22,142
23,080
25,527
26,288
n. d.
119*
*Data not available for 2002, therefore we used the data of 2001.
Source: OECD 2004:144.
In addition to the analysis of the rate of average gross annual earnings in the countries
involved in the Leonardo project, we should emphasize the phenomenon of the genders’ wage
inequalities. Unfortunately, we do not have a comprehensive and medium-term analysis of
wage differences by gender as is the case for average gross annual earnings. Therefore, we
75
use only the data for 2001 as a stylised illustration. The statistics covering both the majority of
EU15 countries and the New Member States indicate the following: the group with the lowest
gender pay gap comprises Belgium and France (below 15%) and countries where gender pay
differences are over 15% are as follows: Poland (15), Spain (16%), Hungary (18%), Slovakia
(20%), Germany (20%) and the UK (21%). See Figure 5.1
Figure 5.1 Gender pay gap 2001
Source: Eurostat 2004:145.
76
In the context of rapidly growing knowledge economy, the position of national
economies both in research and development and in innovation activities will have a decisive
impact on economic growth and productivity. Evaluating R&D expenditure from several
perspectives, firstly we would like to give a general overview of development trends for total
R&D expenditure. In addition, we intend to present the rank order of the total R&D
expenditure in the last year for which statistics are available from the countries investigated.
Moreover, we would like to illustrate the outstanding role of Foreign Direct Investments
(FDI) in the technological catching up process and to demonstrate the benefits of technology
produced by FDI (note: in this case we can use only a single country example as a
benchmark).
Table 5.8 indicates two things. Firstly, there are shocking differences between
Leonardo project countries in the absolute level of R&D expenditure measured as a
percentage of GDP. Countries belonging to the EU15 spend several times more on R&D as a
percentage of GDP than the New Member States. Secondly, in the EU15 countries we can see
an increase in expenditure – although at a rather unequal rate – and in the New Member States
we note, with the exception of Hungary, a pattern of decreasing total R&D expenditure.
Table 5.8. Total R&D expenditure as a % of GDP
Country
1998
1999
2000
2001
2002
2002/1998
Belgium
1.90
1.96
2.04
2.17
n. d.
1.90
France
2.17
2.18
2.18
2.23
2.20
2.17
Germany
2.31
2.44
2.49
2.51
2.51
2.31
Spain
0.89
0.88
0.94
0.95
n.d.
0.89
Hungary
0.68
0.69
0.80
0.94
n.d.
0.68
Poland
n.d.
0.70
0.66
0.64
0.59
n.d.
Slovakia
0.79
0.66
0.65
0.64
0.58
0.79
UK
1.81
1.84
1.84
1.89
1.84
1.81
EU15
1.88
1.92
1.95
1.98
1.99
n. d.
EU25
1.83
1.88
1.91
1.93
n. d.
n. d.
Source: Eurostat 2004:188
77
The participation of foreign companies in R&D expenditure can increase the financial
resources available in national economies. In this respect, Hungary has the best position
worldwide. For example, between 1996 and 1998, the share of foreign companies in corporate
R&D expenditure in Hungary was almost 80%, followed by Ireland, at a little under 70%,
Singapore (almost 60%) and Malaysia (almost 50%). Among some of the countries
participating in the Leonardo project, the share of foreign companies in corporate R&D
expenditure are as follows: the UK: nearly 40%, France: 20% and Germany: less than 20%
(Iwasaki, 2004, p.110.).
Table 5.9 Rank of order of countries in R&D expenditure (% of GDP)
Germany
2.50
Belgium
2.20
France
2.20
UK
1.90
Spain
1.00
Hungary
1.00
Poland
0.60
Slovakia
0.60
EU15
2.00
EU25
1.90
Source: Wim Kok 2004:48.
Beside total R&D expenditure, the distribution of ICT services in employment and its
growth pattern are a good reflection of the present and future position of national economies,
including the SME-sector, in the fast growing knowledge economy. Before presenting the
data related to the distribution of ICT-service employment, it is necessary to present the share
of IT-expenditure as a percentage of GDP. According to the latest international statistics
(Eurostat 2004:191.), the position of the countries surveyed in the Leonardo project is
illustrated in Figure 5.2.
78
Figure 5.2 IT expenditure in 2003 (in % o GDP)
Source: Eurostat 2004:188
The highest expenditure was found in the UK (4%), followed by France (3.3%),
Belgium, Germany (3-3%) and Hungary and Slovakia (2.8 and 2.7%). The lowest expenditure
were registered in Poland (2.2%) and Spain (1.6%).
Evaluating the distribution of ICT-service employment, we can say that in the EU25
member states – excluding Poland because of a lack of data – out of the total work force (cca.
180 million) 2.4 million (1.3%) were engaged in computer and related activities (NACE
sector 72) and 11.3 million (6.3%) in other business activities. In total 7.6% of the European
workforce is involved in these kinds of activities. Figures 5.3 and 5.4 show the structure of
employment by country for computer and related activities and for other business services in
2003.
79
Figure 5.3 Distribution of employment of computer and related activities in Europe,
2003 (in % of all employment)
Source: Huws, U. – Dahlmann, S. – Flecker, J. 2004:13.
80
Figure 5.4 Distribution of employment in other business activities in Europe, 2003 ( in%
of all employment)
Source: Huws, U. – Dahlmann, S. – Flecker, J. 2004:14
“… both activities show a similar distribution, with the highest proportions in the
Nordic countries … and more developed economies in northern Europe. The Mediterranean
countries occupy an intermediate position, close to the EU-average, whilst the new Member
States, along with Portugal, have below-average concentrations of ICT-service employment.
(…) The picture is much as one would expect, with the highest proportions of both types of
employment in the most developed economies.” (Huws, U. – Dahlmann, S. – Flecker, J
2004:13.)
We find a radically different pattern when we turn our attention to the growth rates of
these sectors (NACE 72, NACE 74). Figures 5.5 and 5.6 illustrate how employment in
computer and related activities and employment in ‘other business activities’ grew between
2000 and 2003. The figures show clearly that the strongest employment growth has taken
place in those countries where the employment level in 2003 was the lowest: “In other words,
while the new Member States may be behind the rest of Europe in the proportion of their
economies devoted to ICT-services, they are catching up fast. The lowest growth rates are, by
and large, in the most developed countries.” (Huws, U. – Dahlmann, S. – Flecker, J 2004:14.)
In this context, we should note that the highest growth rates in employment in computer and
related activities in Europe (2000-2003) were registered in such New Member States as
Hungary and Slovakia, while in the case of employment growth in other business activities
81
during the same time period, the highest growth rates were found again in Slovakia and
Hungary.26
Figure 5.5 Growth in employment in computer and related activities in Europe, 20002003 (%)
26
In the case of employment growth in other business activities in Europe, exceptionally high growth was
produced by the Czech economy (see Figure 2.7).
82
Figure 5.6 Growth in employment in other business activities in Europe, 2000-2003 (%)
83
6. The contribution of SMEs to national economies
6.1 Measuring SMEs’ performance at European and country-level
The purpose of this section is to explain the contribution of SMEs to economic growth
and global competitiveness by analysing the economic role of SMEs both at a European and
an individual country level. In addition, we intend to discuss our insight into how the
economic role of SMEs has changed over time.
Firstly, we intend to measure the economic role of SMEs at a European level. It is
obvious that the typical European firm is a micro firm.27 In this context, we wish to stress not
only the dominance of SMEs in numerical terms, but also the significant amount and variety
of work experience and economic activity which this sector represents. In the year of the
latest available statistics for the EU-19 countries28 (2003) there were 19 million enterprises
providing employment for almost 140 million people. The vast majority (99.8%) of
enterprises are SMEs. Large-scale enterprises (LSE) account for only 0.2% of all enterprises,
providing jobs for about 42 million people (30% of the workforce) in 40,000 LSEs. We
should note that in terms of size, the overwhelming majority of SMEs (over 90%) are micro
firms, employing fewer than 10 persons. In this context, we should add that almost half of
these micro firms have no employees at all, in other words they are family companies. The
roughly 9 million of this kind of family companies only provide income to self-employed and
family members. European firms on average provide employment for 7 people, the size of
firms varying between 3 in micro firms and over 1,000 in LSEs.
The average European enterprises export 17% of their turnover; LSEs export 23%,
while micro firms export only 9% of their turnover. This pattern of export characterises all
sectors and industries and indicates that small and especially micro firms serve mainly local
27
On 1st January 2005, a new European definition of SMEs came into force, which will be applied for all current
and future EU measures in support of SMEs. The new definition raises the financial limits at which an enterprise
ceases to qualify as an SME, and introduces new exceptions to the requirements for autonomy. The status of
SMEs is determined by the following criteria: size: fewer than 250 employees (within this size category, the
following sub-categories are distinguished: firms employing less than 10 persons are micro firms, firms
employing 10-49 persons belong to the sub-category of small firms and firms employing 50-249 persons are
medium-sized firms) The firm must have an annual turnover not exceeding € 50 million or a balance sheet total
not exceeding € 43 million, and must be autonomous. (Source: SME Update, June 2005:4.).
28
The notion of EU-19 countries indicates the fifteen member states of the European Union plus Norway,
Liechtenstein, Iceland (the European Economic Area) and Switzerland.
84
and regional markets. This pattern is especially true in the case of NMS countries
participating in the Leonardo project and in the sectors belonging to the so-called Old
Economy. Similarly to the pattern identified in the case of exports, labour productivity
increases along with enterprise size. A person employed in a micro firm creates on average
one third of the value-added (40,000 EUR) compared to someone working in an LSE
(120,000 EUR).
However, when the distortion effect of the economic sector differences are eliminated
(for example, micro and small firms function in large numbers in retail and trade which is a
sector characterised by a lower than average labour productivity), we may identify a rather
different role of SMEs
Box 6.1 Adjustments for differences in industrial sector result in higher economic
performance of SMEs
“… actual labour productivity by size class is compared with an adjusted value of this
measure, which is calculated by assuming the same industry structure for all size classes 10.
When these adjustments for differences in industry structure are included, a rather different
picture emerges, as the difference between small, medium-sized and large enterprises to a
large extent disappear, and only micro enterprises still lag behind with respect to value added
per occupied person. Thus, the economic role of SMEs, as accounted for by labour
productivity, is considerably different after adjusting for the sector effect.”
Source: Observatory of European SMEs 2004:26.
85
Table 6.1 The role of SMEs, Europe-19, 2003
Micro
Number of
enterprises
Employment
Occupied persons
per enterprise
Turnover per
enterprise
Value added per
enterprise
Share of export in
turnover
Value added per
occupied person
Share of labour
cost in value
added
SME
MediumSmall
sized
LSE*
Total
Total
1 000
17 820
1 260
180
19 270
40
19 310
1 000
55 040
24 280
18 100
97 420
42 300
139 710
3
19
98
5
1 052
7
1 000 Euro
440
3 610
25 680
890
319 020
1 550
1 000 Euro
120
11 780
8 860
280
126 030
540
%
9
13
17
12
23
17
1 000 Euro
40
60
90
55
120
75
%
57
57
55
56
47
52
Source: Source: Observatory of European SMEs (2004), p.28.
Estimated by EIM Business & Policy and Research; estimates based on Eurostat’s Structural Business Statistics and
Eurostat’s SME Database; also based on European Economy, Supplement A, May 2003, and OECD: Economic
Outlook, No. 71, June 2003; due to rounding, totals may differ slightly from constituent parts.
*LSE: Large-scale enterprises
The country-level analysis of SMEs in the EU-19 confirms the results of the macroeconomic analysis presented above. Table 6.2 summarises the available statistical data on the
size-class structure of firms in 2003 by country. Countries vary with respect to the average
size of firms. The average number of occupied persons per firm varies between 6 persons
(Spain) and 11 persons (UK). However, Table 6.2 underlines the following similarities: in the
majority of countries, the labour productivity and profitability are below the average; in
addition SMEs in most of the countries have a weaker export activity than LSEs.
86
Table 6.2 Role of SMEs in European Countries, 2003
Country
Belgium
Value
Share
Occupied
added
Propensity
value
Number of persons
Size-class
per
to export, added in
enterprises
per
dominance* occupied
SMEs*** turnover,
enterprise
person,
SMEs****
SMEs**
1 000
%
%
440
7
micro
78
-3
-3
France
2 500
8
micro
76
-7
-4
Germany
3 020
10
large
90
-6
5
Spain
2 680
6
micro
82
-4
0
UK
2 230
11
large
69
-4
-5
19 310
7
micro
74
-4
-4
Europe19*****
*A country or sector of industry is said to be micro, small and medium sized, or LSE dominant, if either micro
enterprises, small and medium-sized enterprises (taken together) or large-scale enterprises have the largest share
in total employment.
**Index, country total = 100.
***Share of export in turnover (%); SMEs minus country total.
****Value added as percentage of turnover, SMEs as deviation of country total.
*****EU-15, Iceland, Lichtenstein, Norway, and Switzerland.
Source: Observatory of European SMEs 2004:29
6.2 SMEs in the acceding (NMS) and candidate countries in comparison with the EU-19
The Observatory of European SMEs (2004) report was written before 1st May 2004.
So, the term ‘Acceding Countries’ is used for the 10 New Member States (NMS) who joined
the EU on 1st May 2004. The term ‘Candidate Countries’ was used for the present candidate
countries, that is: Bulgaria, Romania and Turkey.
Prior to comparing the EU-19 and (at that time) Acceding and Candidate Countries
participating in the Leonardo project, it is necessary to deal briefly with the radical shift
represented by the transformation process from formerly state-owned large enterprises to the
privately-owned diversified firm structure (composed of SMEs and LSEs). In this context, we
should refer to the introduction of this report, in which the comparison of the size-structure of
firms in the capitalist and the state-socialist economies was analysed (see Table 1.1).
Comparing the first period of the transformation process of the 1990s with the new cycle of
87
transformation in the New Member States dating from 2001, the following two phenomena
must be stressed.
Firstly, during the first half of the 1990s and to a lesser extent in the second half of
1990s, the key role of the SMEs in Hungary, Poland and Slovakia partly offset the output- and
job-losses in the privatised, large, state-owned enterprises. In the new cycle of the
transformation process, there are changes in the driving forces behind the economic
performance of SMEs in this region. The new challenge for the SME sector in the New
Member States can be symbolised by the combination of cumulative innovation (e.g.
improving technology with the use of ICT) and radical innovations (e.g. increased
participation in such knowledge-intensive sectors as computer and related activities,
knowledge-intensive services, etc.). In the former case, the drivers of development are
conditioned by ‘path-dependency’29, whilst in the second case by the search of incremental
path creation. The combination of the various development paths is reflected in the choice of
the sectors selected for investigation. For example, the Old Economy sectors or traditional
service activities (e.g. clothing industry, tourism, etc) were used to illustrate the pathdependency-based development and learning process of small firms. The various ICT-related
sectors (e.g. software development, the new media sector, etc) were chosen to identify the
characteristics of new types of SMEs engaged in New Economy activities.
Aware of these features of entrepreneurs in the New Member States, we tried to
compare the basic economic indicators of SMEs in acceding (NMS) and candidate countries
with those for EU-19 countries. The table below presents information with respect to the role
of SMEs in these countries.
Globally, we may say that the average size of firms is higher in the EU-19 countries (7
persons) in comparison with Acceding (NMS) and Candidate Countries (5 persons). In
connection with the size-structure, the following internal differences should be observed. In
the EU-19 countries the average number (3 persons) of occupied persons per micro firms is
higher than in the Acceding (NMS) and Candidate Countries (2 persons). In the case of small
and medium-sized firms, the opposite pattern was identified: the larger average size of small
29
To the term ‘path dependency’ see more in Schienstock 2005:1-2
88
(22 persons) and medium-sized (107 persons) firms in Acceding (NMS) and Candidate
Countries in comparison with EU-19 countries (19 and 98 persons, respectively).
Table 6.3 Roles of SMEs in Acceding and Candidate Countries and Europe-19*
SME
Small
Mediumsized
Micro
LSE*
Total
Total
Accession countries
(2001)
Enterprises
1 000
56 470
230
50
5 950
10
5 970
Occupied persons
1 000
10 210
4 970
5 350
20 530
10 150
30 670
2
22
107
3
919
5
Occupied
persons/enterprise
Size-class dominance
Small/Medium-sized
Europe
Enterprises
1 000
17 820
1 260
180
19 270
40
19 310
Occupied persons
1 000
55 040
24 280
18 100
97 420
42 300
139 710
3
19
98
5
1 052
7
Occupied
persons/enterprise
Size-class dominance
Micro
*EU-15, Iceland, Lichtenstein, Norway, and Switzerland
Table 6.4 illustrates the shares in employment of various size categories of firms
between the two groups of countries analysed earlier. In the EU-19 group of countries almost
two fifths of employment (39.4%) is created by micro firms, while one third of jobs can be
found in the same size category in the Acceding (NMS) and Candidate Countries. In the case
of small firms, we found only slight differences between the two groups of countries: 17.4%
vs. 16%, respectively. However, in the size-category of medium- and large-scale enterprises,
the share of jobs in both cases is higher in the Acceding (NMS) and Candidate Countries.
89
Table 6.4. A comparison of employment share between EU-19 and Acceding (NMS) and
Candidate Countries (%)
Size-category
EU-19 countries
Micro firms
39.4
Acceding (NMS) and
Candidate Countries
33.0
Small firms
17.4
16.0
Medium-sized firms
13.0
17.5
Large sized firms
30.2
33.5
Total
100.0
100.0
Source: Own calculation based on the data of Table 6.3
Size differences exist not only between the firms belonging to the two groups of
countries evaluated above but also within these groups of countries. For example, within the
group of EU-19 countries, the average firm size is relatively low in the case of Mediterranean
countries. Within the NMS countries, the average firm size in terms of the number of
employees in Hungary and Poland is around 4 but in Slovakia this indicator is twice as high.
For greater detail see the Figure 6.1 below.
90
Figure 6.1 Occupied persons per enterprises, Europe-19 countries* (2003) and Acceding
and Candidate Countries (2001)
91
92
93
Table 6.5 Comparison of average European employment costs in euro
Country
Belgium
Pay
36,53
Social
security
12,667
Mandatory
benefits
-
Voluntary
benefits*
4,383
Total pay &
benefits
53,577
France
31,54
10,913
1,529
1,893
45,879
Germany 40,16
8,274
-
2,008
50,445
Spain
n.d.
n.d.
n.d.
n.d.
n.d.
Hungary
7,13
2,338
-
428
9,946
Poland
6,495
1,307
65
390
8,257
Slovakia 4,765
1,506
-
240
6,541
UK
2,972
-
4,668
46,541
38,9
*Includes retirement, death, disability and medical plans. Not strictly voluntary in all countries.
Source: Mercer Human Resource Consulting quoted by The Budapest Times 2005.
Summary of terms:
Pay: The average pay for each country is taken as the national average earnings for full-time male employees. It
is assumed that this figure includes pay for vacation and public holidays. In some countries, there is either a
statutory or customary practice to pay or accrue this pay as a separate item.
Social security: This includes all standard employers’ costs for benefit programmes created by governments and
financed through government bodies or agencies.
Mandatory benefits: Includes benefits which employers must, by law or national collective agreements, provide
– either through their own or through industry-wide financing mechanisms – and ignores changes yet to be
implemented.
Voluntary benefits: This is an indication of the average cost of employee benefit plans that employers typically
provide in the relevant country. It includes retirement, death, disability, and medical plans. The cost of other
benefits is not included – such benefits are not typically provided for all employees, and their cost is relatively
minor.
The figures are not adjusted for the differences in the cost of living, productivity, or personal tax between
countries. It should be noted that the makeup of each country's economy has an effect on the calculation of
national average earnings. In some countries, a substantial low-wage sector can often co-exist alongside other
high-wage sectors. The national average figures may therefore not always be a meaningful benchmark when
looking at a specific employer or industry sector.
94
Table 6.6 Average enterprise size, Candidate Countries and Europe-19, 1995-1999
Country
Hungary
1995
9
1999
4
Change 1995-1999
-5
Poland
5
5
0
Slovak Republic
8
8
0
Total Candidate Countries
6
5
-1
EU-19
6
6
0
Source: Observatory for European SMEs 2002:15.
95
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characteristics of small and medium businesses from the 90’s until today (LEONARDO
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97
PART III. LEGAL AND ADMINISTRATIVE ENVIRONMENT
The aim of this part is to provide a brief overview of the most important issues
concerning the legal and administrative regulatory framework of SMEs in the participant
countries. This part of the Report consists of two main sections. The first one is built up
following the logic of the firms’ life cycle; it concentrates on the foundation, operation,
termination and dissolution of companies. The second section surveys the legal and
administrative burdens of SMEs concerning the employment and working conditions.
7. General overview of the legal environment of SMEs
This part focuses on the regulatory environment of SMEs, since, as we stated before,
one of the main competitive advantages of SMEs are their flexibility, though this may be
strongly affected by their legal and financial environment. In other words the ability of SMEs
to realize their economic and social objectives depends on the regulatory and policy
environment within which they operate (ILO 2000). In a rapidly growing economy, the
regulatory framework provides a stable and transparent environment for firms; that is, it
stimulates investment, creates certainty in economic relations, promotes R&D and innovation,
provides efficient product and financial markets and above all facilitates market entry and
exit. (Wienert 1997).
There is no exact and generally accepted definition of what ‘regulation’ means.
Roemer defines it as “when a government exerts control over the activity of individuals and
firms” (Roemer 1993). From the point of view of SMEs it may be considered as a means of
protecting and assisting small businesses30. This section focuses on the formal regulatory
framework concerning creation, operation and dissolution of enterprises and the next sections
will concentrate more on the social regulatory mechanism shaping the actors’ behaviour in the
SME sectors of the participant countries. As we have stated in the first chapter, the core aim
30
In addition there are approaches that distinguish between ‘regulation’ and ‘reglementation’. In this perspective
both concepts are interpreted as the regulatory framework for the behaviour of actors and/or firms, but while
‘regulation’ means such formal rules as laws and other technical (for example financial) regulations,
‘reglementation’ is defined as the entirety of social and cultural norms that influence human behaviour in a
society and serve as ‘balancing mechanisms’ in order to maintain the various forms of ‘social reproduction’
(Makó-Simonyi 1992).
98
of the research is to combine the analysis of the formal-institutional environment of SMEs
and of the economic and social processes characterising the firms investigated.
Regulation of SMEs takes various forms – for various reasons. There hardly any
aspects of the operation of firms which are not influenced by regulation. Governments can
regulate market participation, production processes and the quality or other parameters of
products and services produced in a very different ways. Based on the classification of
Quartey (Quartey: 2001) we distinguished three main categories of regulation: economic,
social and administrative.
(1) Economic or structural regulation is defined as “the tools which are often used
by governments in order to influence the allocation of resources with the view to improving
the efficiency of markets” (Quartey 2001:8.). It covers the following areas:
1. Restrictions on entry to and exit from markets such as administrative requirements
for registering companies, permits and licensing laws, laws and regulations on
legal forms of companies, business location and types of activities.
2. Monetary and Credit Policies include inflation and money supply policy, interest
rate policy, and requirements on collateral and security, banking and financial
intermediation laws.
3. Trade Regulations are the procedures concerning exports and imports.
(2) Social regulation refers to social conduct and is a tool used by governments to
control the behaviour of firms in order to protect social rights and cohesion. It includes:
1. Health and Safety regulations covering all work place standards: market forces,
direct regulations and incentives that aim to increase employees’ safety.
2. Control over labour contracts and employer-employee relationships: These
regulations comprise wage policy, labour legislation, the training system and
employment issues. Labour regulations affecting SMES can be grouped in three
main categories: minimum wages, non-wage compensations and job security
guarantees.
(3) Administrative regulation is concerned with governments’ efforts to collect,
manage and appropriate revenues and property. It includes taxation, patent protection,
copyright protection, trademark protection and bankruptcy laws.
99
In this section we focus on the description and comparison of some important
elements of the regulatory frameworks presented above. This obviously implies a review of
the legislative definitions of SMEs, the legal forms of companies, the administrative
requirements, and the procedures and costs of establishing and dissolving firms in the
participant countries. There are several theories that question the convergence of national
legal systems, stressing that the ‘deep structures of law’ (legal cultures, legal mentalities, etc)
remain unique and cannot be transformed from country to country (Teubner 2004). In spite of
this, to provide a general overview of the legal environment we use the ‘cross-national’
(comparative) approach in our description. We are presuming ‘functional equivalence’
between the various legal systems of the participant countries, without taking the broader
social-institutional context into consideration.
7.1 Definition of SMEs
Since the SME sector is a heterogeneous economic and social unit, there is no
standard, overall acceptable definition of small firms. According to an ILO study, more than
50 definitions were identified in 75 different countries (Potobsky 1992). The various
classifications mainly take ‘statistical’ and economic’ elements into account: the number of
employees (size) and the economic performance of firms (turnover, profitability, net worth,
etc). The next table provides a brief overview of the most important alternative definitions of
SMEs.
100
Table 7.1 Alternative definitions of SMEs
Institution
Definition
Firms with fixed assets (excluding land) less than
World Bank since 1976
US$ 250,000 in value are small scale enterprises
Firms with less than 50 employees and where at
USAID in the 1990s
least half the output is sold
Large: firms with more than 100 workers
Medium: firms with 20 - 99 workers
UNIDO's definition for Developing
Countries
Small: firms with 2 - 99 workers
Micro: firms with less than 5 workers
Large: firms with more than 500 workers
UNIDO's definition for Industrialised
Medium: firms with 100 - 499 workers
Countries
Small: firms with less than 99 workers
Medium: 49 - 250 employees and an annual
turnover less than EUR 50m and/or an annual
balance sheet total less than EUR 43m
Small: 10 - 49 employees and an annual turnover
European Commision 2003
and/or balance sheet total less than EUR 10m
Micro: less than 10 employees and annual
turnover and/or balance sheet total less than EUR
2m
Source: Quartey 2001:5 and Commission Recommendation of 6 May 2003
101
The alternative definitions vary according to when and in which country they were
formulated. The definition of the European Commission in force since 2003 is a
recommendation for the central institutions and the member states of the EU. According to
this the individual member states regulate the operation of SMEs within the framework of
their national legislation. There are countries where special laws concerning SMEs exist
(Hungary), while others regulate this issue indirectly within economic laws (Poland, UK).In
order to provide a brief overview Table 7.2 presents the various definitions of SMEs in those
participant countries where such definitions exist.
102
Table 7.2 Definition of SMEs in the participant countries, 2005
Country
Sizecategory
Belgium Medium
France
0-9
SME
less than 250
less than EUR 40m
less than EUR 27m
49 -250
less than EUR 50m
less than EUR 43m
Small:
10 -59
less than EUR 10m
less than EUR 10m
Micro:
0-9
10 – 49
0-9
Medium
50 – 250
Slovakia Medium
less than EUR 2m
50 – 249
Micro
Small
EU
50-249
Micro
Small
UK
Annual balance sheet
total
10-49
Hungary Medium
Spain
Annual turnover
Small
Germany Medium:
Poland
Total stuff
number
less than 50
Less than HUF
HUF equivalent to
equivalent to EUR 50m
EUR 43m
HUF equivalent to
HUF equivalent to
EUR 10m
EUR 10m
HUF equivalent to EUR 2m
PLN equivalent of
PLN equivalent of
EUR 40m
EUR 27m
PLN equivalent of
PLN equivalent of
EUR 7m
EUR 5m
50 – 249
Small
10-49
Micro
0-9*
Medium
50-249
Small
10-49
Micro
0-9
Medium
50 – 250
less than £11.2m
less than £5.6m
Small
less than 50
less than £2.8m
less than £1.4m
Medium
49 -250
less than EUR 50m
less than EUR 43m
Small
10 -59
less than EUR 10m
less than EUR 10m
Micro
0-9
less than EUR 2m
Source: LEONARDO Project Research Reports
*Except in the mining, electricity, manufacturing an construction sector
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The EU-25 member countries traditionally had their own definitions of SMEs; for
instance Germany had a limit of 500 employees, while in Belgium it is 100. There is a clear
intention within the EU to standardise the various national legislations on SMEs. As can be
seen from the data presented above, some of the participant countries harmonised their
legislation on the definition of small businesses in line with the EU recommendations
(Germany, Hungary), while for others it remained within the framework of national traditions
(Poland, UK).
Besides the number of employees and the economic performance the EU
Recommendation takes the so-called independence or autonomy criterion into account, which
is connected to the ownership-structure of SMEs (See ANNEX III.1). The EU terminology
distinguishes “autonomous enterprises”, “partner enterprises” and “linked enterprises”
according the extent of independence enjoyed by enterprises. On 1 January 2005, a new
common European definition of SMEs came into force. It raises the financial limits at which
an enterprise ceases to qualify as an SME, and introduces new exceptions to the requirements
for autonomy (see more details in Annex III.1).
7.2 Legislative/administrative procedures and costs of entry
As we have mentioned before, the regulatory environment has a crucial impact on both
establishing and operating firms. On one hand, government regulation ensures a stable and
calculable business environment, but on the other hand, a too high financial, administrative
and social cost of bureaucratic burdens may act as barrier for the dynamics of operating
SMEs. Table 7.3 presents the procedures and costs of establishing new enterprises in the
participant countries.
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Table 7.3 Entry procedures and costs in the participant countries, average 1998-99
(without Slovakia)
Country
Number of entry
Entry cost (% of per capita
procedures
GDP)
Belgium
8
9.98
France
15
14.30
Germany
10
15.69
Hungary
8
85.87
Poland
11
25.46
Spain
11
17.30
UK
5
1.43
Western Europe
8.85
15.50
Transition countries
10.29
28.15
All countries
9.35
19.93
Averages
Source: Klapper – Laeven – Rajan 2004:40.
Both costs and the number of administrative procedures show a different picture in the
various countries. There is a clear difference between the EU-15 and New Member States in
terms of the administrative burdens placed on enterprises. The average number of
bureaucratic processes and the average cost of establishing a company are lower in the
western part of Europe than in the transition countries. The two endpoints of the scale are the
United Kingdom with the lowest entry costs, and Hungary the most ‘expensive’ country. The
diversity of entry costs in European countries draws attention to another aspect of this issue:
in the globalising economic space it is not just the ‘traditional’ actors who compete, but also
national governments, who compete in order to ensure a favourable regulatory environment
for motivating both foreign and domestic investments.
Concerning the issues presented above there are two major dimensions of the national
regulatory framework: stability and complexity. Frequent changes in regulations can cause
great uncertainty, which makes it difficult for firms to make long-term decisions about
entering markets, choosing production technologies, or hiring and training employees. On the
other hand, an extremely complex regulatory environment may raise the entry and operational
105
costs of enterprises dramatically. In the last decade a growing number of countries have been
focusing on reducing the requirements for business registration and simplifying the
administrative burdens of enterprises (‘deregulation’).This may involve using information
technologies that allows on-line processing of regulatory approvals or the creation of ‘oneshop-stop’ systems (World Bank 2005).
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Box. 7.1 One-stop shops – or one-more-stop shops?
In many countries firms have to receive approvals from a range of different agencies
before they can start operating: one to register the business, another to register for taxes,
another to get environmental approvals, another for health and safety clearances, and so on.
To reduce this burden some governments have established ‘one-stop shops’ where firms can
find all the information and complete all the regulatory procedures that they need to start
operating a business in a given jurisdiction.
One approach would be to give a single agency the power to grant all licenses,
permits, approvals, and clearances necessary for a new firm to start operating. In practice this
is difficult. Existing ministries and agencies often resist surrendering their powers to a new
agency. Moreover, to the extent that approvals are a response to a valid policy concern, the
one-stop shop would need to duplicate expertise and facilities elsewhere in the government.
Of course, if the approvals do not meet valid policy objectives, the procedures could simply
be eliminated.
Because of these considerations, most one-stop shops have narrower mandates, with
authority to grant some approvals and provide assistance on others. For approvals that remain
the responsibility of other agencies, the one-stop shops may house staff from the relevant
agencies or simply pass the applications on to them. Even when the staff from other agencies
that are housed at the one-stop shop are unable to approve the application themselves, they
can often facilitate the approval process.
The Tanzania Investment Center houses nine senior officials from other ministries,
and normally manages to turn around applications within a few days. The rapid turnaround is
due in part to a ‘no objection’ provision written into the investment code — unless a ministry
objects within 14 days, the Center is entitled to approve the application.
This approach has been less successful when the lines of authority are not clearly
drawn. After being set up in 1987, the One-Stop Action Center in the Philippines housed
representatives from seven agencies who were responsible for providing information to
applicants and acting on some applications. Lack of effective agency representatives — and
the non-reporting of some representatives to the Center led to poor results, requiring the
government to reorganize the centre in the late 1990s.
When agencies lack authority to grant all necessary approvals, it is important that
they still add value to the process and do not just constitute an additional regulatory burden.
In Thailand the Investment Services Center could issue establishment licenses for nonpolluting activities, but factories still had to get permission from the Ministry of Industry
before production could actually start. To avoid delays later in the process, many firms
preferred to obtain the necessary licenses directly from the ministry from the outset.
One-stop shops with narrower mandates have sometimes accelerated the process of
gaining specific approvals. For example, by shifting from a pre-auditing to a post-verification
system, the One-Stop Service Center for Visas and Work Permits in Thailand reduced the
time it took foreign firms to get visas for foreign workers from about 45 days to just 3 hours.
Source: World Bank 2005
In the following section we provide a general overview of the most important legal
issues concerning the establishment of an SME in the participant countries.
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7.3 Legal forms of business entities and laws concerning SMEs: types of registered companies
There are various forms of registered companies and it is possible to classify them in
several ways. The individual legal forms of companies vary country by country but there are
some common viewpoints that can be used in the classification. In what follows there will be
three main characteristics of firms applied: the liability of the members, the nature of the
company and the minimum required capital.
By liability we usually mean that “the liability of the members is limited to the
amount, if any, unpaid on their shares. Once a members’ share is fully paid, then his liability
to the company on them ceases, and he is not liable to make any contribution to the
company’s assets in respect of the shares in event of the company being wound up. The
limited liability company is the classic vehicle into which the armchair investor, who does not
wish to have a direct involvement in the day-to-day running of the enterprise, may apply his
funds safe in the knowledge that his liability to the company will not exceed the amount of his
investment.” (Goldenberg 1999:7) On the other hand “an unlimited liability company is one
which does not have any limitation on the contribution which can be called for from members
to meet liabilities of the company. The members’ liability will arise if the company is wound
up and has an excess of liabilities over assets. (…) Such company can reduce its share capital
without the sanction of the court.” (Goldenberg 1999:8)
Concerning the nature of the company, company law makes a distinction between
companies with and without legal personality. If a registered company is a legal person in its
own right it means that the company itself is distinct from its officers and members. “The fact
that the company has a separate existence from its directors and shareholders has important
consequences. The feature of corporate existence enables the company to own property, to
continue in existence despite changes in ownership and, most importantly, to keep the liability
of the company separate from that of its members.” (Goldenberg 1997:14) In contrast to this
the legal capacity of companies without legal personality is limited; for example these
organisations cannot carry out activities that only legal persons are permitted to do. In
addition, in these cases the property of the company is not distinct from that of its members,
who carry unlimited liability. Concerning the third criterion of classification the forms taken
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by individual companies vary according to the number of members and the required minimum
nominal share capital of the company.
In the following, based on the papers contributed by the Leonardo consortium
members, we provide an overview about the special laws on SMEs in the participant
countries.
7.3.1 Belgium
Belgian company law recognises the commercial company in various forms. The most
common forms commercial companies can take are:
–
the Company limited by shares (S.A./N.V.),
–
the Private Limited Liability Company (S.P.R.L./B.V.B.A.),
–
the Co-operative company,
–
the European Economic Interest Grouping.
Required minimum initial capital
Company Limited by Shares
The minimum capital requirements and the minimum amount paid-up depend on the
form the subsidiary will take. In the case of a Company Limited by Shares, the minimum
share capital of 61,500 EUR must be fully subscribed and fully paid up. The share capital can
also be subscribed in kind, but this requires a valuation report from an authorised auditor. The
Company Limited by Shares requires a minimum of two shareholders, who may be
individuals or legal entities (Belgian or foreign). The total number of directors in the hands of
the Board of Directors constitutes all the powers of the daily management of the company.
This body appoints one or several statutory auditors, who must review annually the financial
position of the company. The General Meeting shall appoint at least three directors. These
directors do not have to be shareholders. There are also no residence or nationality
requirements. The day-to-day management of the company's affairs may be delegated by the
Board to one or more directors or even to one or more persons who are not on the Board, such
as managers, supervisors or other agents. The term of office they are granted by the General
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Meeting may not exceed six years. The directors may be re-elected by the General Meeting
but also dismissed by it at anytime and without justification.
Private Limited Liability Company
One or more persons who are responsible only for the assets they brought into the
business form the Private Limited Liability Company. The shares are also transferable but
under certain specific conditions. The minimum capital amounts to 18,600 EUR and a third
(6,200 EUR) of it must be fully subscribed and paid up. This form of company admits only
one director.
The Economic Interest Grouping
These are undertakings with incomplete legal personality that offer companies the
possibility of founding a legally independent entity for co-operation, in order to facilitate,
rationalise and develop their economic activities. The collaboratory relationship must take
account of the economic activity of the member companies and should act as a support (for
example joint accounting or canvassing). This type of association cannot be used to found a
new business or regroup all the activities of the members. The main difference between these
legal forms is that an EEIG groups entities from different Member States, which, in principle,
is not the case for the EIG. The EEIG and the EIG are fiscally transparent: as concerns
taxation of income, they are considered not to have legal personality, so that the results of
these economic groupings are exclusively taxable to the members as profits or advantages.
This does not prevent the EEIG and the EIG from maintaining their legal personality to carry
out their other tax obligations (withholding and paying professional withholding tax). Foreign
companies that are members of a Belgian resident EIG could be liable in Belgium to the nonresident corporate income tax if their activities in Belgium are regarded as a permanent
establishment. This form of company can be constituted by a private document.
7.3.2 France
French business law defines SMEs as follows: companies employing less than 250
people (in annual full time equivalent) and where either the annual turnover is lower or equal
to 40 million euros, or the total earnings do not exceed 27 million euros and which are not
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held to a total value of 25% or more (capital or voting right) by one or more companies not
corresponding to the definition (Agence des PME 2002).
Legal forms
Sole proprietors (EI) have no legal personality in France and carry unlimited liability.
In French company law various company forms are defined:
–
Limited liability company (SARL),
–
One-person company with limited liability (EURL),
–
Limited company (SA),
–
Simplified joint-stock company (SAS) and one-person simplified joint-stock liability
company (SASU),
–
Partnership limited by shares (SNC).
The limited liability company (SARL) can be established with at least two members. The
members’ liability for losses is limited to the amount of their contributions to the firm’s
property. The minimum required initial capital is 1 EUR. This is a typical company form for
some intellectual professions. Since 1985 French law has permitted the creation of a limited
liability company with only one member (EURL) and 7,500 EUR as an initial capital, but
only as a subsidiary. A limited company (SA) is one which is established by at least two
members with limited liability to their contributions and with 37,000 EUR minimum initial
capital requirement. The simplified joint-stock company (SAS) and one-person simplified
joint-stock company (SASU) have great contractual freedom and a considerable reduction in
the legal formalities required. The amount of the required initial capital is in both cases
37,000 EUR. The partnership limited by shares (SNC) is a company established by at least
two members with no initial capital and unlimited liability.
7.3.3 Germany
The definable borderline between SMEs and LSEs (Large Size Enterprises) can be
drawn by two variables: the number of employees and the annual turnover. In Germany SMEs
relate to economic aspects as well as to social and psychological characteristics. It includes
quantitative and qualitative futures. Deriving the SMEs economic and social functions only
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from statistics therefore would neglect the fact that SME is an essential force in a dynamic,
competitive and market oriented economy. By this "Mittelstand" is not only defined by size
patterns but by characteristics like private ownership, freedom in decision making and
contracting, individual responsibility of entrepreneurs for the success or failure of the own
enterprise.
Qualitative Aspects
The central (qualitative) characteristic of SMEs focuses at the coherence between
enterprise (professional office resp.) and owner. The close connection between a person and
an economic unit strongly influences the market behaviour and performance of privately
owned SMEs and determines the social and political role of the "Mittelstand". Qualitative
factors like identity between ownership and personal responsibility for the enterprise's
activities identity of ownership and personal liability for the entrepreneur's and the enterprise's
financial situation personal responsibility for the enterprise’s success or failure and personal
relationship between employer and employees are responsible for the fact the SME is not only
an economic but also an outstanding social factor.
Mostly the qualitative criteria dominates the overall enterprise's activities in such a
degree that quantitative aspects for example size, sector or market share are of less
importance. By these reasons even enterprises exceeding the size-classes of the statistically
drawn limit - from a qualitative perspective - in many cases can be regarded as SMEs. To
finalise: The qualitative aspects of the "Mittelstand" influence the choice of the legal form of
the enterprise as well as its way of financing, innovative behaviour, the number of products or
offered services and the managerial attitudes to run the business.
Quantitative Aspects
Like in many other countries also in Germany a rather pragmatic approach is used in
order to estimate and describe the number of enterprises by size-classes or to generate and
compare empirical findings. In most cases sector, annual turnover and the number of
employees are used as size-indicators.In Germany the EU definition by employment size
more and more replaces the traditional definition, at least in public support programs. In May
2003 the European Commission has approved changes to the recommended EU definition of
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micro, small and medium-sized enterprises which is used to determine eligibility for national
SME support schemes and EU-wide SME programs. These changes will apply from 1 January
2005.
Legal forms
German company law makes a distinction between various company forms. Sole
proprietors (Einzelunternemher) have unlimited liability for the financial losses of the
entrepreneurship. A company of the civil right (GbR) is a form where initial capital is not
stipulated and the members (at least two) are liable with their private assets to an unlimited
extent. An open commercial company (OHG) is a company with the same conditions as a
GbR but can be chosen only by full-merchants. The partnership company (PartG) is a new
legal form for the self employed, who would like to work independently with partners. For
occupations where the legal form of a GmbH is impossible or is too costly, a Partnership
company is an attractive alternative to co-partnership (GbR). A partnership company is liable
with its business assets and the private assets of the partners. Freelancers, whose liability by
occupational laws and regulations is limited, must conclude liability insurance. The company
must be registered in the Partnership register by the District court. The unlimited partnership
(Kommanditgesellschaft – KG) consists of the general partner (Komplementär) and the
limited partner (Kommanditist). The general partner has unlimited liability for financial losses
but the liability is limited to the amount of his or her contribution. The company forms
presented above are not obliged to have a minimum initial capital. In the limited liability
company (GmbH) the liability of the company corresponds to the combined value of the share
capital of the partners, with a minimum of 25,000 EUR (including real values). If this
threshold is reached, a partner has no further liability with his or her private assets. In the
German company there is a special form of unlimited partnership: Ltd. & Co. This concerns
one KG, where instead of a natural person a GmbH/Ltd is a personally liable partner
(Complementary). Therefore, as a result, the liability is limited as with the liability in a Ltd.
Company. Usually the partners of the Ltd. company are also simultaneously the
Kommanditisten (limited partners) of this company. The level of the asset threshold of the Ltd
(Complementary) company and that of the respective Kommanditisten, determines the
according jurisdiction and of course the distribution of the profits and losses as well. The
Small INC. is a company established by a relatively small number of shareholders with at
least 50,000 EUR. The liability corresponds to the amount of the fixed capital. The registered
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cooperative (EC) has a minimum seven members bound by a written statute. The foundation
itself does not need to be certified by a notary. However, a notary certification of the
members' signatures is necessary for enrolment into the Company's register (District court).
Each cooperative must belong to the corresponding local cooperative association, which is
responsible for verifying the business and the economic circumstances of the cooperative. The
association supports and advises during the process of foundation as well as in the
development of a business plan. A cooperative consists of three bodies: the General Assembly
of all members’ representatives, which decides, among other things, the annual conclusion of
business, the election of the board members and statute alterations; the Executive, which
governs the cooperative independently, and the Board, which controls the activity of the
Executive. Each member must draw at least one business share, whose value is fixed in the
statute. Each member has one voice, independently of how many company shares he or she
drew. The liability of the members is narrowed to the value of the company shares drawn. A
public existence foundation support is only possible if the cooperative performs as a profitoriented economizing small or medium-sized undertaking.
7.3.4 Hungary
In Hungary there is a specific act concerning SMEs. The first definition of micro-,
small and medium-sized enterprises was laid down in the Act XCV of 1999 on Small and
Medium-Sized Enterprises and the Promotion of Their Development, effective as of 1 January
2000. This law was replaced by a new Act, the Act XXXIV of 2004 on Small and MediumSized Enterprises and the Promotion of Their Development, passed by Parliament on 26 April
2004 and coming into force as of 1 May 2004. The law defines the SMEs according to their
size (number of employees), annual turnover and/or annual balance sheet. The following table
illustrates the individual size categories.
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Table 7.4. Comparative table of the definitions of SMEs in Hungary
Size category
Total stuff number
Annual turnover
Annual balance sheet
total
Micro-enterprise
Fewer than 10
HUF equivalent to 2 million €
persons
Small enterprise
Medium-sized enterprise
10 – 49 persons
50 – 249 persons
HUF equivalent to
HUF equivalent to 10
10 million €
million €
HUF equivalent to
HUF equivalent to 43
50 million €
million €
Source: Kovács 2004:7.
In addition to the elements presented above the so-called independence criterion is
included in the definition of SMEs. The independence criterion means that an enterprise shall
be considered a small or medium-sized enterprise if the property share of the state, the
municipality or companies in the SME (based on equity or voting rights) does not exceed
separately and jointly 25%. The SME Act introduced new definitions, such as ‘autonomous
enterprises’, ‘partner enterprise’ and ‘linked enterprises’, which involved a substantial reregulation of the previous independence criterion. The property limits presented above do not
apply to non-SMEs from 2005.
Legal forms of SMEs
Act V of 1990 regulates the conditions and requisites of the establishment, operation
and disestablishment of sole proprietorships. The sole proprietors respond to the commitments
arising out of their activity with unlimited liability. As for the business company forms, in
accordance with the Company Act (Act CXLIV of 1997), companies may only be founded in
the forms regulated in the Act. These forms include:
–
limited liability company (korlátolt felelısségő társaság /Kft./)
–
public limited company/joint stock company or company limited by shares
(részvénytársaság /Rt./)
–
joint enterprise (közös vállalat)
–
limited partnership (betéti társaság /Bt./)
–
unlimited partnership/general partnership (közkereseti társaság /Kkt./)
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These corporate forms (companies) correspond closely to their German and British
equivalents. Each of these entities is permitted to be up to 100% foreign-owned or foreigncontrolled. Business associations without legal personality are: unlimited partnerships and
limited partnerships. Business associations with legal personality are: joint enterprises, limited
liability companies and public limited companies. With the exception of limited liability
companies and public limited companies, at least two members are required for the
foundation of a business association. Therefore limited liability companies and public limited
companies may be founded as single-individual companies as well. Of the corporate forms the
limited liability companies and limited partnership are the most popular, the proportion of
unlimited partnerships and public limited companies are dwarfed by these dominant forms.
Within the framework of the Companies Act and other regulations, members may freely
establish the contents of the articles of association – known as the deed of foundation, the
memorandum of association or articles of association – in line with the legal formula
prescribed for the foundation of a business association.
Minimum required initial capital
In the case of unlimited partnerships, limited partnerships and joint enterprises no
minimum initial capital requirement is imposed. The minimum required initial capital for a
limited liability company is HUF 3 million (~12,000 EUR). The cash contribution to the
capital must be at least 30% of the initial capital or HUF 1 million (~4,000 EUR) whichever is
the greater. The minimum required initial share capital for a public limited company is HUF
20 million (~80,000 EUR), with a minimum contribution in cash of 30% of the issued capital
or HUF 10 million (~40,000 EUR).
Enterprise foundations in the European Union
To establish enterprises in the European Union general rules of the member-countries
apply. The rules of the EU in some regulatory areas involve the coordination of membercountries rules. For example, the same rules apply to the maintenance of the trade register, the
publication of company-data, and the purchase of companies.
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Besides the Hungarian legal forms of companies there are three new forms of enterprises:
European Economic Interest Groupings (EEIG), European Companies, and European
Cooperative Societies.
–
Members of an EEIG can be entities from member-countries that commonly pursue
business activities and have economic independence and registration in accordance
with the legal rules of their own countries. The provisions of Act XLIX of 2003 on
European General Enterprises came into force after Hungary’s accession to the EU.
This kind of legal entity can provide a framework for co-operation between SMEs
inside the EU and facilitates co-operation beyond the EU as well.
–
A European Company is an independent form of company, which can be established
in any member-country, by a citizen of any member-country and which can operate in
any member-country. It is rather similar to the Hungarian form of joint stock
company; its initial capital is 120,000 EUR (app. HUF 30 million). From 8 October
2004 the Decree 2157/2001/EK of the European Council came into force introducing
this new form of company.
–
Regarding the European Cooperative Society certain EU-level decisions have still to
be made.
Detailed information can be found e.g. on Government Portal, with reference to the
foundation, operation and termination of enterprises (www.ekormanyzat.hu), and for further
information e.g. the publication of PricewaterhouseCoopers entitled “Doing Business and
Investing in Hungary” can be downloaded. The publication gives a general overview of the
business and legal environment in Hungary.
http://www.pwc.com/extweb/onlineforms.nsf/weblookup/HUENGNoServHungaryPublication
sSignUp?opendocument
117
7.3.5 Poland
In Poland there is no specific law concerning SMEs. The establishment, operation and
disestablishment of SMEs are regulated by the Act on Economic Activity (Act 101 of 1999).
The Act defines the SMEs according to the number of employees and the net revenue from
the sale of merchandise, products, or services as well as financial operations.
A small business is a venture employing fewer than fifty workers that achieves a net
revenue from the sale of merchandise, products, or services as well as financial operations no
greater than the PLN equivalent of EUR 7,000,000, or whose total assets as of the end of the
previous financial year do not exceed the PLN equivalent of EUR 5,000,000.
A medium business is a venture employing fewer than 250 workers that achieves a net
revenue from the sale of merchandise, products, or services as well as financial operations no
greater than the PLN equivalent of EUR 40,000,000, or whose total assets as of the end of the
previous financial year do not exceed the PLN equivalent of EUR 27,000,000.
Polish law stipulates the independence criterion. A small business cannot be a business if
other businesses that are not small businesses - or in the case of medium business, other
businesses that are not small or medium businesses - hold:
–
more than 25% of the equity, shares, or stock in the business;
–
the right to more than a 25% share in profits of the business; or
–
more than 25% of votes at the business’s general assembly of shareholders
(stockholders).
Legal forms and minimum initial capital requirements
In Poland a business may be a private individual, corporate entity, or a company
subject to commercial law, but not endowed with corporate entity status. Civil partnerships
are also considered businesses within the scope of their economic activity. The various
possible forms include the conducting of economic activity as a private individual, a civil
partnership, a cooperative, and various forms of commercial companies such as a partnership,
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a general partnership, a limited partnership, a mixed joint–stock and limited company, a
limited liability company, and a joint–stock company. In the case of commercial companies,
capital requirements create certain restrictions. The law defines the minimal level of start–up
capital only in the case of limited liability companies and joint–stock companies, which
amounts to PLN 50,000 and PLN 500,000, respectively. In all of the above–specified
organizational–legal forms there is an obligation to record an entry in the National Court
Register (KRS), which also serves as a register of businesses.
7.3.6 Slovakia
In the Slovak Republic a special legal regulation for SMEs does not exist. The
status of entrepreneurs, their mutual obligations as well as other issues relating to their
business activities (e.g. the Companies Register and competition issues) are governed and
regulated in the Commercial Code (Act No. 513/1991 Coll. as amended) and Act No.
455/1991 Coll. on Business Licensing and Self-Employment Services as amended (Business
Licensing Act). This Act governs and regulates the status of entrepreneurs and business
entities, and contractual relations as well as other relations that arise in the course of carrying
out business activities. The Parliamentary Act No. 231/1999 Coll. on State Aid defines the
SMEs according to the number of employees, the annual turnover and the annual balance
sheet. Companies are categorised into small (0-49 employees), medium (50-249 employees)
and large (250 and more employees) enterprises.
Legal forms
In the Slovak Republic Act No. 455/1991 governs and regulates the requirements
regarding the establishment and operation of sole proprietorships. A sole proprietorship is
defined as a permanent lawful active involvement in the management and operating of a
business in one’s own name, at one’s own responsibility with a view to generating profits and
under the terms and conditions laid down in this Act.
In Slovak business law there are four practical forms of corporations: general
partnerships (1,12% of SMEs in total), limited partnerships (0,20%), limited liability
companies (90,60%) and joint-stock companies (6,14%). A cooperative that is a legal entity is
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also classified as a corporation. As from May 2004, in addition to standard corporate forms
(Ltd, plc, etc.) Slovak entrepreneurs may also set up the so-called ‘European’ corporations.
The Amendment to the Commercial Code passed by the Slovak Parliament enables the
establishment of European economic interest groupings, European public liability companies
and European associations. European legal forms will facilitate co-operation at the European
level ideally suited to small and medium-sized enterprises. It is a compromise between the
community and national interests and brings better mobility to enterprises.
7.3.7 Spain
In Spanish business law there is no specific Act regulating SMEs. The establishment of
companies is regulated by the following Laws and Regulations:
–
Revised Text of Corporate Law (1989),
–
Limited Liability Company Law (1995),
–
Law on Income of Individuals (1998),
–
Cooperative Enterprise Law (1999),
–
Commerce Code,
–
Civil Code.
Legal forms
The Spanish laws define the requirements for establishing and operating sole
proprietorships. A sole proprietorship is described as an individual entrepreneurship with
unlimited liability and no minimum initial capital requirement. Concerning the other business
entities the following company forms are distinguished in Spanish law:
–
Joint property entity,
–
General Partnership,
–
Limited liability company (LLC),
–
Limited Liability Company New Enterprise,
–
Public Limited Company,
–
Limited Partnership with shares,
–
Employee-owned Company,
120
–
Cooperative,
–
Reciprocal Guarantee Company,
–
Venture Capital Company.
The joint property entity and the general partnership are company forms with unlimited
liability, no initial capital requirements and with at least two members. The limited liability
company is one which must have at least one member with limited liability and an amount of
3,005 EUR as an initial capital. In the case of new limited companies the law limits the
number of members to five persons. The limited partnership is a company with at least two
members and at least 60,000 EUR initial capitals. Liability is unlimited for the general partner
and limited for the others. The foundation of the public limited company requires at least
60,000 EUR and its members carry limited liability.
7.3.8 United Kingdom
In the United Kingdom the Companies Acts 1985 and 1989 regulate the establishing
and operating of business companies. In British commercial law SMEs are defined by the
number of employees, the annual turnover and net assets. A small company is one which, for
a financial year, satisfies at least two of the following conditions:
–
a turnover of not more than £2.8m,
–
net assets, as disclosed on the balance sheet, of not more than £1.4m,
–
the average number of persons employed during the year is not greater than 50.
A medium-sized company is one which, in a financial year, satisfies at least two of the
following conditions:
–
a turnover of not more than £11.2m,
–
net assets, as disclosed on the balance sheet, of not more than £5.6m,
–
the average number of persons employed during the year is not greater than 250.
British company law differentiates various company forms with regard to particular
matters, such as the distribution and return of capital. In what follows we try to provide a brief
summary of the logic of how British law classifies companies and of the most popular forms
of company in order to help understand the regulatory background.
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Public companies
A public company is a company having the liability of its members limited by shares, or
limited by guarantee and having a share capital, with a memorandum of association, which
provides that the company is to be public, and for which the requirements as to registration for
public companies are as follows:
–
the name of the company must end with the initials ‘plc’,
–
the company must have an authorised share capital of at least £50,000 (of which at
least £12,500 must actually be paid to the company by its shareholders), and
–
the company’s memorandum of association (which sets out the company’s
constitution) must also comply with the format stipulated for public companies under
Companies Regulations 1985.
The special significance of public companies is that they are permitted to offer securities
to the public.
Private companies
A company that does not register as public is a private company. The Companies Act
is less strict on certain regulatory requirements of private companies, but a private company is
not permitted to offer shares to the public. In contrast to public companies, in private
companies there is no minimum issued share capital requirement, the minimum number of
members and directors is one and there is no age limit applied for directors. According to
British company law it is possible to convert from a private company to a public one and vice
versa.
Companies limited by guarantee
Regardless of whether it is public or private, a company limited by guarantee has the
liability of its members limited by the memorandum to such an amount as they may undertake
to contribute to the assets of the company in the event of its being wound up. Liability by
guarantee is commonly used by clubs, associations and charities.
Companies limited by shares
Companies limited by shares can be either public or private. In these types of
companies the liability of members is limited to the amount, if any, unpaid on their shares.
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These companies are the most common form of company in the UK. This form is mostly used
by commercial enterprises.
Single member private companies
Since 1992 in the UK it is permitted to run private companies limited by either shares
or guarantee with only one member. This type of business unit combines the elements of
companies and sole proprietorships.
Unlimited companies
An unlimited company is a company in which the responsibility of the members for the debts
of the company is unlimited.
Partnership companies
A partnership company is one which is limited by shares, where the shares are
intended to be held to a substantial extent by or on behalf of its employees.
European Economic Interest Groupings
In structure the EEIG is a hybrid of a partnership and an unlimited company in that an
EEIG registered in the UK will have a separate legal personality as a body corporate while its
members will retain unlimited joint and several liability for the debts. The members of an
EEIG may be a company, a partnership or a sole trader, or a public body, provided that they
are based in the EU and are from at least two member states.
Legal forms
Following the logic presented above we will outline the basic characteristics of the
individual company forms. Concerning British company law there are various legal forms of
entrepreneurships. The possible legal structures are listed below:
–
Sole trader,
–
Private Limited Company (Ltd),
–
Partnership,
–
Public Limited Company (PLC),
–
Limited Liability Partnership (LLP),
–
Other (e.g. charity, co-operative).
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Self-Employment/ Sole Trader
To be a sole trader, a partner or a member of a limited liability partnership, an
individual must be self-employed and registered as such with the Inland Revenue. This does
not mean that individuals cannot also do other work as an employee, but the work that is done
for his/her own business must be done on a self-employed basis. Setting up as a selfemployed sole trader is the simplest and quickest way to start a one-person business. There is
not much paperwork and no registration fees to pay. Someone who registers as self-employed
fulfils these criteria:
–
present clients with invoices for the work,
–
works for more than one client,
–
can hire other people on their own terms,
–
uses their own tools or equipment for the work,
–
has to correct unsatisfactory work in their own time and at their own expense.
Partnership
In a partnership, two or more people share the risks, costs, and responsibilities of
being in business. Each partner is self-employed and takes a share of the profits. Usually, each
partner shares in the decision-making and is personally responsible for any debts that the
business runs up. Unlike a limited company, a partnership has no legal existence distinct from
the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership
must be dissolved. To solve this problem a legally binding partnership agreement can be
signed. To draw this up a solicitor is needed. A partnership is a relatively simple and flexible
way for two or more people to own and run a business together. But, there is no protection if
the business fails. The members of a partnership normally share in both the responsibilities of
running the business and the profits or losses that it makes. Their precise rights and
responsibilities will depend on what type of partner they are and additional agreements. There
are three main types of partner, each of which has different rights and responsibilities:
General partners
General partners invest in the business, take part in running it and share in its profits. Each
general partner is fully liable for any debts that the partnership may have. This means that
they could lose more than their initial investment in the business if it runs into trouble, and
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that their personal assets could be at risk. Every partnership must have at least one general
partner.
Sleeping partners (dormant partners)
Sleeping partners invest money in the business and share in its profits, but do not take part
in running it. Like general partners, they are fully liable for the partnership's debts.
Companies
Companies can be members of a partnership. If so, they have the same rights and
responsibilities within the partnership as other partners, but they also have some additional tax
matters and reporting obligations. They must pay corporation tax on their profits from the
partnership, and should include the profits on their self-assessment return for corporation tax.
Partnerships whose members are all companies have to prepare ‘partnership accounts’ and
send these to Companies House each year.
A deed of partnership is a legally binding agreement between the partners that are
setting up in business together. It describes how the partnership will be run and sets out the
rights and duties of the partners themselves. It is not necessary to have a deed of partnership
in order to set up a partnership, but it is important, as it will help to avoid misunderstandings
and disputes between partners in the future. If the partnership does not have a deed, it will be
governed by the terms of the Partnership Act 1890. However, it does not offer solutions to
many of the problems that can arise and may not suit the way that an individual and his/her
partners want to work together.
The deed will usually set out:
–
the amount of capital that each partner is to contribute to the business,
–
the way in which partners will share profits, and whether any of the partners should be
paid a salary,
–
working arrangements, such as how much time each partner should contribute to the
business,
–
changes to the partnership, such as how new partners can be appointed and what
happens if a partner dies or wishes to leave the partnership.
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A limited partnership is any partnership that includes one or more limited partners
amongst its members. It is not the same as a limited liability partnership. The limited partners’
responsibility to pay the partnership’s debts is limited to the amount that they have invested in
the company. But, if they withdraw any of their investment or take part in the management of
the partnership, they lose this protection. Setting up a limited partnership brings many
obligations and is more complicated.
A partnership can trade under the names of the partners or it can use another business
name. If the trading name does not include the partners’ names, they must be on the business
stationery. If there are more than 20 partners then the business stationery does not have to list
them, but it must show the address of the partnership’s principal place of business.
As an ongoing business, the partnership will have many other legal and tax obligations
to bear in mind that will be important during future changes.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is similar to an ordinary partnership, in that a
number of individuals or limited companies share in the risks, costs, responsibilities and
profits of the business. The difference from a normal partnership is that liability is limited to
the amount of money they have invested in the business and to any personal guarantees they
have given to raise finance. This means that members have some protection if the business
runs into trouble. LLPs are more complicated to set up and run than ordinary partnerships, as
they have to meet many of the same requirements as limited companies. Before starting a LLP
advice from a solicitor or agent should be obtained.
Two partners must be ‘designated’ members, on whom the law places extra
responsibilities. They have to ensure that the LLP meets various legal obligations. These
include making sure that the annual accounts and returns are properly signed and delivered to
Companies House. They are also responsible for appointing auditors if necessary, and they act
for the LLP if it is wound up or dissolved. Designated members are legally accountable if they
fail to carry out their duties properly. If the LLP reduces in number and there are fewer than
two designated members then every member is deemed to be a designated member. If the
LLP does not specify any designated members when it registers, then all its members will be
treated as such.
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Social Enterprise
A social enterprise is a business with primarily social objectives whose surpluses are
principally reinvested for that purpose in the business or in the community, rather than being
driven by the need to maximise profit for shareholders and owners. They are businesses
distinguished by their social aims. Examples of social aims are job creation and training,
providing community services and ‘fair trade’ with developing countries. There are many
different types of social enterprises, including community development trusts, housing
associations, worker-owned co-operatives and leisure centres. Social enterprises may take a
number of different business structures - companies limited by guarantee, companies limited
by shares and industrial and provident societies are the most usual. From 2005, a new trading
form, the Community Interest Company or CIC, will be introduced. This will provide social
enterprises with the flexibility of the company form.
7.4 Enterprise foundation, company registration
The aim of this section is to provide a brief overview of the most important
administrative burdens concerning the establishment of companies in the participant
countries. Another important goal is to compare and evaluate the basic conditions and
requisites of company registration in terms of complexity and simplicity, which we have
referred to in the introduction to this chapter.
7.4.1 Belgium
Establishing a subsidiary in Belgium
A subsidiary in the form of a company organised under Belgian law is endowed with
legal personality and hence forms a legal entity distinct from its parent. In Belgium a new
subsidiary must be incorporated by public notary deed and a preliminary financial plan for a
2-year period must also be supplied.
The articles of association and all documents regarding the appointment of the
directors and auditors must be filed with the Court of Commerce and must be published in the
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Belgian Official Gazette within fifteen days. The language of the documents is either French
or Dutch depending on the region in which the business will be located. The setting up costs
are made up of:
–
the notary fees which are calculated as a decreasing percentage on the subscribed
capital,
–
the registration tax of 0.5% on the subscribed capital,
–
the costs of publication in the Official Gazette.
The subsidiary must be registered with the local Trade Register and must also apply
for a VAT number (the latter does not entail any additional costs).
Establishing a branch
Unlike a subsidiary, a branch, although it may constitute an economic entity separate
from the head office of the foreign company, is not endowed with a distinct legal personality,
but is part of a legal entity of that foreign company.
As for the formalities of incorporation, the foreign-registered company must file, with
the Court of Commerce, a copy of its articles of association, together with its resolution to set
up a Belgian branch and the name of the manager or chief executive of the branch and the
powers to be vested in him/her as legal representative of the company in Belgium. The main
costs are:
–
the fee for the official translation into either French or Dutch of the articles of
incorporation and the by-laws of the parent company,
–
the fee for publication in the Belgian Official Gazette.
The financial statements of the foreign company (annual accounts and consolidated
annual accounts) have to be translated and filed with the National Bank of Belgium. The
branch must be registered with the local Trade Register and must also apply for a VAT
number (the latter does not entail any additional costs).
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7.4.2 France31
Formalities for international investors in France
The current French regulations require international investors to complete the
following formalities:
–
File a statistical return with a credit institution for transactions in which nonresidents acquire more than 10% of the equity or voting rights in a resident
company,
–
File an administrative return with the Ministry of the Economy (Treasury
Directorate) for investments that create new companies or result in the acquisition
of an equity interest in a French company involving more than a third of its shares
or voting rights, if the investment is greater than 1.5 million EUR.
–
Request prior authorization from the Ministry of the Economy (Treasury
Directorate) for investments relating to national defence, weapons and explosives
or investments likely to affect public order and safety or create serious public
health risks.
Establishing companies
The first step in establishing a company is to ensure it is entered in the company
register (Registre du Commerce et des Sociétés). The introduction of a one-stop service has
greatly simplified the administrative formalities for setting up businesses.
One-stop shop
Since the so-called ‘one-stop shop’ system has been introduced, all of the formal
duties of the company registration process can be arranged at just one place: the Centre de
Formalités des Entreprises (CFE). The CFE takes charge of all documents required to
establish, change or terminate companies and delivers them to the relevant authorities:
–
The Commercial Court Clerk's Office which issues, free of charge, a Business
Creation Certificate, and then issues the 'K-bis' register extract, when the company
has been registered.
31
The description of the French system is based on the following review: Doing business in France. Invest in
France Agency (IFA) – 2004. www.investinfrance.org
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–
The French National Statistics Institute (INSEE) which determines the relevant
activity code (APE) for the company and issues SIREN (company identification)
and SIRET (local unit identification) numbers required for recruiting staff.
–
The tax authorities (tax office) and social security agencies, including URSSAF
(Union de Recouvrement des cotisations de Sécurité Sociale et d'Allocations
Familiales), which collects payroll taxes. (IFA, p. 7.)
The registration application form (the ‘MO’ form) and the list of documents to be
translated into French and submitted are available at the Business Formalities Center. After
filling all application forms it takes about two weeks for a company to be recorded in the
company register (RCS). During the registration process the legal representative of the
company can use the Business Creation Certificate for dealings with the authorities and public
and private sector organizations (e.g. accessing the new company’s bank accounts). The
administrative procedure costs about 60 EUR, plus the cost of publishing a notice in the legal
gazette (approximately 200 EUR). There are some formalities that the Business Formalities
Center does not handle:
–
Applications for authorization to engage in regulated professions, professional
cards (sales representatives), licenses or registration with professional associations
for lawyers, accountants, architects, physicians, etc.
–
Proof of address
–
Formalities to register trade names and brands with France's National Industrial
Property Institute (INPI),
–
Registering internet domain names ending in '.fr' with the French Internet Names
and Cooperation Association (AFNIC),
–
Registration of the company with an insurance center,
–
Registration with an employee retirement plan (must be done within three months
of registration). (IFA, p. 8.)
Formalities relating to hiring employees must be completed with the Union de
Recouvrement de Sécurité Sociale et d'Allocations Familiales (URSSAF).
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Industrial property rights
French industrial property laws provide protection for patents, trademarks, models and
designs. France's National Industrial Property Institute (INPI) is the core of the French
protection system, and filings with it are the starting point for patent and trademark
protection. Industrial property rights entitle patent holders to a monopoly on use for 20 years.
Trademarks are valid for 10 years and can be renewed indefinitely. Models and designs are
protected for 25 years (IFA, p. 7.).
7.4.3 Germany
In Germany every commercial business must be declared to the responsible Trade
office (local Council offices, community offices). A personal identification card as well as
passport are necessary for this, as well as special authorizations and proof (for example
Handwerkskarte) concessions etc. are also possible. ‘Free’ occupations (for example doctors,
architects, tax advisors, lawyers, artists, authors) scientists, country- and forestry
entrepreneurs do not need to be declared to the Trade Office.
With the trade registration, the following authorities are, by law, informed automatically:
–
The tax office,
–
The Chamber of Crafts (for craft occupations)
–
Trade Union,
–
The Industry- and Chamber of Commerce,
–
The Regional Statistics Office,
–
The Commercial Register Court.
A company, in the sense of the Code of Commercial law (HGB), must be registered at
the Register of Companies at the responsible District court and this enrolment must be
certified by a notary. After being registered the tax office gives a tax number. On a
questionnaire, the entrepreneur(s) must answer various questions about future turnover and
profits.
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If the entrepreneurship has employees it must be registered at the regional or local
employment office under a business number. Even if taking over an already existing company
the entrepreneur must apply for a new business number. During the establishing process the
Health Insurance Company/Ersatzkasse-Substitute Company/Pension Funds must be
informed about the employees of the company. Then the health insurance company provides a
registration number.
Permits and licences
In Germany for some industries, there is a requirement for special authorization. A
craft business can only be run by someone who has passed a masters exam. However, the
masters exam can be replaced by an exceptional approval (§ 8 craft order). Only people who
are registered in the craft by the locally responsible Chamber of Crafts are allowed to run an
independent craft business. All essential activities that constitute the core elements of a craft's
business have to be registered. An exception to this is the so called ‘craft-similar’
occupations.
In the case of industrial activities installations with particular environmental impacts
must be approved under the Bundes-Immissionsschutzgesetz (The Federal Emission
Protection Law). In the retailing sector for different trade areas, special expertise proofs are
necessary (milk, drugs etc.). In operating hotels and restaurants a special permission is
required from the Trade office, after a one-day instruction course with the responsible IHK
(Chamber). For the commercial transportation of passengers in buses, rental cars and taxis
compulsory authorization is required. Permission is granted by the responsible trade office as
well as by the government presidency. For a further group of industries, special permission is
also necessary (i.e. a check on personal and economic reliability by the trade office):
–
To position game appliances with an opportunity for profit, other games events
with opportunities for profit, game halls,
–
Real estate brokers, installation mediators, builders and construction advisors,
–
Auctioneers,
–
Deposit mediators and deposit distributors,
–
Driving schools,
–
Heavy goods traffic etc.
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Freelance/Freiberufler
Anyone counting as ‘regulated’ self-employed (for example lawyers, doctors or tax
advisors), needs certain permissions in order to become independent. For the ‘non-regulated’
self employed (for example artists, authors, and scientists) no particular authorization is
required.
7.4.4 Hungary
In Hungary, since 16 June 1998, the law distinguishes between the procedures to be
applied in the case of organisations without legal personality and those applicable in the case
of legal entities. The time and cost requirements of registration depend on this distinction.
In the case of organisations without legal personality, the Court of Registration carries
out only format type checks in which case the processing time may not exceed 30 days (not
including the time required for supplying details not submitted with the original application).
In the case of legal entities, in addition to content review the total processing time may be up
to 60 days. Legal representation is a mandatory requirement in the registration process; the
entities are legally established from the day they are recorded in the trade register. In addition
to making available the minimum equity required for the foundation of the business, a fee for
publication and the procedural charge also have to be paid. The amounts of these are specified
as percentages of the founding equity. For instance, the costs of the foundation of a limited
partnership may, depending on the costs charged by the lawyer for his or her services, vary
between HUF 80,000 (~320 EUR) and 100,000 (~400 EUR), including duties and the costs of
the forms to be used. In the case of a limited liability company the costs are between HUF
200,000 (~800 EUR) and 250,000 (~1000 EUR), above the HUF 3 million (~12,000 EUR)
initial capital.
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The duties payable on certain Court of Registration procedures – under Act XCIII of
1990 on Duties – changed from January 2004. Until 31 December 2003 this duty was equal to
2% of the initial capital. Thus,
− a legal entity had to pay a minimum of HUF 60,000 (~240 EUR) and a maximum of
HUF 600,000 (~2400 EUR);
− business entities without legal personality and companies that cannot be classified in
the previous category, at least HUF 20,000 (~80 EUR) and not more than HUF
200,000 (~800 EUR);
− a company without initial assets, HUF 15,000 (~60 EUR);
− the Hungarian business premises of a company with a registered seat abroad, HUF
250,000 (~1000 EUR); and
− the direct commercial representation of a foreign company, HUF 150,000 (~600
EUR).
From 1 January 2004 the modification of the law ceased the payment of duty on
individual company procedures calculated as a percentage of the subscribed capital, and the
liability regarding duties payable was stipulated as by lots depending on the legal form of
enterprises. The introduction of the modification was necessary in order to avoid the
application of the EU-guidelines on duty on capital. In accordance with these guidelines, if
common public charge has to be paid as a percentage of subscribed capital, the duties payable
should be introduced for other transactions as well. At present the amounts of duties payable
are as follows:
− in the case of a public joint stock company duty payable is HUF 600,000 (~2400
EUR),
− in that of private joint stock company and limited liability company it is HUF 80,000
(~320 EUR),
− in the case of corporations with legal entity, which do not belong to the abovementioned categories, it is HUF 100,000 (~400 EUR),
− for partnerships without legal entity it is HUF 50,000 (~200 EUR),
− for a sole trader/one-person firm it is HUF 30,000 (~120 EUR),
− in the case of a registration of the Hungarian business premises of a company with a
registered seat abroad it is HUF 250,000 (~1000 EUR),
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− for the registration of the direct commercial representation of a foreign company it is
HUF 150,000 (~600 EUR).
From 1 September 2005 the request for registration (or the registration of changes) of
a limited liability company and a joint stock company can be arranged electronically in
accordance with stipulations of Act LXXXI of 2003.
We would like to emphasise that beyond the above-mentioned forms, foreign investors
can also chose two further legal forms to establish a business in Hungary. These are: direct
commercial representation of a foreign company, and Hungarian business premises of a
company with a registered seat abroad. If a foreign company works as a direct commercial
representation, foreign investors can maintain traditional relations, including support during
the negotiations on contracts, advertising and display of products as well as other forms of
marketing in the name of the parent company. However, the company is not allowed to pursue
business activity. This form is useful when a foreign enterprise would like to become familiar
with the local business environment and conditions before investing. The Hungarian business
premises of a foreign company are an arrangement in which the entity receives a mandate to
pursue traditional business activities independently.
Licensing of Activities
In Hungary there are numerous activities that enterprises can only pursue in possession
of a relevant official authorisation. For sole proprietorships this means that the following
items shall be handed in with the application for an entrepreneur’s licence under the law:
− a document certifying the qualification provided for by legal regulation if the
applicant intends to pursue an activity conditional on a specific qualification as
defined under the law,
− authorisation of other authorities as specified by legal regulation if the activity is
subject to official authorisation according to the relevant legal regulation.
If the activity to be pursued by a sole proprietor requires other official authorisation
according to the provisions of the relevant legal regulation, it can only be started and pursued
in possession of this authorisation.
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Under the Companies Act, the establishment of a business company may be subject to
official authorisation (establishment authorisation) and, furthermore, the law may rule that
certain business activities can only be pursued under specific legal forms. For guarantee
reasons, such restrictions shall only be announced by statutory-level legal instruments. Such
official authorisation is provided for, for example, in the Act on Credit Institutions and
Financial Enterprises in the case of establishing credit institutions and financial enterprises.
Official (operating) licences needed for pursuing individual activities, on the other hand, may
require official authorisation not only at the statutory level, but at a lower one as well. Such
provisions apply to diverse branches of business activities, and economic actors need ad hoc
information due to the large number of such provisions and their frequent changes. Official
(operating) licences required for pursuing an activity shall be acquired by the company itself,
in the company’s name, and cannot be submitted to the Court of Registration, unlike the
establishment permit.
Activities subject to specific qualification requirements shall only be pursued by the
business company if has at least one member/employee or person acting on behalf of the
company on the basis of a permanent civil law contract concluded with the company and
taking part personally in the said activity, who possesses the qualification specified by legal
regulation. The existence of the given qualification shall be certified to the authority in charge
of licensing or controlling the given activity.
Licensing and monitoring tasks are assigned to the competence of organs specified by
legal regulation. Territorial transport inspectorates perform official functions relating to taxi
drivers’ licences. The Licensing and Public Administration Office of the Ministry of
Economy and Transport (from 1 May 2004 the Hungarian Trade Licensing Office) is
responsible for licensing/registering the activities listed below – formerly assigned to the
competence of commercial chambers – and for related public administration tasks:
− registration/control of gas-fitters as indicated in the Act on Gas Supply,
− performance of tasks relating to the announcement of qualification as a
commercial accommodation/catering facility,
− activities relating to guides, travel organisations and the mediation of travel
services,
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− public administration activities relating to certain commercial activities,
− official functions relating to the sales of utilisation rights of real property on a
time-sharing basis.
On the basis of Government Decree No. 4/1997 (I.22.) on the operation of shops and
the conditions of pursuing home-trade, traders shall only pursue commercial activity, with
specific exceptions, at shops possessing an operating licence. In the terms of the decree
traders are as follows (excluding the trade of pharmaceuticals and therapeutical equipment):
business organisations engaged in retail and wholesale, in hotels and restaurants, in vehicle
trading, fuel trading and in rental activities (together commercial); Hungarian business
premises of a company with a registered seat abroad, and producers who sell goods produced
by themselves in stores. The said licence shall be requested from the notary of the settlement
competent at the location of the shop. Several special authorities may co-operate in issuing the
licence: the National Public Health and Medical Officers’ Service, the veterinary and food
control stations, the plant health and soil protection station, the fire, environmental protection
and building departments, the transport inspectorate or the police headquarters competent on
the given territory.
The Chamber System
It is a speciality of the Hungarian chamber system that mandatory membership was
introduced in 1994, and then abolished in 1998. Under Act CXXI of 1999 on the Economic
Chambers, from 1 November 2000 economic chambers, that is, chambers of commerce and
industry, and agrarian chambers, operate as public bodies on the basis of voluntary
membership, established by election by the business organisations concerned. The voluntary
chambers have a higher proportion of medium-sized and large enterprises than small ones, but
in spite of this, many micro- and small enterprises take part in the activity of chambers. The
Hungarian Chamber of Commerce and Industry (MKIK) had more than 42,000 voluntary
members at the end of 2003, of which the Budapest Chamber of Industry and Commerce
(BKIK) was the greatest with 7,680 members, followed by Pest County Chambers with 5,335
members. The economic weight of the members is characterised by the fact that the
enterprises concerned produce nearly 60% of Hungarian GDP.
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Currently, separate chambers of commerce and industry are operating in the capital, at
the 19 county seats, and in Sopron, Dunaújváros and Nagykanizsa, in which commercial,
industrial and artisan sections were formed. It is possible to create a maximum of 12 chamber
departments per section. In the network more than 500 experts are at work.
The membership fees, their calculation and manner of payment are specified in the
statutes of the economic chambers. The membership fee regime of the Budapest Chamber of
Industry and Commerce (BKIK) is as follows: the fee corresponds to 0.6 thousandth of the
corrected net sales revenue (the business tax base) of the previous year, with the proviso that
the minimum amount is HUF 10,000 (~40 EUR) and the maximum is HUF 930,000 (~3,720
EUR). The membership fee can be paid in two instalments. Upon entry to BKIK, a ‘one-off
registration fee’ (HUF 10,000 ~40 EUR) is to be paid, but for micro-enterprises, sole
proprietors and starting companies, this already covers the membership fee for the given year.
7.4.5 Poland
In Poland the first step on the road to establishing an enterprise is to procure a
certificate of entry into the register of economic activity. The body with responsibility for
keeping such records is the rural municipality manager (wójt) or town or city mayor.
Obligations connected with registration consist of the filing of a notice of intent to conduct
economic activity by the business, and registration of the economic activity in line with the
notice. The appropriate office then issues a certificate confirming entry into the records. There
is a treasury fee for making an entry into the register which amounts to PLN 30 (~7,5 EUR).
All businesses entered into the register of economic activity (the court register) are obliged to
file an application for entry into the business register. This application is not subject to court
fees. A fee of PLN 150 (~37.5 EUR) is collected for registration in the business register of a
private individual; registration of businesses that are not private individuals requires the
payment of PLN 1,000 (~250 EUR). Entry into the register of businesses that are not private
individuals requires an announcement in the Monitor Sądowy i Gospodarczy (Court and
Business Monitor). The cost of such an announcement of entry into the business register is
PLN 500 (~125 EUR).
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Procuring the RECON number
Each business is obliged to have an identification number with the Official Domestic
Register of Entities of the National Economy and to use that number in submitting
information used for statistical purposes. The Official Domestic Register of Entities of the
National Economy encompasses corporate entities, organizational entities that do not have
corporate entity status, and private individuals conducting economic activity, as well as their
local units. This register is managed by the President of the Central Statistical Office (GUS)
in a computerized manner and is referred to by the acronym REGON. Notification of the
Statistical Office must be made within fourteen days as of receipt of the decision regarding
entry into the business register. The certificate regarding the issue of the REGON
identification number to the entity is made free of charge, usually immediately.
Procuring the NIP number
Being taxpayers from the point of view of tax regulations, businesses are obliged to
register and receive the NIP taxpayer identification number. Registration is conducted by the
tax authority. During registration of the entity, the Treasury Office determines the form of
taxation, the manner of managing tax records, and registration with respect to the tax on
goods and services (VAT), and excise tax.
In cases in which the business is a private individual residing within the area of
operation of a Treasury Office other than the one where he/she conducts his/her economic
activity, applications must be filed with both offices. Such a person will make personal
income tax settlements through the Treasury Office of his/her place of residence and VAT
settlement through the Treasury Office with jurisdiction over the location of the economic
activity. The treasury fee for confirming the filing for VAT registration and excise tax
amounts to PLN 152 (~38 EUR).
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Social Security Administration (ZUS) notification
Economic entities that conduct non–agricultural activities within the territory of the
Republic of Poland are subject to obligatory retirement and disability insurance. Persons
conducting non–agricultural economic activities are required to file a notice for such
insurance by themselves and directly. Registration consists of completing the application that
is appropriate for the given legal form and submitting it to the ZUS Branch Office appropriate
to the seat of the entity. The deadline for filing such a notification is seven days as of the date
of the appearance of the insurance obligation. Employees employed by the business must be
disclosed for insurance purposes.
Opening a bank account
The next and last step is the opening of a bank account. Due to the degree of
competition on the financial services market, this phase is relatively easy for the business. The
application for the opening of an account should include an excerpt from the court register,
the GUS certificate regarding the REGON number, and the certificate confirming the issue of
a taxpayer identification number.
Licensing activities
The Act on Economic Activity is the basic legal act in the Polish system regulating
questions concerning the restriction of economic activity through permits and licenses. The
obligation to procure a license is exclusively derived from the Act on Economic Activity. The
principles of applying for a license are identical for all businesses. A license is issued for a
specified period of time, but not shorter than two years nor longer than fifty years.
Presently, eight areas of economic activity require licenses in Poland:
− Exploration or identification of mineral deposits, the extraction of minerals from
deposits, the tank–free storage of substances and the storing of wastes in rock masses,
including underground post–mining excavations;
− The manufacture of and trading in explosives, arms, and ammunition as well as
products and technologies with military or police designation;
− The manufacture, processing, storage, transmission, distribution of, and trading in
fuels and energy;
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− Personal and property security services;
− Air transportation and the rendering of other aviation services;
− Construction and operation of toll highways;
− The management of railway lines and shipping by rail; and
− The broadcasting of radio and television programs.
The business applying for a licence is required to pay treasury fees. These vary
depending on the type of activity.
In contrast to licensing, the obligation to procure a permit encompasses very many
fields of economic activity. A whole series of detailed regulations contains rules relating to
the procurement of permits that, together with the Act of Economic Activity, define issuing
bodies, terms for undertaking activities encompassed by permits, and the manner of issue,
rejection, or revoking of permits. Examples of areas of economic activity encompassed by an
obligation to procure a permit in Poland include:
− Permits for the production, bottling, purifying, denaturation, and dehydration of
alcohol, the isolation of alcohol from other products, and the production and bottling
of liquor as well as the manufacture of tobacco products;
− Permits for wholesale trading in alcoholic beverages, the sale of alcoholic beverages
designated for consumption at the point of sale or beyond it, and the production and
bottling of wine products;
− Permits for the performance of insurance–related activities;
− Permits for wholesale trading in pharmaceuticals and medical supplies, the
manufacture of such products or materials, and the managing of general–access
pharmacies;
− Permits for activities related to the use of atomic energy;
− Permits for performing insurance agent activities;
− Permits for activities related to the removal, utilization, and rendering harmless of
municipal wastes;
− Permits for the management of a bonded customs warehouse;
− Permits for the organizing of tourist events and intermediary services as commissioned
by the customer in concluding agreements relating to the rendering of tourist services;
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− Permits for the production and distribution of license plates;
− Permits for the manufacture, processing, and altering of narcotics and psychotropic
agents, the import and export of such substances, and their wholesale trading;
− Permits for the cultivation of poppies and hemp;
− Permits for the operation of public telephone networks or public networks designated
for the broadcasting or distribution of radio and television programs; and
− Permits for the conducting of economic activity in special economic zones.
Permits are issued for an unspecified period of time. A treasury fee is collected for the
issuing of a permit; its level is defined by the Act on Treasury Fees unless the provisions of a
separate act states otherwise. The level of the treasury fees varies.
Sanitary, fire-emergency and environmental protection regulations
The body with responsibility for overseeing hygiene at work is the National Sanitary
Inspection Authority (PIS). A business is obliged to notify the appropriate National Sanitary
Inspector of the location, type, and scope of the activities being undertaken, within fourteen
days as of commencement of operations. A business is further obliged to provide information
regarding the projected number of employees as well as means and procedures applied to
meet requirements stemming from labour, health and safety regulations connected with the
given field of activity. Among obligations derived from the fire–emergency regulations which
apply to a business undertaking an economic activity are:
1)
Observance of fire–emergency construction, insulation, and technological
requirements;
2)
Equipping of the building, facility, or grounds with fire–fighting and rescue
equipment as well as extinguishers in line with principles as defined in separate
regulations;
3)
Securing the safety of people in the facility and providing for their evacuation;
4)
Preparing the facility or building for the conducting of rescue operations and
5)
Establishing procedures to follow in the event of a fire, natural disaster, or other
local threat.
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Regulations relating to environmental protection, including those contained in the Act
of January 31, 1980 on Environmental Protection and the Shaping of the Environment
(Journal of Laws of 1994, No. 49, item 196, with subsequent modifications) as well as the Act
of July 18, 2001—Water Law (Journal of Laws of 2001, No. 115, item 1229) introduce
several regulations, prohibitions and orders that must be observed by a business from the
moment it commences economic activity.
7.4.6 Slovakia
At present, eight companies’ registers administer registration of entrepreneurs in
Slovakia. Companies’ registers operate under district courts seated in the same towns as
appropriate regional courts. The system and network of registration has not been centralised
and individual companies’ registers are not mutually linked. Details of incorporation in the
companies’ register are publicly available. The court informs the appropriate tax authority,
statistical office and the body that granted a business or any other licence of the
entrepreneurs’ incorporation in the companies’ register. The companies’ register records are
available on the Internet.
Licences and permits
Act No. 455/1991 Coll. on Business Licensing and Self-Employment Services (Business
Licensing Act) sets out the requirements for doing business in a self-employed capacity,
especially the requirements for being granted a business licence, an entrepreneurs’ duties and
obligations, the mechanisms for checking upon compliance with all statutory requirements, as
well as the sanctions for any non-compliance or breach of these.
The Business Licensing Act in its Sec. 2 defines business licence as an activity carried
out independently, in one’s own name and on one’s own account with a view to generating
profits and in compliance with the statutory terms and conditions laid down in the Business
Licensing Act. Any entrepreneurial activities are subject to the legislative framework set out
in the Business Licensing Act, except for activities specifically excluded under Sec. 3 of the
Business Licensing Act. These are the activities that are strictly reserved for the state, or
which do not have all the characteristics prescribed by law of a business run as a self-
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employed entity, or special activities, which are governed and regulated under separate legal
rules.
Set-up procedures and launch of operations still take longer in Slovakia than in other
well-developed economies. This was also reported in the World Bank Report on the Business
Environment. While a Slovak entrepreneur on average needs 52 days to set up his/her
business, in Canada it takes only 3 days. Even though previously entrepreneurs needed 89
days to set up their businesses and launch their operations there are a still a number of
obstacles in place.
After changes implemented in 2004 Slovak entrepreneurs may expect that they will only
have to follow an 9-step procedure scheme involving the following institutions: the authorized
court, a notary, the appropriate department dealing with business licensing and selfemployment services, a bank, the revenue authority, and the social insurance, health
insurance, and employment agencies (from January 1st 2004 this latter is not necessary).
7.4.7 Spain
In Spain both sole traders/proprietors without legal personality and companies must
apply for a tax identification number to the tax office (AEAT) as the very first step of
establishment. As a second step companies are obliged to register themselves in the Central
Registry of Companies in order to get a negative certification of their corporate name. They
have to certify their foundation documents with the notary. In the case of cooperatives there
are two additional obligations. They have to register their business bylaws and the articles of
association at the notary and the regional community as well. Concerning the cost of
registration each company is obliged to pay Transfer and Stamp Tax to the corresponding
Regional Community.
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Companies must be registered with the Chamber of Commerce of the corresponding
province. A fee is charged for the services that they offer; basically training, advice, and
advertising.
As for social contributions, companies with employees must be registered at the
General Treasury for Social Security in three steps. First they have to register themselves and
secondly their employees. As a third step they have to complete and register an employment
accident policy, which also has to be registered and permitted by the Mutual Work Accidents
Society. The employment contracts must be certified and stamped by the National
Employment Institute.
Permits and licences
In Spain there are various licences required for the operation of a company. These are
obtained mainly at the city halls, and include:
–
Activity License,
–
Works License and associated Licenses (Occupation of Public Thoroughfares,
Opening Trenches, Crane Placement),
–
Opening license,
–
No-parking zone license.
In addition companies must have a low-voltage installation authorization from the
regional community and they must apply for water supply and sewerage to the City Hall or
the Water Management Company.
In this section we provide an overview of the most important elements of the
registration process concerning the most common company forms in the United Kingdom.
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Setting up and registering a limited company
In the United Kingdom before a business can begin operating as a limited company, it
has to be registered with the Registrar of Companies (Companies House). Incorporation is the
process by which a new or existing business is converted into a corporate body. Companies
House is available under: www.companieshouse.gov.uk.
To set up as a limited company in the UK, an individual - or the agent acting for him
or her - will need to send several documents and completed forms to Companies House (or, in
Northern Ireland, to the Companies Registry for Northern Ireland):
–
A Memorandum of Association, giving details of the company's name, location and
what it will do.
–
Articles of Association, describing how the company will be run, the rights of the
shareholders and the powers of the company's directors.
–
Form 10 (Statement of the First Directors, Secretary and Registered Office) giving
details of the company's registered office and the names and addresses of its directors
and company secretary. The equivalent form in Northern Ireland is Form 21.
–
Form 12 (Declaration of Compliance with the Requirements of the Companies Act),
stating that the company meets all the legal requirements of incorporation. The
equivalent form in Northern Ireland is Form 23.
The company’s officers
The officers of the company are the people formally appointed to run it - the company
directors and company secretary. By law, companies must have officers in place at all times,
and their names and addresses must be on the company's registration documents. If officers
resign or new ones are appointed, or if their personal details change, the Registrar of
Companies must be informed straight away.
–
Private companies must have at least one director and a company secretary. If there is
only one director, this must be stated in the company's Articles of Association and this
director cannot also be the company secretary.
–
Public limited companies must have at least two directors and a company secretary.
The company secretary of a PLC must be formally qualified.
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It is possible for a single person to form a so-called 'single-member' private company
and to be the sole director of this company. However, the company will need to have a
secretary, who cannot be the same person as the sole director.
Registration costs
The registration process can be handled by the individual directly through Companies
House, or a company formation agent, accountant or solicitor can be employed to carry out
the process. Companies House charges a standard registration fee of £20. It also offers a
premium same-day registration service for a fee of £50, as of 1 February 2005. Memorandum
and Articles of Association have to be obtained from law stationers or company formation
agents - costing around £15. The cost of having Form 12 witnessed is around £10.
Companies House can give advice on the basics of the registration process, but they
cannot give detailed advice on how to draw up the necessary documentation. The registration
process can be handled by the individual, but ideally professional advice should be sought. A
company formation agent, solicitor or accountant can carry out the process for a fee as well as
offer advice.
Setting up and registering a limited liability partnership (LLP)
An LLP can be registered either through Companies House (Companies Registry in
Northern Ireland) or alternatively via a solicitor, accountant or company formation agent.
Companies House charges a fee of £20 to register an LLP, as of 1 February 2005.
Sole traders/proprietors
A sole trader has to pay income tax on any profits from the business. For this a selfassessment tax return has to be filled out, detailing the income and expenses. It is used to
work out how much tax and Class 4 National Insurance contributions have to be paid. The tax
is paid on the business profits. Like a company, the individual can deduct business expenses
from the business income to work out how much taxable profit is made. It is obvious that the
return has to have correct details of income and expenditure.
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The registration with the Inland Revenue has to be made as soon as the business is
started. If this is not done within the first three full months there is a fine of £100. A form to
register as self-employed can be downloaded from the Inland Revenue website.
Every self-employed person has to make flat-rate Class 2 National Insurance
Contributions (NICs) throughout the year (£2.00 a week in 2003/04 and £2.05 a week in
2004/05). Help on how to pay can be obtained from the Inland Revenue website or through a
telephone helpline. If the annual profits are over a certain amount (£4,615 in 2003/04 and
£4,745 in 2004/05) the insurance contribution is higher, corresponding to Class 4 NIC. This
sum is to be paid together with income tax; the amount is calculated from the self-assessment
tax return.
VAT (value added tax) is a tax on spending. If a business owner has or expects to have
a turnover of more than £58,000 a year, he or she has to charge their customers VAT and send
it to Customs and Excise. There are three different rates, and registration can be completed
online on the www.hmce.gov.uk website.
Special rules apply to subcontractors in the construction industry, the second largest
SME industry sector. Forms are available from the tax office. As the business develops, other
legal and tax issues can come into force.
Anyone can set up in business as a sole trader, although for certain types of work there
is a licence or permission needed from the local authority. Restaurants, childminders, cab
drivers and street traders, for example, need to have a local authority licence. Qualifications
and business premises can be inspected beforehand to ensure that they comply with
regulations.
7.5 Termination and dissolution of companies
Finishing business activities belongs to the ‘natural life-cycle’ of a company, though it
has several legal and other administrative consequences. The aim of the next section is to
overview the most important issues concerning the termination and dissolution of companies
in the participating countries.
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7.5.1 France
In France the objectives of the business law concerning rectification and bankruptcy of
companies are expressly affirmed: to safeguard the company, to maintain activity and
employment, and to audit the liability (Code of the trade, art. L 620-1, subparagraph 1st). The
safeguarding of the company involves a search for a plan of rectification, which results either
in the continuation of the company, or its transfer. To arrive at one of these results, the
legislator implements some derogatory rules.
The procedure begins with one observation period during which an economic and
social assessment and/or a project or plan of rectification are drawn up. During this phase, the
rights of the former creditors are paralysed: the payment of their credits, except exceptions, is
prohibited; their rights of continuations and of execution are suspended. Moreover, if they are
consulted on the outcome of the procedure, their opinion does not bind the court, which is the
only judge of the decision to be taken and is able to impose terms of payment. The contracts
of employment are maintained, even though dismissals remain possible but under strictly
limited conditions.
Nevertheless the procedure finishes nine times out of ten in bankruptcy, and this is
very often announced immediately because the activity of the company has already finished
(even if the judgement remains open), or the chances of rectification seems to be non-existent.
The company is then liquidated and the sums generated by this liquidation distributed
between the creditors cover only one of their credits.
7.5.2 Germany
The insolvency regulation (Insolvenzordnung - InsO) which came into force on 1
January 1999 replaced existing legislation governing bankruptcy, composition and liquidation
procedures and modernised Germany's insolvency law. The law now also applies to natural
persons and provides for the possibility of residual debt relief.
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In the area of enterprise insolvencies, the new regulation on the one hand creates better
opportunities for restructuring firms facing insolvency while on the other hand maximising
recoveries for the benefit of creditors.
The main provisions introduced to enhance the scope for restructuring insolvent
enterprises are as follows:
1) For enterprises in danger of becoming insolvent, avenues were created for gaining
access to insolvency proceedings at the earliest possible stage and under less strict
conditions, so as to enable firms to get back on course with the aid of all involved
(including banks and creditors). To this end, debtors facing impending insolvency are
able to apply to be declared insolvent without having to wait until they have become
overindebted or bankrupt. Moreover, the chances of insolvency proceedings actually
taking place (with the possibility of residual debt relief inter alia) were increased.
Plus, the proportion of the associated costs which has to be borne by the affected
enterprises as a prerequisite for the opening of insolvency proceedings was
appreciably reduced.
2) Under the new insolvency legislation, priority is no longer attached to the liquidation
of insolvent enterprises but to their rescue and continuation. The receiver is instructed
to keep the company in business if at all feasible. The aim during insolvency
proceedings is to maintain operational capability as far as possible. Operating
resources tied to collateral arrangements now generally remain in the enterprise.
3) Insolvency proceedings can now be managed in such a way as to respond more
flexibly to the various requirements of the enterprise concerned. The insolvency
regulation merely prescribes a framework within which various proceedings are
offered.
In order to maximise recoveries for the benefit of creditors, insolvency assets were
placed on a broader base:
1) Creditors are now largely given the same ranking so as to distribute the available
assets more equitably among them. Preferential rights, such as public-sector privilege,
were discontinued.
2) A debtor's new assets – i.e. the revenue generated by an enterprise after proceedings
have been opened - are now included in the assets to be distributed.
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7.5.3 Hungary
Procedural rules for terminating entrepreneurial activities are similar to those
applicable to obtaining a certificate for sole proprietors. Sole proprietors have to report their
intention to terminate entrepreneurial activities to the document office of the Ministry of
Interior with jurisdiction at the proprietor’s seat. The revocation of sole proprietorship
certificates is in the jurisdiction of the notary of the settlement (or the respective district of the
capital) if the conditions specified by law exist. These cases are listed exhaustively in Act V
of 1990 on Sole Proprietorship; thus, the certificate will be revoked from a sole proprietor if
–
any circumstances arise that would exclude the issuing of the certificate (causes set out
in Article 5 of the Act);
–
the sole proprietor does not meet the requirements for operation as set out in the Act or
other legislation, and in spite of the notification from the notary of the district centre
or the notary of the municipality (or the capital district) having competence at the sole
proprietor’s seat or a notification from the authority specified in a separate law, the
sole proprietor fails to meet the requirements within 30 days or – based on
authorisation in a separate law – a deadline specified by the authority, and there is no
other remedy for the violation of the law;
–
the sole proprietor failed to meet his/her obligations to pay taxes or customs duty for
12 months prior to a notification from a competent authority, or failed to meet his/her
registration, tax declaration and recording obligations in spite of a notification from
the Tax Authority by the deadline specified in the notification;
–
the sole proprietor failed to pay his/her contribution owed exceeding an amount of
his/her contribution liabilities equivalent to 12 months or failed in his/her obligations
of registration, in declaring his/her contributions, in data provision or recording
obligations in spite of a notification from the social security administration bodies by
the deadline specified in the notification.
The Tax Authority is notified of the revocation of the licence via a computer network,
as a consequence of which the Tax Authority will delete the taxpayer from the register by a
resolution. Following this, the sole proprietor has to prepare a closing declaration to settle
his/her existing tax debts. In the event that the sole proprietor dies or loses his/her legal
capacity, his/her widow, heir or legal representative may continue the enterprise, for which
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they have to submit an application for a sole proprietor certificate to the document office in
accordance with the general rules.
The general and particular procedures of terminating business associations pertaining to
each type of company are regulated by the Act on Business Companies. According to this, a
business company will cease to exist if:
–
the period specified in the Articles of Association (deed of foundation, or by-laws) has
elapsed or any other condition for termination has occurred,
–
the company decides to dissolve without legal successor (in the event of deciding on
dissolution without legal successor – except for the case of liquidation, which shall be
proceeded in the case of insolvency – winding-up procedures are conducted.)
–
it decides to dissolve with legal successor (transformation),
–
the number of its members decreases to one, except if otherwise provided by rules
applicable to particular corporate forms,
–
the Court of Registration declares it to have been terminated,
–
the Court of Registration orders it to be deleted from the company register ex officio,
–
the court terminates it in a liquidation process,
–
the rules of the act applicable to individual corporate forms require it.
A business company ceases to exist from a legal point of view on the date it is deleted
from the company register by the Court of Registration, regardless of the reason for
termination (whether it is a company decision or court procedure), because their termination,
just as their establishment, is subject to a procedure by the Court of Registration.
From 1 January 2003 in proceedings before the Court of Registration as well as in the
case of bankruptcy and liquidation procedures, HUF 7,000 (~28 EUR) instead of HUF 5,000
(~20 EUR) has to be paid for appeals against decisions passed, and HUF 8,000 for a review of
a decision passed in Court of Registration proceedings and in bankruptcy and liquidation
procedures. The duty on liquidation procedures increased from HUF 40,000 (~160 EUR) to
HUF 50,000 (~200 EUR) in the case of companies with legal entity, whereas the duty for
instituting bankruptcy procedures is HUF 30,000 (~120 EUR). For business organisations
without legal entity, the respective amounts of these duties are HUF 25,000 (~100 EUR) and
HUF 20,000 (~80 EUR).
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The rules applicable to the reorganisation of insolvent business organisations by way
of bankruptcy proceedings, and if this is not possible, to their termination by liquidation, as
well as the rules applicable to the winding-up of business organisations that, though solvent,
terminate their activities without a legal successor, are laid down in Act XIX of 1991 on
Bankruptcy Procedures, Liquidation Procedures and Winding-up. The need for a new
legislative package on insolvency, replacing the Bankruptcy Act that came into force over 10
years ago, has been discussed for a long time. The Bankruptcy Act may be extended to sole
proprietors as well, given that the scope of the existing Act only covers economic
organisations and their creditors which are listed by the Act (some 30% of the total number of
economic organisations). Accordingly, these organisations are: state enterprises, trusts, other
state business organisations, co-operatives, business associations, public benefit companies,
enterprises of certain legal entities, subsidiaries, water management associations (except for
water utility associations), forest management associations, voluntary mutual insurance funds
and private pension funds; furthermore associations, sports associations and sports federations
are also considered to be economic organisations.
7.5.4 Poland
Special kind company dissolution is bankruptcy. In Polish business law there are
several rules concerning bankruptcy. The act regulating this matter in the Polish system is the
Act of February 28, 2003—Bankruptcy and Restructuring Law (Journal of Laws of 2003, No.
60, item 535). These regulations are intended to create conditions making possible the total
satisfaction of creditors and improving the potential for maintaining the business and its
operations through restructuring. Any business that has defaulted on its debts is obliged to file
an application for the announcement of bankruptcy with a court no later than two weeks as of
the date of such default. Such an application may also be filed by any of the business’
creditors. The appropriate court is the regional court or commercial court. Any party declared
bankrupt is obliged to identify and release to the receiver in bankruptcy all assets as well as
commercial books, correspondence, and other documents. As a result of the declaration of
bankruptcy, the bankrupt party by law loses rights of management and the ability to use and
dispose of assets belonging to the party on the date of the announcement of bankruptcy as
well as those procured during the procedure. These assets make up the estate in bankruptcy.
The estate in bankruptcy does not encompass the property of the bankrupt party exempt from
execution.
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The takeover of the assets of the bankrupt party, its management, and the undertaking
of the liquidation of these assets are the responsibility of the receiver in bankruptcy. The
receiver must notify the Treasury Authority, the Social Security Administration (ZUS), and
creditors of the known address of the bankrupt. The receiver is also obliged to inform banks
and institutions where the debtor has safety deposit boxes, cash deposits, or other assets. It is
the task of the receiver to prepare an inventory of the assets of the estate in bankruptcy and
assess it over a period of no more than one month as of his or her designation. Following the
preparation of the inventory and balance sheet, the assets of the estate in bankruptcy are
liquidated.
The judge–commissioner may appoint a council of creditors as a body overseeing the
actions of the receiver in bankruptcy, examining the state of funds of the estate in bankruptcy,
and granting their approval to the receiver. Under specific circumstances, - e.g. when at least
two creditors holding a total of no less than one–third of the total acknowledged debt file an
application - the judge–commissioner calls an assembly of all creditors. Each and every
creditor wishing to participate in the bankruptcy proceedings should submit to the judge–
commissioner the total of his/her claim in writing. Following the elapse of the deadline for
submitting claims, the receiver in bankruptcy drafts a specification of claims. There is a
defined order for satisfying debts.
In addition to the potential for satisfying the creditors of the insolvent debtor by way
of universal execution directed against the party’s assets, Bankruptcy and Restructuring Law
also makes possible the restructuring of the business and liabilities of the insolvent debtor.
Such actions are aimed at reviving the party’s ability to be competitive on the market. Thus,
in a sense, the solutions found in the provisions of the Bankruptcy and Restructuring Law
create favourable conditions for maintaining jobs and the development of business.
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7.5.5 Slovakia
Revocation of business licence
The appropriate department of business licensing and self-employment services
(according to the legal entity’s registered office or individual’s residence) will revoke a
business licence, if
–
an entrepreneur no longer meets the requirements prescribed by law, i.e. he/she no
longer has a full legal capacity (this does not apply if a guardian has been appointed)
and is no longer a person of integrity,
–
the entrepreneur has been declared to be bankrupt or the bankruptcy proceedings have
been brought to an end, this being within 3 years of the completion of bankruptcy
proceedings or after a repeated confirmation of the compulsory scheme of
arrangement with creditors,
–
the entrepreneur himself/herself asked for revocation of a contingent business licence,
which is subject to certain statutory restrictions,
–
in furtherance of his/her business under a business licence the entrepreneur is in
breach of statutory terms and conditions, or in breach of duties and obligations defined
by law as duties and obligations of special importance.
Dissolution of companies and cooperatives
The company is deemed dissolved upon its being struck-off the companies register. It
may be dissolved with prior liquidation (winding-up) or without liquidation if its assets pass
to its legal successor. No winding-up scheme need be applied if the company has no assets, or
if the bankruptcy petition was rejected due to the lack of assets, or if the bankruptcy
proceedings were discontinued on the grounds that the bankrupt’s property is not sufficient to
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cover the costs and remuneration due to the bankruptcy trustee, or if after completion of
bankruptcy there are no company assets left.
Bankruptcy
The institution of bankruptcy should become more effective under a new Bankruptcy
Act that was drafted by the Slovak Ministry of Justice and which should take effect in the
beginning of 2005. The new Act favours the idea of the sale of the bankrupt’s assets as soon
as possible with the highest possible proceeds rather than the idea of sustaining its operations.
The institution of composition that is currently in place will be replaced by the scheme of
arrangement, which should guarantee the same rights and protection to small creditors as well.
The court will have to approve the scheme of arrangement within 15 days.
The status of creditors in the case of the debtor’s insolvency is rather weak under the
applicable legislation. The bankruptcy proceedings take 3 – 7 years and debt collection
through bankruptcy proceedings has proved to be rather ineffective. The latest amendment to
the Bankruptcy Act No. 238/1991 Coll. guarantees some support to creditors in relation to the
bankruptcy trustee. However, the problem is still the lack of demand for the assets of bankrupt
enterprises, mainly because of the investors’ unwillingness to enter the rather complicated and
non-transparent bankruptcy schemes prevailing in Slovakia.
7.5.6 Spain
In Spain the mechanism for the termination of business activity is essentially the
inverse of the process to create one that was described earlier. Companies may first dissolve
and then liquidate, or carry out both processes at the same time. The system that applies to the
individual businessperson is more simplified, and involves removing the company entries
from the corresponding registries and proceeding with the liquidation of any pending taxes, as
well as the laying-off and liquidation of payments to the contracted workers. The bankruptcy
is regulated by the Temporary Receivership and Bankruptcy Law (1922 and later
modifications), with the intervention by the corresponding Court and the appointing of Legal
Auditors and Representatives of the Creditors.
156
Administration and receivership
According to British company law, when a company or partnership gets into financial
trouble an administrator or administrative receiver may be appointed.
Administration
The role of an administrator is to get the company out of trouble and trading again.
Administrators can be appointed to a company or partnership that is unable, or is likely to
become unable, to pay its debts. They can be appointed by any of the following:
–
the Court - on application from a creditor, directors or partners,
–
the holder of a qualifying floating charge over the assets of the business,
–
the company or its directors,
An administrator's primary goal is to rescue the company as a going concern. If this is
not possible, the administrator will try to get a better result for the creditors than would be
possible if the company was wound up. If neither of these is possible, the administrator will
sell the company's property to make at least a partial payment to one or more secured or
preferential creditors, such as employees or the bank.
Receivership
A creditor whose debt is secured by a floating charge appoints an administrative
receiver. This is a form of security often required by banks. The Enterprise Act 2002
introduced a prohibition on appointing administrative receivers for floating charges created
after 15 September 2003. The receiver is only concerned with getting back the money owed to
that creditor and has the power to take control of the assets covered by the charge. Often this
may be the cash or debts owed to the business, which means the receiver has control of the
whole business. Once the receiver finds enough to pay off the creditor, and the costs of the
receiver, the original owners will be given back control of the business.
157
Insolvency of companies
If a company becomes unable to pay its debts and no arrangement or period of
administration is likely to save it then the director can propose a creditors’ voluntary
liquidation (CVL). In a CVL the director must pass a resolution that the company cannot
continue and then call a meeting of the creditors. The creditors will appoint a liquidator who
will carry out the winding up of the company. The company can also be wound up by
compulsory liquidation under a court order. The director can apply for the court order, but
usually the application will be made by a creditor owed more than £750.
In a compulsory liquidation the official receiver is appointed to wind up the business.
Companies House publishes guidance on winding up for companies in England and Wales.
The Accountant in Bankruptcy (AiB) is responsible for liquidation and receivership in
Scotland.
In general, directors are not liable for company debts. Shareholders’ losses are limited
to the value of their shares. Therefore, the insolvency of a company does not always lead to
personal bankruptcy unless any personal guarantees are called in. When the company is
insolvent the accounting date is reset to start a new accounting period at the date the liquidator
or administrator is appointed. At the end of a winding up a company is struck off the register
and ceases to exist.
Insolvency of partnerships
Partnerships can become insolvent if the partnership debts are greater than its assets or
its trading income cannot cover its debts as they are due. The partners can propose a voluntary
arrangement to its creditors but otherwise they are liable to pay off the debts and then either
dissolve the partnership or inject new money and carry on. If partners are unable to pay the
debts of the partnership, then they will be subject to personal bankruptcy.
If one of the partners becomes personally bankrupt, then their share of the partnership
will be taken by the trustee in bankruptcy and this will lead to the partnership being dissolved.
158
However, the business can be saved if the existing partners or a new partner can buy out the
bankrupt partner’s share and a new partnership can continue in place of the old one.
In a limited liability partnership (LLP) the situation is similar to that for the insolvency
of companies. Companies House publishes useful guidance on the winding up of these
partnerships in England and Wales. The Accountant in Bankruptcy (AiB) is responsible for
liquidation and receivership in Scotland.
In limited partnerships - rather than LLPs - there must be at least one general partner
and while the limited partners lose only their investment, the general partner(s) will be liable
without limit for all the outstanding debt. This could lead to personal bankruptcy of the
general partner(s).
Bankruptcy of individuals
If a sole trader/proprietor is unable to pay his/her debts on their due dates, then he/she
can be made bankrupt. But bankruptcy has serious implications and should be avoided if
possible. Voluntary arrangements should be the first option, with an informal arrangement the
best choice as it will have the least long-term effect. If it is not possible to get creditors to
agree to an arrangement, then bankruptcy will be the only option. An application can be made
directly to the court for a bankruptcy order or any creditor (or group of creditors) owed more
than £1,000 can apply.
An official receiver will be appointed by the court to manage the proprietor’s affairs
while he/she is bankrupt. During this period he/she is referred to as an undischarged bankrupt.
At the end of the bankruptcy he/she will be discharged by the court and will regain control of
his/her own finances.
While a proprietor is an undischarged bankrupt all money he/she is entitled to will be
paid to the receiver. They will use it to pay off debts and will provide an allowance to live on.
Except in cases where the court thinks that the proprietor has been to blame for the
bankruptcy, he/she should be discharged from bankruptcy within one year under the rules of
the Enterprise Act 2002.
159
8. Administrative burdens on SMEs: various fields of employment and
working conditions
After giving an overview of the characteristics of the legal framework of SMEs in the
countries participating in the LEONARDO project, we highlight another important aspect of
the administrative burdens SMEs have to face; those related to the circumstances of
employment, i.e. the recruitment of employees. As we mentioned earlier, SMEs have an
important role in employment generation and stabilisation. However, if administrative
burdens have a negative impact on SMEs’ recruitment decisions, as the evidence indicates,
their job creation potential cannot be fully exploited. The Joint Employment Report 2000
states that there is a growing consensus among EU-countries on the need to simplify the
administrative burdens of enterprises (COM 2000). These efforts have strong political support
in all Member States. The overview of the administrative burdens of SMEs presented above
concentrated on the start-up process of enterprises. In the following we review the most
important administrative barriers concerning the recruitment of employees.
160
BOX 8.1 Jobs and taxes: No easy choice in Germany
Germany’s cumbersome hiring and firing policies may be such a big hump that even
higher demand for labour would not be able to surmount it. Unlike 10 other European Union
members, Germany still cannot break into the World Bank’s top 20 for the easiest countries in
which to do business in 2005. In the rankings last year for ‘hiring and firing workers’,
Germany ranked well below the Organization for Economic Cooperation and Development’s
average in all four of the bank’s categories: difficulty of hiring, rigidity of hours, difficulty of
firing and firing costs. Across the categories, an average of 94 countries out of 144 rank above
it.
German labour market
Germany has one of the tightest labour markets in the world, according to the World Bank.
Indexes from 0 to 100, higher values indicate more rigid regulation.
Difficult of
Hiring Index
Rigidity of
Hours Index
Difficulty of
Firing Index
Firing Costs
(weeks of
wages)
Germany
Average of high-income
OECD countries*
Number of countries that
scored lower than Germany
44
26
87
80
56
106
40
26
69
80
40
102
*As defined by the World Bank out of a list of 145 countries
Source: Altman 2005:12.
Although nobody questions the importance of administrative burdens in the creation
and operation of SMEs there is no generally accepted definition of this category.
Administrative burdens are mainly described as an extensive paperwork and administrative
formalities by which governments collect information and intervene in individual economic
decisions (OECD 2000). In terms of administrative burdens related to the recruitment of
employees there are two main aspects to emphasize. The first concerns the number and nature
of administrative procedures, and the second is associated with employment regulations
employers have to be aware of if they want to recruit new employees. On the basis of these
two dimensions the definition of administrative burdens dealing with recruiting new
employees can be formulated as follows.
161
Administrative burdens are:
–
The number and nature of the obligatory administrative procedures entrepreneurs have to
go through in the recruitment process including obligatory contacts with authorities,
‘form filling’ and delivery of the requested information to the respective authorities;
–
The preparatory work and information collection; as entrepreneurs first have to find out
which specific regulations are relevant for their individual case, they have to understand
these norms and they have to work out which precise actions are demanded from them.
(Observatory 2002:11)
The results of the 2001 ENRS Survey on SMEs32 suggest that larger enterprises
complained considerably more often than smaller firms on the increase in administrative
burdens between 1997 and 2001. The share of companies indicating an increase in
administrative burdens rises steadily with enterprise size.
Table 8.1 Enterprise owners’ perception of the development of administrative burdens
resulting from employment regulations since 1997, by enterprise size, Europe-19*, 2001
Number of employees
0
1
2-9
10-49
50-249
Total
Increase
42%
51%
69%
75%
80%
64%
Decrease
4%
2%
3%
2%
1%
3%
No change
27%
31%
21%
18%
15%
23%
answer
27%
16%
7%
5%
3%
10%
Total
100%
100%
100%
100%
100%
100%
Don't know/No
Source: Observatory 2002:17.
In Europe, on average, 3.3 administrative procedures have to be gone through when
recruiting the first employee (Outlook 2002). The form, content and costs of the
administrative procedures related to employment are different in the various European
countries. For example in Germany or in the UK employers have go through administrative
procedures either before or after hiring a newly recruited employee, while in Belgium, France
or Spain the recruitment process covers both time periods.
32
The ENRS Survey on SMEs was carried out in the framework of the Observatory of European SMEs in 2001,
among more than 7,600 SMEs across Europe.
162
Box 8.2 Licensed Employers’ Social-Accounting Secretariats in Belgium
In Belgium, administrative procedures are rather complex. Apart from the six
obligatory for all first-time employers, there is a considerable number of additional
procedures that apply only to certain groups of employers, e.g. those employing manual
workers or those operating in specific economic sectors. In order to cope more easily with
employment-related administrative obligations, most Belgian SMEs have joined a licensed
Employers’ Social-Accounting Secretariat. These private non-profit organisations execute
the complete wage and personnel management for their member enterprises (e.g.
administrative procedures in the recruitment process, calculation of wages and social security
contributions, withholding taxes on wages, undertaking the respective /monthly, quarterly or
yearly/ declarations, etc.)
The use of specialised services provided by these Social-Accounting Secretariats is so
widespread in Belgium that very few SMEs do this job themselves. So, Belgian employers
are significantly relieved from performing these complex administrative tasks themselves,
however, they have to bear the costs of outsourcing them.
Source: Small Business Research Institute K.U. Brussels
Another aspect of the recruitment procedures is the number of institutions to be
contacted, which again varies from country to country.
Table 8. 2. Obligatory institutions to contact when recruiting the firs employee
Country
Social
Tax
Insurance Authority
Employment Accident Pension
Office
Other
Total
XXX
5
X
4
Insurance Scheme
Office
Belgium
X
France
X
X
Germany
X
X
Spain
X
X
UK
X
X
X
X
3
X
3
X
2
In spite of these national differences in the institutional context, the social insurance
offices and/or the tax authorities represent the key institutions in the recruitments process. In
all European countries two institutions at least have to be contacted when employing new
workers and, in addition, they often play an important coordinating role within the recruitment
process.
In some countries social security institutions or tax authorities function de facto as
one-stop-shops in terms of social security matters. A good example of this is the URSAFF
163
(Union de Recouvrement de Sécurité Sociale et d’Allocation Familiales) in France, which is
an institution collecting the social security and family allowances contributions.
Box 8.3 URSSAFF: a French Social Security Institution
Since June 1998, French employers have to complete just one single document
(Declaration Unique d’Embauche – DUE: Single Recruitment Declaration) with a time
requirement of approximately ten minutes. This Single Recruitment Declaration has to be
sent to the URSSAF institution within the week before the newly recruited employee starts
work.
The URSSAF collects all obligatory information and then submits the relevant
documents the other institutions that are involved. Thereby, up to nine formalities can be
carried out in one single step, thus, significantly reducing administrative burdens on
employers. In adition, the registration process is simplified by the use of e-government. The
form for the Single Recruiting Declaration can be downloaded (www.due.fr) and returned via
the Internet or alternatively sent via MINITEL, by fax or by registered letter.
Source: Association pour la Pormotion et le Dévelopement Industriel (APRODI)
There are other countries as well, where similar institutions have been set up. In
Germany for example the health insurance fund offices have been established as one-stopshops for all notifications to social security institutions. That means German entrepreneurs
have to contact only one official institution, which automatically transfers all relevant
information to other concerned public authorities.
In relation to the second aspect of the definition of administrative burdens presented
above, i.e. the complexity of employment regulations, in the 2001 ENRS Survey on SMEs,
enterprise owners were asked to identify one single field of employment regulation which
imposes the highest administrative burdens on them.
164
Table 8.3 Fields of employment regulation with highest administrative burden, by enterprise
size, Europe-19, 2001
0
Health and safety protection for
workers
Social security and pension
requirements
Employment related taxes
Restriction on working hours
Sector-specific requirements
Dismissal law
Employment contracts
Collective bargaining
Worker participation law
Don't know/No answer
Total
Number of employees
1
2-9
10-49
50-249
Total
12%
22%
34%
38%
40%
30%
13%
14%
15%
10%
9%
14%
10%
2%
5%
0%
2%
1%
1%
54%
100%
10%
5%
5%
2%
2%
1%
1%
38%
100%
13%
7%
5%
4%
4%
2%
1%
15%
100%
14%
7%
7%
6%
3%
2%
1%
12%
100%
11%
6%
4%
7%
4%
3%
3%
13%
100%
12%
6%
5%
4%
3%
2%
1%
23%
100%
Source: The 2001 ENRS Survey on SMEs
According to the results of the Survey health and safety regulations are on of the most
regulated fields of employment as the most important field – particularly for firms operating
in manufacturing and construction sector. Interestingly a large number of micro enterprises
cannot name a single regulatory field that imposes the highest administrative burdens on
them.
An international survey highlighted another crucial aspect of administrative burdens
and stressed that law enforcement plays an important role in the operation of the labour
market (Bertola et al. 2000). According to the study, jurisprudence seems to be very important
and not only the strictness of the regulations in themselves. The vague legal definitions of
unfair dismissal provide the courts room to interpret regulations, which is considered to be an
important reason for the large number of cases brought to the courts in France, Germany and
Spain. The same study indicates that the outcomes of legal labour disputes are not
independent of external factors such as the cyclical and regional labour market situation or the
density rates of trade unions. Empirical data from Germany and Spain show that courts
protect employees far more against dismissals during cyclical downturns than in booming
labour market conditions.
165
Another aspect of administrative burdens related to employment-related regulations
applies if the size of the firm exceeds a specific threshold. For example smaller sized
enterprises are exempted from certain legal obligations as long as the number of their
employees remains below the defined threshold. These thresholds are mainly applied in the
fields of collective representation (work councils), health and safety, dismissal protection and
disability law.
Table 8.4. Thresholds in employment related legislation, Europe-19, 2001
Country Worker representation
Health and safety
Dismissal protection
Disability law
Belgium
X
France
X
X
X
X
Germany
X
X
X
X
Spain
X
X
UK
X
X
X
X
X
In summarising it can be stated, that the administrative burdens mainly result from the
complexity of the employment legislation. In a large number of European countries
administrative burdens in themselves seem not to be particularly high. Contrary,
administrative burdens on SMEs represent collecting and interpreting the obligatory
information in the complex and often obscure regulatory environment (Outlook 2002).
In the following we provide a brief selection on the legal framework of employment
and working conditions in the participant countries, based on the research results of the
Leonardo consortium partners.
166
Extract 8.1 France: Social security and labour contributions
1. Collective agreement: the main document for the labour force in the enterprise
A collective agreement is set up to deal with the totality of the collective relations
between employers and paid employees (collective bargaining, all conditions of employment
and social guarantees). It supplements and adapts the provisions of the Fair Labour Standards
Act to the situations of a particular branch of industry. A collective agreement is a written act
concluded between:
– one or more trade-union organizations or employees’ representatives,
– one or more organizations of employers or any other grouping of employers, or one
or more individual employers.
A sector collective agreement is concluded between trade-union organizations
representative of a sector of activity (metallurgy, wholesale, etc.). It applies to companies
operating in the sector, professionally (in terms of activity) and geographically (in terms of
national, regional or departmental location), who are members of an employers’ organization
signatory to the aforementioned agreement. The collective agreement of a company is
concluded between the individual employer and one or more trade-union organizations or
employees’ representatives in the company.
Determination of the right agreement for the firm
Two criteria determine whether a collective agreement is applicable:
–
the activity of the company: this is determined by the NAF code (nomenclature of
French business activity), formerly the APE code, prepared by the INSEE,
–
the site of the company: if the territorial field of application of a agreement is limited
(to an area or department), it applies only to companies having their registered office
or an autonomous establishment established in the definite geographical sector.
In the case of companies with multiple activities, the company’s principal activity
determines the collective agreement applicable to all the paid workers in the company. The
principal activity is defined according to the manpower (industrial sector) or turnover
(commercial sector). The name of the collective agreement on which the employees depend
generally appears on the pay slip. Moreover, the place where the text of the collective
agreement is kept must be publicized by the company at workplaces. Thus any employee of
the establishment can consult it during working hours.
Form and registration
A collective agreement must be an act fulfilling the following requirements:
– French drafting,
– determination of the field of professional and territorial application,
– determination of the duration of the agreement (given or unspecified),
– methods of renewal or revision,
– methods of reporting breaches in the agreement,
– clauses relating to the conditions of employment, working conditions and wage
guarantees.
167
Collective agreements are deposited at the Departmental Management of Work
(DDTE) in five copies. A specimen is also given to the Secretariat-Clerk’s Office of the
council of ‘prud’hommes’.
Items in the agreement
A collective agreement generally contains a basic text, endorsements and agreements
or appendices. After having defined the field of application, it treats the majority of the
subjects related to the professional life of paid workers, such as:
– probationary period (duration, notice),
– duration of work, part time, night shifts,
– overtime / public holidays,
– paid-leave,
– various premiums: seniority, transport, 13th month,
– exceptional allowances,
– non-competition clauses,
– military obligations,
– replacement, change,
– disease, accident, maternity,
– retirement (notice, allowances, …)
– resignation,
– dismissal (reasons, notice, allowances).
If necessary, it defines the methods for adapting working time following the 35 hour
rule. A collective agreement can still include precise details on the methods and the operation
of the representative bodies of paid employees in the company, such as trade unions or
work’s councils.
Application of the collective agreement
When an employer is bound by the clauses of a collective agreement, these clauses
apply to the contracts of employment concluded with him/her, except for more favourable
provisions. All the employees profit from the provisions of the collective agreement,
whatever their function. An employee belongs to the collective agreement applicable to the
establishment where he/she works. In the absence of a collective agreement applicable within
the company, the employer can decide, without being obliged, to voluntarily apply a
collective agreement.
2. Different kind of contracts (Different forms of employment)
Contract of Unspecified Duration (CDI)
If employment corresponds to a normal situation in the firm’s development, the
employee must, in theory, be recruited under a contract of employment of unspecified
duration (CDI). This contract of employment is a common right. The Contract of Unspecified
Duration cannot be broken by the employer any time: the dismissal must be justified, either
for a personal, or for an economic reason. It is possible to include a probationary period in
the contract of employment. In the probationary period it is possible to break the contract at
any time, without notice or allowance. The duration of this period is in theory unspecified
(unlike the CDD), except when the collective convention applicable envisages a maximum
duration.
168
Contract of Specified Duration (CDD)
In other cases, when recruitment corresponds to a temporary situation, it is possible to
have recourse to a Contract of Specified Duration (CDD). A great number of companies do
this in order to judge the qualities of the recruited employee, the probationary period planned
for a contract of employment of unspecified duration sometimes being insufficient to judge a
new recruit’s abilities. It should however be made clear that this type of contract, due to its
precarious nature, can be used only in precise cases, defined by the Law, in particular when it
is a question of carrying out a precise and temporary task within the company (the
replacement of a person absent or a temporary increase in the activity of the enterprise).
It should however be pointed out that the use of the CDD is not without risk since the
company will not be able to terminate this contract before the date envisaged. Thus, when the
CDD is concluded for a 6 months period, the manager, except in the case of a serious fault or
in some special cases, will not be able to terminate the contract. There is one exception:
he/she could pay the total of the wages which would have normally have to be paid by the
end of the contract. On the other hand, the employee cannot resign for the period envisaged
within the contract.
The new recruitment contract (CNE)
The new recruitment contract (CNE) has been created in August 2005 for companies
under 20 employees. This contract is a true contract of employment, the holder of this
contract beneficing the whole of the rights and guarantees which affect the quality of
employee. Concluded for one unspecified duration, this contract obeys however particular
methods of rupture during the first two years which follow its signature. The device tries to
set up a new balance in the working relationship, while associating, with a simplification of
the dismissal procedures, new guarantees (returned of replacement, help to employment...)
for the employee.
Dismissal condition
SMEs employers consider that dismissal condition are complicated in France and
dissuades recruitment of new employees. Reasons: a contract cannot be broken by the
employer any time: the dismissal must be justified. Notice of dismissal: except in case of
serious or heavy fault, the rupture of the contract intervenes one or two month after the
notification of the dismissal, according to the seniority.
A dismissal indemnity is due: its amount depends on the conditions of the collective
agreement without being able to be lower than the legal amount. The legal amount is 1/10 of
the wage for each year in the company (1/15 over 10 years)
Obligatory formalities related to recruitment
Single Declaration of Recruitment (DUE): this is a single process by which the head
manager declares the hiring of an employee. It must be addressed to the URSSAF as soon as
possible eight days before the recruitment and at the latest the last working day preceding the
paid employee’s effective entry into the company. Preliminary Recruitment Declaration to
the Factory Inspectorate: this declaration must be sent by registered post to the factory
inspectorate of the geographical area where the company is established. It does not have to
comprise particular details, apart from the identification of the company, and the intention of
the company to recruit.
Affiliation to a supplementary pension scheme: the head manager has three months
from the creation date of the company to choose the regime of his/her choice within the
pension fund. This must be done even if no recruitment is done in this period.
169
Single Register of Personnel: the head manager, whatever the manpower of the
company, must keep an up to date register of personnel. This register mentions, in order of
recruitment, all the paid employees in the firm. This register must be filled in an indelible
way (for example by ball point pen), and must be kept for 5 years as from the date of the
departure of the employees.
Recruitment Medical Examination: every employee must have a medical examination before
recruitment, or, at the latest, before the expiry of the probationary period. In some cases, the
visit must take place before recruitment, for example in the case of person with a disability, a
pregnant woman, a mother of a child under 2, a worker under 18, or in the case of an
employee whose work involves particular risks.
Extract 8.2 Germany: Important legal regulations
In the following the most important regulations concerning the labour issues are listed:
− Working time law
− Workplace ordinance
− Occupation educational law
− Federal holiday law
− Business constitution law (Regulation of the participation right of the employee in
operational decisions and business councils.)
− Cottage industry law
− Youth work protection law
− Termination protection law
− Maternity protection law
− Ordinance over foreign IT-specialists (Regulation on the work permit and the
residence permission for highly qualified foreign specialists in the information - and
communication technology sectors – Green Card)
− Law on the equality of people with disabilities
− Part-time and deadline law
− Law on people with severe disabilities
170
Extract 8.3 Hungary: Labour Code Regulations, Labour Inspection
Issues relating to the world of labour, that is, to tax, contribution and budget issues
having an effect on the economy, employment and the development of earnings, as well as
discussions on relevant draft legislation, belong to the competence of the National Interest
Reconciliation Council. This Council is the peak interest reconciliation organ, the most
comprehensive forum of tripartite negotiations. Presently nine organisations represent the
interests of employers. The Council agreed to those government measures that had protected
the interests of the Hungarian labour market before the country’s accession to the EU,
namely the introduction of a registration obligation for those countries that during the
transition period implemented restrictive measures for Hungarians on their labour market.
Just two countries (Ireland and the United Kingdom) provided non-restrictive job
possibilities for Hungarian citizens after 1 May 2004.
As a consequence of law harmonisation activity in recent years, the more important
EU guidelines have already been incorporated into the Hungarian labour regulation system.
The Hungarian Labour Code (Act XXII of 1992) is in harmony with the relevant rules of the
European Union. From 1 May 2004 the Labour Code was completed with detailed
regulations regarding teleworking. Similarly, from the day of Hungarian accession to the EU
the Hungarian Parliament decided on the introduction of the Integrated Hungarian Labour
Database. The objective of the database was to facilitate the assertion of the right to self
determination regarding labour relations and to enhance the effectiveness of labour control.
The database contains data relating to employment, employers and employees. Since 1997 it
is also possible in Hungary to employ people in occasional jobs (with an occasional
employment record).
Labour inspection is the task of labour inspectors and labour safety inspectors of the
regional supervisory bodies of the National Labour Safety and Employment Chief
Supervisory Body (www.ommf.hu) on the basis of Act LXXV of 1996. Labour inspection
takes place in the same way as labour safety supervision, which is also the task of the
regional supervisory bodies, namely, it is based on rules relating to public administration
procedures, and the punitive sanctions are similar as well (penalties for both legal persons
and employers).
During a supervisory action the following are examined: legal documents (labour contracts)
regarding employment; liability to give notice of termination employment; labour
registration; bans on unfavourable discrimination; employment of vulnerable groups of
employees; working time; days of rest; extraordinary working time; rules regarding holidays;
salaries; employment of foreign citizens; obligations of employers regarding rules on
organising trade unions; protection of rights of employees who have an elected function. The
supervisory bodies also examine whether the rules relating to the obligation of employers in
cases when trade unions do not agree with implemented measures are kept. From 1 June
2003 the fine liable on the first occasion when provisions of one rule are broken can be from
HUF 50,000 to HUF 2 million, instead of the previous HUF 1 million. If the provisions of
more than one law are broken or a repeated law breaking occurs within 3 years from the
previous fine, the amount can be from HUF 50,000 to HUF 6 million, instead of the previous
HUF 3 million. In the case of small enterprises, employing fewer than 20 employees, the fine
cannot be more than HUF 3 million. It worth mentioning that in Hungary 60 kinds of fines
can be imposed on enterprises if they break rules, e.g. of fire prevention, labour safety, late
payment etc.
171
Extract 8.4 Poland: Regulations Regarding Work by Foreigners in Poland
There are several regulations in Polish law relating to the employment of foreigners
within the territory of the country. The most important of these are the Act of 11 April 2004
on Foreigners (Journal of Laws of 2001, No. 42, item 475) and the Act of 20 April 2004 on
Employment Promotion and Labour Market Institutions (Journal of Laws of 2004, No. 99,
item 1001). In addition to the above regulation, the following directives of the Minister of
Economy, Labour, and Social Policy are of significance in this respect:
– 26 May 2004 on the scope of restrictions in the sphere of work by foreigners within
the territory of the Republic of Poland (Journal of Laws of 2004, N. 123, item 1293);
– 9 February 2004 on detailed principles and procedures for issuing promissory notes
and permits for work by foreigners (Journal of Laws of 2004, No. 27, item 236);
– 9 February 2004 on detailed principles and procedures for issuing promissory notes
and permits for work by foreigners employed in the rendering of export services
(Journal of Laws of 2004, No. 27, item 237);
– 9 February 2004 on work by foreigners not requiring work permits (Journal of Laws
of 2004, No. 27, item 238); and
– 9 February 2004 on defining cases in which promissory notes and permits for work by
foreigners shall be issued by the voivode [provincial governor] regardless of the
situation on the local labour market (Journal of Laws of 2004, No. 27, item 239).
The Act on Foreigners regulates matters of employment within the territory of Poland
in the context of the issue of visas. Prerequisite to the issuance of an entry visa by a Polish
consulate, if the purpose of the journey to Poland and stay in the country is employment or
the execution of work for valuable compensation, is the presentation by the visa applicant of
a permit issued by a Polish employment office or a written declaration by an employer
regarding the intention to employ the person.
Pursuant to the Act on Employment Promotion and Labour Market Institutions, the
foreigner may perform work in Poland if he/she has a work permit issued by the appropriate
voivode [provincial governor] in the seat of the employer. The obligation to hold individual
permits for work in Poland does not encompass persons with refugee status, foreigners with
permits for permanent residence in Poland, members of the family of foreigners holding the
citizenship of European Union member states with the right to permanent residence in Poland
or working legally in the country, persons who have concluded economic activity in Poland,
and students.
Work permits for foreigners are issued upon application by the employer for a
specified period of time for a specific foreigner and employer for a defined job position or
type of work performed. Moreover, the permit is issued for a period of time no greater than
for the period of stay as defined in the visa or no longer than the permit for residence within
the territory of the Republic of Poland.
The procedure required for employing a foreigner in Poland is a multi–stage, lengthy,
and complex one. It necessitates the delivery of numerous documents and fees (at a level of
the current minimum wage in the case of application for a successive permit for a candidate
in a situation in which an employee did not appear, where such a fee is not returnable), which
is a factor warding off employers. They often decide against employing a foreigner or choose
a different path such as use of the grey zone.
172
The National Labour Inspection Authority (PIP)
The National Labour Inspection Authority (PIP) is a body created in order to monitor
and oversee the observance of labour law, especially occupational health and safety
principles and regulations. This body acts pursuant to the Act of 6 March 1981 on the
National Labour Inspection Authority (Journal of Laws of 1981, No. 54, item 276, with
subsequent modifications).
The National Labour Inspection Authority is subject to the Sejm [Parliament].
Supervision over the National Labour Inspection Authority rests with the Labour Protection
Council (ROP). The National Labour Inspection Authority is made up of the Chief Labour
Inspectorate (GIP) and district labour inspectorates as well as labour inspectors operating
within the territorial jurisdiction of the district labour inspectorates. Among the main tasks
facing the National Labour Inspection Authority are:
– Monitoring and oversight over the observance by the employer of labour law, mainly
regulations and principles of occupational health and safety, regulations relating to
labour relations, remuneration for work and other benefits related to labour relations,
working hours, holidays, protection of labour by women, adolescents, and the
disabled;
– Monitoring the observance of occupational health and safety regulations in the design,
construction, remodelling, and modernization of work places;
– Participation in acceptance for operation of newly built or remodelled work places or
parts thereof;
– Monitoring and oversight over observance by the employer of occupational health and
safety requirements in the construction and manufacture of machines, equipment, and
tools for work;
– Analysis of the causes of accidents at work and occupational disease, monitoring the
use of preventive measures in the case of accidents and illness, and participation in
investigations into the circumstances and causes of serious, group, and fatal accidents;
– Prosecution of violations against worker rights and participation in such cases as
public prosecutions; and
– Review of draft legal acts and the initiation of legislative efforts in the realm of labour
law.
173
ANNEX III.1 Criteria of independence
Community research EUROPEAN COMMISSION
Small and medium-sized enterprises (SMEs) are key players in the transformation of
the European knowledge economy. Their ability to apply, adapt and spread new technologies,
as well as to create and develop them, is unique. Realising the full potential of SMEs is an
essential part of the European Union’s strategy for maintaining prosperity and high-quality
employment.
The European Commission is keen that all technology oriented SMEs should consider
participating in its Research Framework Programmes. In the current programme, it has
earmarked more than €2.1 billion of research funding directly for SME participants. There are
special measures to facilitate their involvement and to ensure that much of the research
carried out is of immediate relevance to their needs.
On 1 January 2005, a new common European definition of SMEs came into force.
This will be applied for all future EU measures in support of SMEs, including the Research
Framework Programmes. It raises the financial limits at which an enterprise ceases to qualify
as an SME, and introduces new exceptions to the requirements for autonomy. The definition
and the simple checklist on the next pages will be enough to determine the status of the
majority of SMEs*.
We hope that you will take full advantage of the new opportunities created by these changes.
European Commission, Research DG
Research and SMEs unit
*
DISCLAIMER: This leaflet offers general guidance on the application of the new SME definition. It does not
have any legal value and does not bind the Commission in any way. Commission Recommendation
2003/361/EC as published in the Official Journal of the European Union L 124, p. 36 of 20 May 2003 is the sole
authentic basis for determining the conditions regarding the qualification as an SME.
174
An enterprise is autonomous:
1. if it owns no shares in other enterprises, and other enterprises own none of its shares, or
2. if it owns less than 25% of the shares of one or more other enterprises, and other enterprises
own less than 25% of its shares, provided these enterprises are not linked, or
3. if it owns in total less than 25% of the shares of linked enterprises, and they own in total
less than 25% of its shares, or
4. if other enterprises each own between 25% and 50% of its shares, provided they are not
linked and are of the following types:
a) public investment corporations, venture, capital companies, or business angels with
stakes of less than €1.25 million,
b) universities or non-profit research centres,
c) institutional investors, including regional development funds,
d) autonomous local authorities with annual budgets of less than €10 million and
fewer than 5,000 inhabitants.
An autonomous enterprise only needs to check its own payroll, turnover and balance
sheet against the limits defined in the checklist.
An enterprise which is not autonomous may still qualify as an SME, but must take into
account the effect of outside shareholdings – see ‘partner enterprise’ and ‘linked enterprise’.
An enterprise is a partner enterprise:
1. if it owns between 25% and 50% of the shares of one or more other enterprises, or they
own between 25% and 50% of its shares, provided these enterprises are not linked, or
2. if it owns in total between 25% and 50% of the shares of linked enterprises, or they own in
total between 25% and 50% of its shares.
175
When calculating its payroll, turnover and balance sheet figures, a partner enterprise
must add to its own data the percentage of the payroll, turnover and balance sheet that
corresponds to the shareholding.
An enterprise is a linked enterprise:
if it owns more than 50% of the shares of one or more other enterprises, or they own more
than 50% of its shares.
When calculating its payroll, turnover and balance sheet figures, a linked enterprise
must add to its own data the entire payroll, turnover and balance sheet of the other
enterprise (as well as a percentage of those of partner enterprises, as explained above).
An enterprise in which public bodies (other than those mentioned in point 4 under
‘autonomous’) own more than 25% of the shares cannot qualify as an SME.
Further information
• A full account of the background to the changes, a comprehensive user guide, and the texts
of the Commission recommendation, are available at
http://europa.eu.int/comm/enterprise/enterprise_policy/sme_definition/index_en.htm
• Specific questions may be directed to:
SME Helpline
European Commission
Research Directorate-General
tel +32 2 295 71 75 - fax +32 2 295 71 10
[email protected]
176
177
ANNEX III.2 UEAPME* Proposal for simplification
UNION EUROPEENNE DE L’ARTISANAT ET DES PETITES ET MOYENNES
ENTREPRISESEUROPÄISCHE UNION DES HANDWERKS UND DER KLEIN- UND MITTELBETRIEB
EEUROPEAN ASSOCIATON OF CRAFT, SMALL AND MEDIUM-SIZED ENTERPRISES
UNIONE EUROPEA DELL’ ARTIGIANATO E DELLE PICCOLE E MEDIE IMPRESE
UEAPME PROPOSALS FOR SIMPLIFICATION
UEAPME highly welcomed the intention, expressed by the Commission, to simplify
the acquis communautaire and to make ‘better regulation’ a priority.
For many years now, simplification has been high on the agenda of the representative
business organisations and of the national and European authorities. Substantial and
immediate progress and action is necessary in order to remain credible. Indeed, the European
Charter for Small Enterprises, endorsed in 2000 already stated, “Small enterprises are the first
to suffer if weighed down with excessive bureaucracy. And they are the first to flourish from
initiatives to cut red tape” and that “New regulations at national and Community level should
be screened to asses their impact on small enterprises and entrepreneurs. Wherever possible,
national and EC rules should be simplified. Governments should adopt user-friendly
administrative documents” (Action line 3).
UEAPME recalls that the average cost of administrative burdens is 6 to 30 times
higher for SMEs than for larger businesses.
In this position paper we make some proposals for better regulations in the
environmental sector, the social sector, foodstuff, consumer protection, among others. The list
of proposals we received from our member organisations was much longer. However, after an
*
UEAPME is a European Social Partner, the employer's organisation representing the interests of crafts, trades
and SMEs from the EU and accession countries at European level. UEAPME has 78 member organisations,
which represent crafts and SMEs across the whole of Europe, covering over 11 million enterprises with nearly
50 million employees
178
analysis, it was clear that the administrative burden had been added at national level. Here it
has to be highlighted that although the European legislation did not contain, in these cases,
any concrete administrative burden for SMEs, most of the time they encouraged the
development of such at national level.
In prioritising, the first and main indicator should be the impact on SMEs, especially small
enterprises.
It is of utmost importance that careful preparation, including appropriate consultation,
is taken. Appropriate consultation should mean a real consultation and involvement of the
European representative business organisations.
UEAPME does not, in principle, advocate exemptions for SMEs, as this can give the
wrong impression that employees, consumers, clients, society as a whole, are less protected in
these enterprises. The impact of legislation on small businesses must be an important
consideration in determining its form and content. Therefore, the ‘think small first’ approach
should be the guiding principle when reviewing the existing legislation and conceiving new
legislation. This means that legislation should take into account the particularities of SMEs.
In addition, the following accompanying measures are necessary:
-
Further consultation and involvement of the representative business organisations;
-
Development of regulatory impact analysis and instruments for evaluating compliance
costs and administrative burdens especially for small enterprises, such as impact index
cards, which indicate the cumulative effect of regulations;
-
Allowing reasonable timeframes for the implementation of legislation, especially for
small businesses;
-
Conducting effective information campaigns regarding changes required by the new
legislation;
-
Consulting businesses before introducing new administrative practices, including new
forms and questionnaires, to ensure that enterprises can provide the information, and
that it is not already available elsewhere. For instance, information required for
statistical or other similar administrative reasons should be limited and separately
identified;
179
-
In the case of directives being transposed into national legislation, care should be
taken to avoid adding undue complications and ‘gold plating’ should be resisted and
eventually eliminated. Meanwhile, it should be made clear when additional provisions
are being made. These should be identified and evaluated separately.
UEAPME supports the idea of creating “Better Regulation Units” (as already
suggested in the BEST report in 1998) within the European Commission, the Council and the
European Parliament in order to co-ordinate regulatory review, to assist in improving the
clarity and effectiveness of each of their contributions to EU legislation, in deciding whether
legislation is actually necessary or whether there are alternative courses of action and to
ensure that the consequences of any legislative proposals for SMEs have been assessed and
fully taken into account.
Social
• Regulation (EC) 530/1999 Statistical survey on the cost of labour, on the structures
of workers in enterprises.
Should only be carried out in enterprises with more than 20 workers or simplify the
number and the content of the questions.
• Directive 91/533/EC relating to the obligation of the employer to inform the worker
of the conditions applicable to the contract or employment relationship
The information obligations contained in the directive do not take account of the
functioning of SMEs. SMEs should be excluded from the field of application of the directive
because of too heavy obligations for SMEs
• Directive 2002/73/EC modifying directive 76/207/EC relating to the implementation
of the principle of equal treatment between men and women
The obligation to regularly inform workers and/or their representatives on the policy
of the enterprise in the area of gender equality (Art 8 b4) is difficult to implement and
constitutes significant administrative burden
180
• Directive 2002/14/EC on the information and consultation of workers
The thresholds in terms of members of enterprises (50) or establishment (20) are too
low and pose problems for SMEs
The obligation to create workers representation structures in enterprises with more
than 50 workers to cope with the new information and consultation obligation of workers
creates new burdens and difficulties for SMEs
Environment
• Council Directive 91/156/EEC of 18 March 1991 amending Directive 75/442/EEC
on waste
The definition of waste needs to be clarified. For instance, the directive does not
sufficiently encourage recycling.
Setting minimum thresholds for the delivery of permits for businesses carrying out
activities in the field of recovery and final disposal of waste.
• Council Directive 96/61/EC of 24 September 1996 concerning Integrated Pollution
Prevention and Control
The standards set are too strict and difficult to respect (concept of Best Available
Technologies) in the fields of air, water, and waste.
Constraints linked to the EPER (European Pollutants Emission Register), which
require carrying out measurements etc. in order for the emissions of businesses related to this
central register to be published.
• Directive 2002/96/EC of 27 January on waste electrical and electronic equipment
(WEEE)
The principle of the “producer responsibility” is leading to an increase in red tape for
businesses. It is requiring the setting up of very complicated structures and most of the
181
financial burden relating to the recycling and recovery of WEEE will fall on the importers,
most of whom are SMEs.
Setting minimum threshold values for the “producer responsibility”. Small electrical
or electronical equipment with low prices (such as PC-mouses, electrical toothbrushes, alarm
clocks, etc.....) should be excluded from producer responsibility or should be exonerated from
contribution to the local organisation.
• Regulation (EC) N° 761/2001 of 19 March 2001 allowing voluntary participation by
organisations in a Community eco-management and audit scheme (EMAS)
Further simplification is necessary in the Regulation in particular with regard to SMEs
and environmental statement. The obligation for an external verifier to validate the
modifications of the environmental statement every year must be removed.
The possibility for businesses to implement EMAS in a staged or gradual approach
must also be inserted.
• Directive 94/62/EC of 20/12/94 on packaging and packaging waste
Small shops, which are only “responsible” for a small amount of “service-packaging”
(such as bags they give to customers, package to make a parcel...), should be excluded from
the scope of the directive.
European waste lists
At present at EU level different nomenclatures of waste exist. Those nomenclatures
are implemented by 3 different legal acts:
• Council Regulation (EEC) No 259/93 of 1 February 1993 on the supervision and
control of shipments of waste within, into and out of the European Community
• 2000/532/EC: Commission Decision of 3 May 2000 replacing Decision 94/3/EC
establishing a list of wastes pursuant to Article 1(a) of Council Directive 75/442/EEC
on waste and Council Decision 94/904/EC establishing a list of hazardous waste
pursuant to Article 1(4) of Council Directive 91/689/EEC on hazardous waste (EWC)
182
• Regulation (EC) No 2150/2002 of the European Parliament and of the Council of 25
November 2002 on waste statistics
These legal acts are, in part, based on different systematic approaches. This causes an
extensive administrative effort for companies and complicates the classification of waste
within different predetermined codes of waste.
Possible improvement: harmonisation of European waste lists.
Only that way EU- wide homogeneity of waste data can be assured.
• Directive on environmental liability 2004/35/EC
The directive on environmental liability with regard to the prevention and remedying
of environmental damage has to be considered as a burden for national economy. Exemptions
concerning “permit defence” and “state of the art” might have been more effective if
applicable community wide rather than at national level. The scope of the directive, which is
still considered to be too broad, could be limited to cases where activities go along with a
significant risk. This limitation should be based on threshold values related to chemistries
related to directives listed in Annex III paragraph 7 of directive 2004/35/EC.
Foodstuffs
UEAPME is calling for proper and coherent structuring of the large amount of
European Regulations and Directives on labeling:
-
Regulation on food additives (WGA/004/03)
-
Directive 94/35/EC Sweeteners for use in Foodstuffs
-
Directive 95/2/EG on food additives other than colors and sweeteners
-
Regulation on flavorings and food ingredients with flavorings properties for use in and
on foods (WGF/002/02)
-
Labeling Directive 2000/13 including Declaration of Allergens
-
Addition of Vitamins and Minerals (COM (2003) 0671)
-
Directive 89/108/EWG on food additives
183
-
Directive 90/496/EEC on nutrition labeling
-
Directive 1829/2003 on GMO definitions
-
Directive 1830/2003 on GMO labeling
-
Regulation 258/197 concerning novel foods and novel food ingredients
For the owner of a small enterprise it is not clear arranged, which requirements he has to
fulfill according to which Directive or Regulation.
Concerning the guidelines for the implementation of the Hygiene regulations 852/2004,
853/2004 en 854/2004, we fully support the actual approach of the European Commission,
issuing guidance documents for SMEs. However, the definition of the small food producing
enterprises must not be limited to only micro- enterprises and enterprises in remote areas.
Data protection
• Directive 95/46 Directive 95/46/EC of the European Parliament and of the Council
of 24 October 1995 on the protection of individuals with regard to the processing of
personal data and on the free movement of such data.
Without questioning the objectives of this directive, a simplification is necessary.
Clearer definitions, review of the notifications and simpler procedures are a priority.
New Approach Directives
The new approach directives (23 at the last count) map the procedures for CE marking
(referring to harmonised standards) to facilitate the free movement of goods that comply with
minimum requirements of health and safety. Depending on the type of product Modules from
A to H (increasingly complex and costly) are used to satisfy the requirements of safe design
and production methods.
For small enterprises that mainly work on custom made and non-series production,
Module A (Initial Type Declaration) should be sufficient for CE marking, while the higher
modules are better suited for large companies involved in high volume production.
Furthermore for the purposes of custom made and unique application products small
companies should be allowed to opt out of CE marking.
184
Consumer Protection
Directive 98/6/EC of the European Parliament and the Council of 16 February 1998 on
consumer protection in the indication of the prices of products offered to consumers.
This directive should be simplified to reduce the administrative burden and workload for
small shops.
Unfair competition law
In the area of unfair competition law, it is important to align existing and future
European legislation in order to create a coherent body of rules, which can be enforced in a
consistent manner. Therefore, it is particularly important to align horizontal legal instruments
with vertical instruments for specific sectors, in order to prevent conflicting regulation.
Furthermore it is extremely regrettable that the European legislator did not attempt to
harmonise fair trading law in a coherent and systematic way but restricted the directive on
unfair commercial practices to the B2C area and even introduced such a splitting in the area
of misleading advertising which has offered a consistent and homogeneous set of rules up to
now.
Postal law
In order to assure fast an effective liberalisation of the postal market within the
European Union, it is proposed to establish a detailed road map for liberalisation of the
European postal market as soon as possible. Such road map is necessary to enable companies
and national legislators to effectively prepare for liberalisation on a European scale.
Brussels, July 2005
For further information on this position paper, contact:
Luc Hendrickx, Director of Enterprise Policy & External Relations,
UEAPME,
Rue Jacques de Lalaing, 4,
B-1040 Brussels.
Tel: +32 2 2307599
E-mail: [email protected]
185
ANNEX III.3 Company legal forms and abbreviations in the participant
countries
Table 8.5 Legal forms in some participant countries
Legal forms in the participant countries
Public Limited
Country Company
Private Limited Company Unlimited Company
Belgium Naamloze Vennotshap
Besloten Vennotshap
(NV) / Société Anonyme
(BVBA) / Société a
(SA)
Responsabilité Limite
(SARL)
France
Société Anonyme (SA)
Société a Responsabilité
Limite (SARL)
Germany Aktiengesellschaft (AG) Gesellschaft mit beschränkter Kommenditgesellschaft
Haftung (GmbH)
(KG)
Hungary
Részvénytársaság (Rt.)
Korlátolt Felelısségő
Társaság (Kft.)
Spain
Sociedad Anónima (SA)
Sociedad Limitada (SL)
UK
Public Limited Company
(PLC)
Private Limited Company
(Ltd)
186
Betéti Társaság (Bt.)
Unlimited Company
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188
PART IV. FINANCIAL FRAMEWORK AND SMEs
This part focuses on the administrative framework of small and medium-sized
enterprises; especially on the taxation environment of companies. It provides an overview
concerning the tax structures and tax rates within the EU and a description, evaluation and
comparison of the tax systems in the countries participating in the Leonardo project.
9. Tax rates and structures
Tax policies shaping tax rates and structures depend on various economic, social,
political and historical factors. The structure and extent of public expenditure determines the
structure of national tax systems, yet the political and social considerations underlying the
individual tax policies vary country by country. The different size and composition of public
spending are reflected in different government financing needs which may lead to significant
differences in national tax systems.
In the last few years however there have been several efforts carried out in order to
harmonize the national tax systems at European level. For example from the mid1990s, the
free movement of capital, the elimination of customs controls, the introduction of the Euro
and the development of information and communication technologies have contributed to the
increase in the mobility of tax bases in Europe. However the recent crisis of Lisbon strategy
call the attention to the lack of integration not only in the field of product market, employment
relations (e.g. degree of employment protection for permanent workers), but “… labour
market and tax or welfare reforms, the evidence does not suggest tight coordination either.”
(Pisani-Ferry, J. 2005:8.) The growing importance of international competition also forced
European governments to raise public sector efficiency and achieve a double goal: lower taxes
and better public services. Another incentive behind the tax harmonization efforts was the
intention to reduce tax avoidance and evasion. On the other hand evidence shows that these
efforts have resulted in the lowering of tax burdens on highly mobile production factors and a
higher tax pressure on the less mobile ones, in particular labour (Joumard 2001).
189
Figure 9.1 illustrates the general extent of tax burdens in terms of GDP ratio in the
OECD countries.
Figure 9.1 Tax to GDP ratio in OECD countries1
1998
Comparing the extent of tax burdens it can be stated that tax rates in the European area
are higher than in most other OECD-countries. The EU-15 average defined in the tax-to-GDP
ratio was 40% in 1998, more than 10 points higher than in Japan or in the United States.
Concerning the tax rates there are clear differences between the various European countries.
Tax burdens are relatively low in Ireland, Portugal and Spain; the UK, Greece, Germany,
Poland and Hungary stand somewhere in the middle. The Nordic welfare states (Finland,
Denmark, and Sweden), Austria, Italy, France and Belgium represent the highest tax rates in
ratio to GDP.
190
Box 9.1. Differences between European tax burdens
Differences between the effective tax burdens in the EU Member States may be
important for two reasons. First, differences in effective tax rates faced by companies located
in different countries, but competing in the same market, may affect their international
competitiveness: two different companies, competing in the same market, may face two
different tax rates. Second, when multinational companies face only the tax rate of the
country where the activity takes place then differences in the effective tax rates between
countries could also affect the location choice of individual activities. This can occur either
as a result of the provisions of international tax codes, for example when the repatriation of
profits by way of dividend from a subsidiary to a parent results in no further taxation because
the dividend is exempt, or as a result of tax planning. A multinational company may
therefore face different tax rates, depending on where its activities are located. As indicated,
this economic reasoning is based on purely tax considerations and cannot, on its own, explain
the actual behaviour of companies.
Source: European Commission 2001
In order to highlight not just the quantitative but the structural differences between the
various tax systems, it is worth overviewing the different so-called ‘tax-mixes’ in the OECD
countries. Figure 9.2 presents these differences.
191
Figure 9.2 Tax mix by source1
Per cent share of total tax revenue, 1998
On of the most important distinctive features of tax systems in the EU-15 compared to
the US and Japan is the relatively high proportion of social contributions, consumption and
environmentally-related taxes, and on the other hand, the lower share of corporate income and
property taxes, except in the UK and France. Income redistribution is a key objective in
Europe, though the progressivity of the personal income tax rates is often weakened by a large
scale of tax allowances and tax credits, which mainly benefit high income groups (Joumard
2001).
192
9.1 Tax on labour
As we have stated above, the average effective tax rate on labour in the EU-15 in 1998
was about 15% higher than in the US and Japan. Austria, Belgium, France, Italy and the
Nordic countries tax labour income most heavily, whilst the UK, Ireland and Portugal are
closer to the patterns of the US and Japan. Unfortunately there is a shortage of systematic
analysis of the New Member States, but based on OECD-statistics, labour taxation in Poland
and Hungary is similar to the first group of countries mentioned above (OECD 2000 tax
database). Since the mid 1990s several EU-countries have tried to lower the tax burdens on
labour, typically by reducing payroll taxes to boost the demand for labour. (See Annex IV.3.)
Despite these incentives both average and marginal wedges on labour remained high in the
EU-area: at the wage level of an average production worker, the average effective tax wedge
on labour approached 40% in the year 2000, compared with 30% in the US and 24% in Japan.
In addition the marginal tax wedge on labour is also significantly higher in the EU-15
countries than in the US and Japan, which may be reflected, particularly in the Nordic
countries, in short working hours combined with relatively high employment rates (Elmeskov
et al. 1998).
9.2. Indirect taxes: VAT
Compared to the US, Japan and the other OECD-countries, it can be stated that
effective tax rates on consumption are relatively high in the EU, too. This fact is reflected not
only in the high tax to GDP ratio, but also the relatively high proportion of consumptionbased taxes in the European tax-structures. Among consumption-based taxes VAT plays a
dominant role: in 1998 VAT accounted for about 60 % of total tax revenues on goods and
services in the EU-area (OECD, 2000).
The relatively high proportion of VAT within the European tax mix has various
advantages. From the point of view of economic effectiveness, tax systems must be ‘neutral’
in terms of economic choices. Among others considerations, VAT (like other consumption
taxes) is relatively neutral towards saving and investments; as long as it is based on the
destination principle, it does not discriminate between imports and local products and does
193
not affect external competitiveness. The countries of the European Community agreed in 1967
to establish a harmonized VAT system, in order to create the basis of the single market.
However the European countries have not been able to harmonize their VAT systems up till
now, the current situation can be characterised by a fair degree of standardization, with two
categories of rates, and minimal standard and reduced rates fixed at the EU level. At the same
time, many EU countries have differentiated (reduced) VAT rates and exemptions, since the
European Community law allows a certain number of derogations and special schemes.
The lack of uniformity in the implementation of EC Directives on VAT has, on the
other hand, several negative consequences, as well. The cross-European VAT rate
differentiation may induce direct revenue losses and may lower VAT efficiency indirectly by
increasing the complexity of the VAT system, making it difficult to assess and monitor the
degree of tax compliance. In addition the complex and non-transparent system of derogations
and exemption my distort competition and consumption patterns within and between EUcountries. (For example, in recent years there have several problems caused by the
introduction of competition in traditionally state-controlled sectors, such as posts and
telecommunications, radio and television broadcasting services or electricity, gas and water
supply. These areas, under the current system, are mainly subject to a special - and rather
complex - VAT treatment which can have a clear distortion effect on competition). The
dispersion of excise duties, through transfer prices, can also have significant impact on crossborder shopping and can encourage smuggling as well. Concerning the European Commission
(EC), the lack of uniformity of the current European VAT system creates confusion, an
additional workload, administrative complication and legal uncertainty for traders (EC 1999).
As a result the EC estimates that VAT fraud amounts to 8 billion EUR annually and as they
note: “there are indications that the level of serious fraud in intra-Community trade is
growing” (European Commission 2000).
194
9.3 Corporate income tax
Company income tax rates in most European countries are significantly lower than in
the other OECD-countries. This relatively low proportion of the corporate income tax within
the tax structure by international standards originates in various factors. Among these are
large differences in accountancy rules that firms must comply with and the relatively low
percentage of incorporated firms. In addition the large and complex system of tax relief also
plays an important role in the practice of European corporate taxation. These reliefs mainly
cover the following areas: investment tax credits, accelerated depreciation allowances for
investments in equipment goods and in intangible assets (e.g. R&D), tax breaks for
employment creation and tax incentives for depressed areas (European Commission 2001). In
some EU-countries investments tax credits are combined with depreciation rates higher than
economic depreciation, which can cause a bias in favour of capital intensive activities. In
addition many countries have introduced tax measures in order to favour SMEs, newly
created firms and/or information technology companies (e.g. France, Netherlands, Portugal,
Spain and the UK). These measures are designated to offset the disadvantages of the targeted
enterprises in financing their investments and/or disproportionate costs stemming from
administrative complexities, including tax compliance (OECD, 2001).
Box 9.2 Favouring SMEs in company taxation
In the United Kingdom, to help small companies, a 10 percent starting rate was
introduced in April 2000 to companies with taxable profits below £ 10,000. A 20 per cent
rate is also applied for companies with taxable profits between £ 50,000 and £ 300,000 (the
‘normal’ corporate income tax rate, i.e. paid by companies with profits above £ 1.5 million,
is 30 per cent). In addition, the Budget 2000 introduced an enhanced relief for SMEs for
R&D spending. From April 2000, SMEs are entitled to claim 150 per cent of their qualifying
expenditure on R&D. In France, full and partial exemptions are granted to companies created
between 1995 and 2004 if certain conditions concerning the type and location of the activity
are satisfied.
Source: Freedman – Ward 2000
In several cases tax allowances are introduced in order to attract multinational
investments. Some European countries have introduced special tax measures to encourage
foreign direct investments in specific geographical areas or activities (e.g Ireland has applied
a reduced corporate tax rate for manufacturing and some internationally traded services, in
Greece off-shore and shipping companies are exempt, and in Spain the Basque country
195
granted large tax privileges for fixed-assets investment above a certain amount). In addition,
in some countries there are special holding-company schemes and co-ordination centres,
which allow international investment income to flow through those companies at a low tax
rate (e.g. Belgium, Denmark, Finland, Germany, Greece and the Netherlands). In 1997, the
EU agreed to introduce a Code on business taxation, in order to avoid harmful tax competition
between European countries (See ANNEX IV.1.). The generally accepted Code, however,
does not contain legally binding obligations or sanctions; it simply serves as a guide.
Box 9.3. Company taxation and globalisation
The following figures illustrate that companies increasingly operate, in various facets,
on a multinational scale. Tax administrations however broadly continue to operate on a
national scale.
The number of multinational enterprises has increased from some 7,000 parent firms
in 15 developed (EU and non-EU) countries at the end of the 1960s to some 40,000 at
the end of the 1990s. There are now approximately 63,000 parent firms and 690,000
foreign affiliates operating world-wide.
Accordingly, international production, trade and investment have increased
significantly. Sales of foreign affiliates worldwide accounted for an estimated $13.6
trillion in 1999, compared to about $2.5 trillion in 1980, a figure twice as high as that
of global exports. Multinational enterprises now account for about one-tenth of global
GDP, compared to one-twentieth in 1982.
This corresponds to a broad increase in foreign direct investment (FDI). The ratio of
world FDI inflows ($865 billion in 1999) to gross domestic capital formation is now
14%, compared to2 % twenty years ago. In the same period, the ratio of world FDI
stock to world GDP increased from 5% to 16%.
At the same time, both the number and the value of mergers and acquisitions have
increased significantly. The value of all mergers and acquisitions (cross-border and
domestic) as a share of world GDP has risen from 0.3% in 1980 to 8% in 1999 while
the value of completed cross-border mergers and acquisitions rose from less than
$100 billion in 1987 to $720 billion in 1999. The total number of all mergers and
acquisitions world-wide has grown at 42% annually between 1980 and 1999.
Source: European Commission 2001:21.
9.4 Description, evaluation and comparison of the tax systems in the countries participating
in the Leonardo Project
Comparing the various elements of tax systems, significant differences can be found
concerning both in the structures and rates. As for personal income tax (PIT), there are quite
large differences among the countries participating in the project. Table 9.1 presents the PIT
rates in the eight participant countries surveyed.
196
Country
France
Table 9.1. Personal income tax rates in the participant countries
Income (Euro)
Tax (%)
0-4262
0
4262-8382
6,83
8382-14 753
19,14
14 753-23 888
28,26
23 888-38 868
37,38
38 868-47 932
42,62
47 93248,09
Germany
0-7236
7236-9251
9251-55 007
55 007-
0
19,96-23,02
23,02-48,50
48,5
Hungary
0-3189
3189-5979
5979-
16
26
38
Poland
0-8257
8257-16 513
16 513
19
30
40
Slovakia
0-
19
Spain
0-4000
4000-13 800
13 800-25 800
25 800-45 000
45 000-
9,06
15,84
18,68
24,71
29,19
UK
0-3036
3036-47 200
47 200-
0
20
25
Source: IBDF Tax Travel Companions, The EU Accession States Tax Memo, European Tax Handbook 2003,
PWC
Excluding Slovakia with a flat tax rate (linear taxation), personal income tax is
progressive in all countries. There are differences concerning the number of tax brackets and
the lowest taxable income. In Spain and France, the system is quite complex, having several
brackets, and Hungary levies personal incomes most heavily, since, uniquely in the EU, the
average income is taxed at the highest personal income tax rate (38 %). On the other hand the
corporate income tax rate in Hungary is one of the lowest in the EU; therefore the average tax
burden in ratio to GDP is about average in Europe.
197
The structure of corporate income taxes (CIT) in the participant countries is less
complex than in the case of PIT. The nominal tax rates are everywhere under 40%, but there
are no tax brackets. In order to avoid internal tax competition, some large EU-countries
initiated the introduction of a minimum standard corporate income tax level of 20%. The total
tax burden is the lowest in Slovakia and in the UK and the highest in Belgium and France.
Country
Belgium
Table 9.2. Corporate tax burdens in the participant countries
Total corporate tax
Nominal tax rates (%)
burdens in share of
Corporate tax
Local tax
GDP (%)*
46,6
34
France (a)
44,2
33,3
Germany
40,2
25
Hungary
38,8
16
Poland
39,1
19
Slovakia
33
19
Spain (b)
36,2
35
UK
35,8
30
EU-25
40,4
26,3
1,5-4
2
* Contains all taxes and contributions (personal income tax, corporate income tax, VAT, local taxes)
(a) In France the real rate of the local tax depends on the local governments’ decision.
(b) In Spain local tax is levied on taxable profits above EUR 1 million, depending on the firms’ activity and
location. The maximum amount of local taxes cannot exceed 15% of the annual net revenue of the firm.
Source: IBDF Tax Travel Companions, The EU Accession States Tax Memo, European Tax Handbook 2003
The taxation on consumption is far from being simple and transparent. The standard
VAT rates in the participant countries vary between 16 and 25%, but – except for Slovakia
with only one bracket – every country applies a complex system of exceptions and allowances
concerning various activities.
198
Country
Belgium
France
Table 9.3. VAT rates in the participant countries
Super Reduced
Reduced Rate
Standard Rate
Rate
6
21
5,5
19,6
Germany
7
16
Hungary
5 or 15
25
7
22
Poland
2,1
3
Slovakia
Spain
Parking Rate
12
19
4
UK
7
16
5
17,5
Source: European Commission 2005:3.
Evaluating and comparing different taxation regimes without taking into account the
broader economic and social context is extremely difficult. The European Commission
provides some general principles of taxation which can serve as a basis for a comparative
perspective (See ANNEX IV.2). There are three main requirements which can characterise a
tax system and strongly influence the economic actors’ decisions and behaviour: simplicity,
certainty and transparency.
Within the framework of this study we cannot undertake to analyse the tax regimes in
the participating countries systematically. However, in terms of the above-mentioned
requirements, we can state, that the Old and the New Member States have to face different
problems concerning the taxation environment of enterprises. Evidence, however, suggests
that tax systems in Europe are complex, which gives rise to high costs, both for the tax
administration and for tax payers. There are economic and political reasons why a tax system
can be complex. Sometimes governments take measures on an ad hoc basis without taking
into consideration how they may interact with other parts of the tax system or with other
policy objectives. One paradoxical measure is, for instance, when a tax credit is introduced for
those on low-incomes to encourage them to take out complementary health insurance
schemes, and at the same time, these schemes are subject to a specific insurance tax.
Concerning company taxation, there are a number of specific reliefs and allowances which
can make the systems quite complex and the large number of small taxes, which are simply
inherited from the past without providing large revenue for government, may also increase
complexity (Leibfritz – O’Brien 2005).
199
Another specific problem, first of all in the post-socialist economies, is the uncertain
character of the taxation system. The transition of the taxation regimes in these countries was
extremely fast and this is reflected in its fragmented nature and in the continual changes in
taxation rules. Furthermore, complexity and uncertainty can be increased by the operation of
the tax administration, e.g. by the complexity of various levels of government and public
institutions which are entitled to collect their own taxes with a different tax base
(fragmentation or concentration).
Box 9.4. The fragmented French tax administration
Tax administration is also more fragmented in France than in most other countries.
Within the Finance Ministry there are significant organisational divisions between the
different tax functions (Direction Générale and Direction Générale des Impôts, DGI) and
there are also two separate administrations for calculating tax liabilities (mostly by the DGI)
and for tax collection (mostly by the Direction Générale de la Comptabilité Publique,
DGCP). Social security contributions are collected and administered separately by a number
of different agencies. Also, France is one of the few OECD countries which does not have a
withholding tax system, or deduction at source, for the income tax on wages and salaries;
social security contributions are deducted at source, however. While since 2002, income tax
payers can file and pay taxes online on the websites created to this end, for those who are
unable or unwilling to use this new technology the procedure is more cumbersome. The
self-assessment of wage income also leads to a significant time lag between income and tax
payments. People who are newly unemployed can find themselves still having to pay income
tax on the previous year’s income; this delay also makes measures that make use of income
tax incentives less likely to be effective, at least in the short run, and to increase the
deadweight losses associated with them. Simplifying the tax system and rationalising tax
collection would certainly help reduce administrative costs. Introducing a withholding
system for the wage tax would probably meet some resistance from the business sector,
although it should not be too costly for firms as these are already withholding social security
contributions.
Source: Leibfritz – O’Brian 2005, p. 33.
In terms of complexity, international comparison is difficult, because of institutional
diversity, but the various costs related to collecting taxes can serve as a proxy indicator. Table
9.4 provides some basic indicators concerning the efficiency of the tax administration in the
participant countries.
200
Table 9.4. Indicators of administrative costs in tax revenue collection and tax arrears in
the participating countries
Country Administrative Number of
Number of
Reported gross tax arrears as
costs as a % of
citizens
employees per
a % of net tax collections
collected
per fullfull-time staff
(2003)
revenue (2002) time staff
(2003)
(2003)
Belgium
1,00
476
207
14,6
France
1,44
Germany
788
358
16,1
665
324
2,6
Hungary
1,35
768
309
Poland
1,32
751
339
8,6
Slovakia
1,46
929
458
39,7
Spain
0,78
1 680
745
5,9
UK
1,15
730
360
17,2
Source: Tax administration in OECD countries: Comparative Information Series (2004), Centre for Tax Policy
and Administration
The data presented above should be interpreted with considerable care as they are
divorced from their national institutional context, although in comparison, France and the
three New Member Sates show a different pattern with relatively high costs per unit of
collected revenues and also relative high tax arrears.
In recent years the European tax systems have undergone a large number of different
attempts to increase simplicity and increase transparency, from reducing tax rates and the
number of tax brackets to simplifying tax administration. Recently the Polish and Slovak
governments have introduced radical tax reforms and a similar transformation of the tax
regime is also permanent topic of political debate also in Hungary, paradoxically increasing
the uncertainty of the system. In the following section we provide a brief overview of the tax
systems by participant countries in order to make the main characteristics of the different
regimes and the logics behind them understandable. The descriptions are based on the
contributions of project partners.
201
9.4.1 Belgium
Corporate income tax structure
The Corporate income tax regime in Belgium is applied on worldwide income.
Belgian resident companies as well as Belgian branches of foreign companies are therefore
taxed on their foreign source income to the extent that it is linked to their activity. Foreign
companies are taxed at a 33.99% nominal ordinary tax rate. For small and medium sized
companies (SMEs) with a taxable profit not exceeding 322,500 euro, the tax rate drops to
24.98% at the lower end of the tax scale.
Aware of the importance of increasing legal certainty for potential and existing
investors, the Belgian tax legislation provides economic actors with a general advance ‘ruling’
practice. Moreover, the advance ruling possibilities have been enlarged recently and the
procedure has been re-organized in order to make it smoother, more rapid and more efficient.
The ruling is, in principle, issued within a reasonable term. A ruling decision will be legally
binding for a maximum of 5 years. Complementary information regarding the ruling practice
can be obtained at the Fiscal Department for Foreign Investments within the Federal Public
Service FINANCE.
Depreciation of assets
Depreciation is spread over the estimated economic lifetime and is only allowed on the
original acquisition cost. Generally, the straight-line method or the declining depreciation
method is used. The declining depreciation method is used until the amount of the annual
depreciation has become equal or less than the amount computed under the straight-line
method. The taxpayer may then change to the straight-line method.
Ancillary costs may either be deducted as expenses in the year of acquisition or be
depreciated over a period of time at the taxpayer's choice. For investments in industrial
buildings, plant and equipment that were granted regional investment incentives, the straightline depreciation method can be applied at double normal rates for three consecutive years in
development areas.
202
Inter-corporate dividends
Participation exemption applies both to Belgian resident and non-resident companies
with respect to dividends attributable to Belgian permanent establishment. Under the
exemption 95% of the dividends are deducted from the profits if existing. The deduction
cannot give rise to a negative tax base. If the Belgian company is in a loss position, the
qualifying dividends cannot be deducted.
Effective from the 1993 income year, the participation exemption applies only if both
a minimum participation test and a taxation test are satisfied. Belgium does not impose a
holding period condition to qualify for the participation exemption. Under the minimum
participation test, companies are required to own a minimum participation of 5% or 1.25
million EUR. To satisfy the taxation test, dividends must be received from companies that are
subject to Belgian corporate tax or from non-resident companies subject to a similar foreign
corporate tax. The participation exemption does not apply to dividends received from:
–
A company located in a country whose general tax regime is substantially more
advantageous than the regime in Belgium;
–
A holding or finance company benefiting from a tax regime which deviates from the
general regime in the country of establishment;
–
An investment company;
–
A company established abroad to the extent it distributes income which itself would
not have been exempt under the participation exemption.
Withholding taxes
Resident companies must withhold a 25.75% tax on the dividends distributed to
resident and non-resident shareholders. Most tax treaties reduce this withholding tax either to
15% or to 5% in the case of a subsidiary-parent relationship (at least 25% shareholding).
203
Moreover, the Royal decree of 14 October 1991 deals with the withholding tax
applicable to dividend distributions to parent companies established in an EU Member State
(incl. Belgian resident companies). Under certain conditions withholding tax is fully
exempted. In order to obtain the exemption, a foreign parent company should deliver a
statement to the Belgian subsidiary in which the parent declares that all these conditions are
met.
Capital gains and losses
Under the participation exemption, capital gains realised by a Belgian resident
company on shares in a Belgian or foreign company are fully exempt from corporate income
tax, provided that the dividends on the shares qualify for the participation exemption. For
purposes of the participation exemption for capital gains the minimum participation test is not
required.
Unrealised capital gains on shares that are recognised in the financial statements
(which recognition is not mandatory) are taxable. But a roll-over relief is granted if, and as
long as, the gain is booked in a separate reserve account on the balance sheet and is not used
for distribution or allocation of any kind.
As a counterpart to the new exemption of realised capital gains, capital losses on
shares, both realised and unrealised, are no longer tax deductible. However, the loss incurred
in connection with the liquidation of a subsidiary company remains deductible up to the
amount of the paid-up share capital.
Other capital gains are taxed at the ordinary rate. If the total amount of sales is used
for the purchase of depreciable fixed assets within 3 years, the taxation of the capital gains
will be spread over the depreciable period of these assets
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9.4.2 France
Company Taxation
The choice of the mode of declaration and imposition is to be carried out at the time of
the declaration of existence of the company or the activity. The existing options are:
–
micro-firm,
–
simplified real regime,
–
real regime,
–
controlled declaration.
The tax system takes account of the estimated turnover and the type of activity. It will
make it possible to determine the mode of calculation of the taxable profit, the frequency of
the tax declarations and the payment of the tax. During the existence of the company, a
change of taxation mode is possible. However, it remains impossible to pass from a real
regime to a micro-firm regime.
Micro-firm
This regime is reserved for very small companies which have an annual turnover not
exceeding 76,300 Euros for the sales volumes of goods and 27,000 Euros for the activities of
provisions of services and the liberal professions. The choice of this regime exempts
declaration and payment of VAT (value-added tax), which can neither be invoiced, nor
deducted. An obligatory note should be attached to the invoices and the notes of fees: “no
applicable VAT, article 293 B of the CGI”.
The taxable profit is evaluated in a contractual way by application of a rate of
abatement on the turnover:
–
72 % for the sale of goods,
–
52 % for the provisions of services,
–
37 % for the liberal professions.
205
The micro-firm regime brings some reductions of tax and accounting formalities. The
registers are simplified with only the day book of the receipts and the register of the purchases
(for the sale of goods) required. Even if they are within the limits of turnover, certain legal
structures cannot claim as a micro-firm. These are in particular companies subjected to the
‘society taxation’ (IS), companies of people subjected to income tax (IR) and all companies
normally subject to VAT.
Real simplified regime
The simplified mode relates to the industrial, commercial and craft companies whose
annual turnover lies between:
–
76,300 EUR and 760,000 EUR for the sales volumes of goods,
–
27,000 EUR and 230,000 EUR for the provision of services.
As for the regime of controlled declaration, the taxation on the benefit is based on the
real result. The carry forward and the deduction of the deficit to the following period are both
possible. The activity is subject to VAT. The declaration of VAT is annual and the payment is
due each quarter (payment on account).
Real regime
The real regime relates to the industrial, commercial and craft companies whose
annual turnover is higher than:
–
760,000 EUR for the sales volumes of goods,
–
230,000 EUR for the provision of services.
The constraints of this regime are heavier because the companies are obliged to
produce structured accounts and to publish annual statements. VAT must be declared and paid
each month.
206
Controlled declaration
The controlled declaration regime relates to the liberal professions which are excluded
from the field of the micro-firm, i.e. whose annual turnover is higher than 27,000 EUR. With
this regime, the taxation on the benefit is based on the real result. The carry forward and the
deduction of the deficit to the following period are both possible. The activity is subject to
VAT. The declaration of VAT is annual and the payment is due each quarter (payment on
account).
Different kinds of taxes
Professional tax
Professional tax is due each year from persons or entities (companies) which carry out
a professional activity. However, the legislation envisaged many exemptions, some applying
automatically and others being subordinated to the discretion of the local authorities
concerned. Among the different exemptions are:
–
all firms during the year of their establishment,
–
craftsmen who work in their family or with an apprentice,
–
artists, authors, sportsmen,
–
and those who are exempted, for a temporary period, following a decision of the local
authorities:
o new companies or companies in difficulty newly re-established,
o companies which extend to or are decentralized in some special areas.
This direct local tax is calculated on the rental value of real estate (real estate,
industrial estate, vehicles, etc) and of a fraction of total revenue. The amount of the
professional tax can reach a maximum, on the written request of the company, at a percentage
of the added value, equal to 3.5 % for the companies whose turnover is lower than 22 million
EUR.
207
The land tax
The land tax on built and not-built properties is established each year. The local
authorities decide the rate of this tax. It is due from all owners, persons or entities, and uses as
a base a fraction of the cadastral rental value of the properties located in France.
Tax on vehicles
The tax on vehicles used for tourism (TVS) is due when the entire firm has its
registered office or an establishment in France, whatever its form, objectives and tax system,
and whether they are liable or not to corporation tax. The chargeable vehicles are those of less
than 10 years of age registered in France in the private car category. Also liable are those
vehicles belonging to the employees of the company for which the company deals with all the
expenses incurred.
Tax on wages
The tax on wages is due from those firms, associations or certain liberal professions
which have employees who are not subject to VAT on at least 90% of their turnover. The tax
is based on wages, including benefits in kind. As from 1 January 2002, the base of the tax is
the same as for social security contributions. This means that the voluntary termination
payments for retirement are integrated in the base amount. The tax is due only when its annual
amount exceeds 840 EUR.
Apprentice tax
The tax for training is a tax paid by companies which makes it possible to finance the
expenditure necessary for the development of technological and professional teaching and
training. The training tax is due from all firms with employees. However, and companies
employing apprentices (on condition that their approximate wage bill does not exceed 6 times
the annual minimum wage: 8.03 € per hour since July 2005) are exempt from this tax. The tax
applies, at the rate of 0.5 %, of gross salary.
208
Vocational training tax
All companies, whatever their legal form and their activity, must contribute to the
financing of the Continuing Vocational training of their employees. If the average monthly
number of paid workers is at least equal to ten during the year under review, the company is
subject to pay the equivalent of 1.6% of gross salary (2005). On the other hand, if the monthly
number of employees is lower than ten during the year under review, the employer is liable to
tax at the minimum rate of 0.55% of gross salary (2005).
Value added tax
Value-added tax (VAT) is a tax on consumption (or indirect tax) which is imposed on
all the deliveries of goods and the provisions of services listed in the VAT code (whatever the
stage of the production and consumption). The usual rate is 19.6% in France. There is also a
reduced level at 5.5% for food, transportation, spectacles and edition, and a special level
(2.1%) for refundable drugs by the social security. VAT is collected by the firm at the time of
the sale of the goods and services to their customers and is deducted at the time of their own
purchases and investments. It is the positive difference between the collected VAT (sales) and
the deductible VAT (purchases) that the company must refund to the Public Treasury. The
payment of VAT depends on the regime of taxation that the firm chooses; monthly for the real
regime, annual with payment of quarterly instalments for the simplified regime. In the case of
a micro-firm regime, the enterprise will pay its purchases including all taxes without being
able to recover the VAT.
Taxation regime
The imposition of the benefit is dependent on the legal statute of the company. If a
company is generally subjected to corporation tax, an individual will be always subjected to
income tax.
Benefits taxation
After account closure of the business period, the current results before taxes must be
declared to the tax services. In all cases, even if the amount due is negative, the companies
209
will have to discharge an IFA (Annual Contractual Imposition). This tax is levied according to
the section in which the turnover including all taxes is located. It constitutes a recoverable
advance on the IS of the year and the two following periods.
If the result of the business period is negative, the company will be able to carry
forward the deficit and to reduce the amount due for the following period. In the absence of a
sufficient amount due, the carry forward can be renewed until the fifth year. If this amount
due is positive, this benefit will be imposed as for the first declaration. The imposition is
currently calculated on the basis of 33% of the result.
However, in order to help SMEs, the Finance Act of 2001 set up a method to reduce
the imposition on SMEs. This method applies to the companies whose turnover is lower than
7.6 Million EUR and at least 75% of whose capital is held directly or indirectly by physical
people. For these companies, the taxable profit will be taxed at:
–
15% up to a limit of 38,120 EUR of benefit per 12 months period, for the 2005
declaration period.
In case of error, the company pay an over tax of 10%, non deductible, interest for the
delay and some times penalties. In case of control, if the manager is considered “bad faith”,
penalties can be 100%.
Impositions on incomes (IR)
The benefit resulting from professional or company activity will be determined by the
declaration of professional financial results. This benefit will be deferred on the personal
declaration of income tax, in proportion to the rights held in the company, or entirely for
independent individuals or EURLs. If the activity is commercial or industrial, this income will
be declared as BIC (industrial and commercial benefit); otherwise, the income will be
declared as BNC (non commercial benefit). This income will be added to other incomes of the
tax base and taxation will be calculated according to the progressive scale of income tax by
taking account of the tax shares, and of the deductions and abatements to which the base is
entitled. The income tax is calculated for a family. To found the tax rate, income is divided by
the family quotient (usually one for each of the two first persons and 0.5 for each child). For
the same income, a single pay a lot more than a large family.
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In case of error, there is an over tax of 10%, non deductible, and interest for the delay.
There is no over tax for a small error (under 10% of the income), but if there is dissimulation,
the over tax is 20 %.
Social security
Social security contributions are calculated in two parts: the employer part and the
employee part. The two parts are collected by the firm and deducted directly from salary. The
payment to the URSAFF depends on the size of the firm; quarterly instalments for small firms
and monthly for big firms.
Total contributions are around 65% percent of gross salary, so an employee pays about
20% of his/her salary, and the employer 45%. The self-employed pay the contributions
themselves.
Created in 1945, the social security system follows now three principals:
–
all French residents have social rights including health, housing assistance, minimum
income,
–
the calculation of national social insurances depends on a ceiling amount (2516 € for
2005). This means that contributions are generally only calculated up to a maximum
amount,
–
a part of contributions depend of the law, other depend on the collective convention of
the sector (concluded between trade-union organizations representative and
employers) but concern almost all employees and their family’s (complementary
health insurance).
French social security system can be divided into 7 parts (2005):
1. Pensions:
•
national pension insurance: compulsory insurance by distribution. There is a
minimum pension, for old people.
•
complementary pension insurance: compulsory insurance by distribution.
Contributions are calculated on the ceiling amount for a part and exceeding
earnings for a part.
•
additional pension insurance: not compulsory insurance by capitalization,
usually for top management,
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Pensions (main compulsory insurances)
Employer
Employee
National
(CNAV)
Percent of gross
salary
ARRCO
complementary
under ceiling
pension
amount
AGIRC
over ceiling amount
+ Others
Additional
Not compulsory
Total
8.20%
6.55%
14.75%
1.60%
0.10%
1.70%
4.50%
3.00%
7.50%
12.50%
7.50%
20%
1.5% to
2%
1% to 1.2%
2.5% to 3.2%
0%
0%
0%
2. Health
•
national health insurance, compulsory and covers all French residents.
Generally patient pays and gets back 70 % to 100 % of the amount from the
social security.
•
complementary health insurance, complete the national health insurance and
covers more than 90% of French people. This insurance is individual, but it is
usually taken out by the company. The firm funds, between 25% and 50%. For
poor people, this insurance is free: universal medical cover (CMU)
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Health
National
(CNAM)
Percent of
gross salary
Employer
Employee
Total
12.80%
0.75%
13.55%
3. Family allowances (CNAF): France has a natalist policy. Enterprises pay 5.4% of
gross salary for the national family allowance. They also contribute to the housing
assistance (0.10% under ceiling amount for companies until 9 employees, 0.50% of
gross salary for companies over 9 salaries)
4. Unemployment insurance, for all employees,
Percent of gross salary
Unemployment insurance
Employer
Employee
4.45%
2.40%
Total
6.85%
5. Care insurance, for employees earning more than the ceiling amount: employer pays
1.50% up to the ceiling amount.
6. Companies’ accident insurance depends of the activity of the company. Employers
pay usually between 1% and 6% of salary.
7. Others: transportation, building taxes, general social taxes – employers 5% and
employees 8% of gross salary.
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9.4.3 Germany
Taxes
Tax authorities
In Germany taxes are levied by the federal, state and local governments. The most
important taxes are federal taxes, regulated in the Income Tax Act, the Corporation Tax Act,
the Trade Tax Act, the Value Added Tax Act, and the Estate and Gift Tax Act, as amended.
The German Ministry of Finance issues interpretative regulations as well as letter-decrees in
certain cases regarding the above-mentioned taxes, and administers the federal laws through
local tax offices (Finanzämter). An important source of statutory interpretation in tax matters
is the decisions of the various Finance Courts (Finanzgerichte) and the Federal Finance Court
in Munich (Bundesfinanzhof).
Principal taxes
In Germany there are no particular fiscal privileges for the starting entrepreneur. A
single exception is the so called Ansparabschreibung which is increased for future
investments, in comparison to existing businesses. Starting businesses, like all other
taxpayers, are therefore dependent on first using the existing tax laws optimally for their
situation. Especially important in this matter is the legal form of the business, formalities with
the turnover tax and the probable form of the ownership relations with the property used for
business operations (a tax advisor should be consulted). An independent entrepreneur has to
deal with a whole row of taxes:
Income taxes
Each sole proprietor/trader pays income taxes. These are adjusted to the personal profit
that is obtained (after the deduction of all business costs) through the business. In the first
year of independent operation, the tax office estimates the entrepreneur’s statements on the
bases of the expected profit. From the already taxed income, a basic tax allowance remains
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tax free (in 2003 this was 7,235 EUR for single people and 14,471 EUR for married people).
Income over the basic tax free allowance must be taxed. The level of the tax rate depends on
the amount of the income. Annually the tax office fixes a certain sum that must be transferred
as a prepayment each quarter. The tax explanation for the entire calendar year is concluded in
the following year and the tax liability is settled, taking into account the prepayments.
Personal taxes
Personal tax is a type of income tax on legal individuals, (for example an Inc. a Ltd.
company, a cooperative). It is raised on the distributed and non-distributed profits of the
business. The personal tax is raised by the federal states. The tax rate amounts uniformly to 25
percent in the year 2003 for non-distributed and distributed profits. On the distribution, in
principle an investment income tax is raised, with a tax rate of 20 percent. Here, the tax office
fixes annually a certain sum as well, which must be transferred as a quarterly prepayment.
Trade taxes
Every trade business must pay trade taxes to cities and communities. The level of the
trade tax results from the profit of a trading business. This amount is then multiplied by a so
called ‘assessment rate’, which is always valid for a certain community. A tax-free amount of
24,500 EUR is available for natural persons and personal companies. For trade profits up to
72,500 EUR a reduced tax assessment comes into force. The trade tax, as a business cost,
decreases the fiscal profit of the trading business and because of this also influences the level
of the income- as well as personal tax.
Taxes on transactions (Turnover tax/Vorsteuer)
The Turnover Tax (Value Added Tax) must be added to all accounted amounts. At
present it is fixed at 16%. For a series of products and services (i.e. food, books, magazines) it
is 7%. The sum of the sales taxes, which is calculated on the business’s custom, must be
regularly forwarded to the tax office. Prior to this however, the Turnover Taxes (Vorsteuern)
that have been paid in the same period, i.e. to a firm’s suppliers, can be deducted from this
amount.
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An important characteristic of the German tax system is that normally, a new business
pays none or only a few taxes in the initial phase because the tax office takes into
consideration the high financial burdens at this time. However, if a business is successful, it
can happen that the tax office - in around the third or fourth year - drastically increases the tax
demands. In order to comply with the new tax-liabilities, the business must:
− store business records and all commercial receipts, including those for the preparation
of the business’s foundation; for example travel costs and advice honoraria,
− carefully record business procedures and hand over tax explanations,
− in the case of small-tradesman or the self employed, keep a cash register book and a
revenue excess bill,
− in the case of merchants carry out proper double accounting and produce a balance at
the end of the year,
− in the case of merchants additionally keep a merchandise entrance/exits of stock
keeping book
− make tax prepayments and pay tax bills.
− pay taxes to the tax office according to the level of the profit, possibly after the first
year (and according to profit for all following years).
Social security
In addition to income tax, an individual employed with a German firm may be required to
pay social security contributions. If employment in the Federal Republic of Germany lasts
less than two months or 50 working days, no social security contributions are withheld from
gross income. The German social security system can be divided into 5 parts:
− pension insurance,
− unemployment insurance,
− health insurance,
− care insurance,
− companies’ accident insurance.
Contributions to pension insurance, unemployment insurance, health insurance and
care insurance are paid half by the employer and half by the employee; the companies’
accident insurance is paid only by the employer. For the calculation of the monthly
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contribution to pension insurance, unemployment insurance, health insurance and care
insurance special ceiling amounts apply. This means that contributions are only calculated up
to a maximum amount; exceeding earnings will remain free of social security contributions.
Total contributions are around 40 percent of gross salary, so an employee should expect to
pay about 20% of his/her salary into the system. Contributions are deducted directly from
one’s salary. The self-employed pay the contributions themselves. Depending on whether the
work is provided in the former West Germany or former East Germany in 2001 the following
ceiling amounts of earnings apply:
Former West Germany:
− Pension/unemployment insurance: 4,500 EUR monthly/54,000 EUR annually
− Health/care insurance: 3,375 EUR monthly/40,500 EUR annually
Former East Germany:
− Pension/unemployment insurance: 3,750 EUR monthly/45,000 EUR annually
− Health/care insurance: 3,375 EUR monthly/40,500 EUR annually
The annual ceiling amount is important for the calculation of contributions. This
means that extra payments that exceed the monthly ceiling may have to be made if in former
months the ceiling amounts are not met. The social security rates detailed below apply (up to
the ceiling amounts) in general on the gross salary. Allowances paid tax free according to
German tax law are also social security free. For 2005 the social security rates are as follows:
− pension insurance: 19.1 %,
− unemployment insurance: 6.5 %,
− health insurance (average rate): 13.7 %,
− care insurance: 1.7 %.
The amount of health insurance contribution depends on the chosen health insurance
company. Also, if the ceiling amounts are met, employees have the option of either being
insured with a state health insurance company on a voluntary basis or being insured with a
private health insurance company, or having no health insurance at all. The contributions for
those being voluntarily insured are calculated as shown above. For those insured with a
private company, the amount of contributions depends on age, current state of health and
family situation.
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9.4.4 Hungary
Tax System, Social Security and Liability to Pay Other Contributions
In Hungary sole proprietors are subject to personal income taxation (unless they
choose the alternative taxation option offered by the simplified tax for entrepreneurs
applicable as of 2003), according to the provisions of Act CXVII of 1995 on Personal Income
Taxation. As a sole proprietor’s activity is a form of independent activity, it is, as a general
rule, taxed on the basis of the entrepreneur’s income (with costs deductible). These
entrepreneurs pay tax calculated according to the progressive tax rate table on withdrawals
accounted under the title of personal work performance, linear tax on the entrepreneurial tax
base, personal income tax applying to entrepreneurs (from 2004 16%) and tax calculated
according to the regulations applying to income originating from dividends on their
entrepreneurial dividend base. In certain cases, however, they can choose lump-sum taxation,
too.
Corporate and dividend taxation is governed by Act LXXXI of 1996. Since the
provisions of the Act are to be interpreted in harmony with the Act on Accounting, the recodification of the latter as of 1 January 2001 implied significant changes in corporate
taxation as well. The corporate tax rate was 18% from 1995; from 2004 it is 16% – a
relatively low rate in international comparison, implying a moderate tax burden on
enterprises, which is further alleviated by various tax allowances. The corporate tax
allowances were harmonised with EU legislation referring to state subsidies. The most
important change in tax allowance policy is the elimination from 1 January 2003 of the option
of eligibility for investment tax allowance (if the investment amounted to HUF 3 billion and
HUF 10 billion, respectively: ~12,000,000 EUR and 40,000,000 EUR). The other change is
that from the date of EU-accession tax allowances already granted are converted. That is,
enterprises that had already acquired the right to tax allowances can take advantage of them.
The former investment tax allowances are replaced by the development tax benefit which can
be requested by taxpayers for five years, on certain conditions, in the framework of individual
procedures. In 2004 the conditions were significantly modified. According to the general rule,
from 2004 the development tax benefit can be applied if the taxpayer carries out at least HUF
3 billion (ca. 11.5 million EUR) investment anywhere in Hungary or HUF 1 billion (ca. 3.83
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million EUR) in priority regions of the country or in a sphere of activity operated by a higher
educational institution or the Hungarian Academy of Sciences, with the purpose of carrying
out basic research, applied research or experimental development. The extent of the tax
benefit should be calculated on the basis of investment value (in the case of investment for
new job creation it is 24-month-employee-expense) multiplied by the so-called ‘support
intensity rate’ and reduced by the state subsidies received for the particular development
project. These rates can be increased by 15% in respect of SMEs. Certain limitations are set
for so-called ‘sensitive industries’, meaning that the tax allowance is not applicable or its
utilisation is limited in these industries.
In order to moderate the tax burdens of small enterprises, two significant benefit
schemes were introduced as of 2001.
–
One is the investment tax base benefit for micro- and small enterprises, that allows an
enterprise to reduce profit before taxation, up to the extent of the full tax base, under
specific conditions but not exceeding HUF 10 million (~40,000 EUR) in 2001 and
HUF 30 million (~120,000 EUR) in 2002. From 2004 medium-sized enterprises can
also reduce their tax base.
–
The second is tax allowance on credit interests for small and medium-sized
enterprises, allowing them to deduct 40% of the interest paid for fix-assetspurchasing-credits from the tax (the amount must not exceed HUF 5 million (~ EUR
20,000) or HUF 6 million (~EUR 24,000) from 2004).
In order to promote research and development in the sector, as of 2001 both corporate
businesses and sole proprietors may deduct 200% of their R&D costs from their tax base. In
2003 the most important change in the regulations was the introduction of a new type of tax,
called simplified tax for enterprises/entrepreneurs (Hungarian abbreviation: EVA). This new
form of tax was available to the smallest businesses with a maximum of HUF 15 million
(~60,000 EUR) annual sales revenue - from 2004 HUF 25 million (~100,000 EUR) - VAT
included, which had been active under the same legal form for at least two years.
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–
The EVA tax can be chosen by a limited liability company, a limited partnership, a
general partnership, a sole proprietor subject to Personal Income Tax Act, a cooperative, lawyer’s office, patent administration office, executive office and forest
owners’ society.
–
The tax rate is 15% of total annual turnover, and includes VAT, the company’s cartax, the entrepreneur’s personal income tax for sole proprietors and the personal
income tax payable on the entrepreneur’s dividend base, the corporation tax for
business companies and the personal income tax on dividends.
–
It can only be chosen by one enterprise in the sphere of proprietary interest of a private
individual and his/her close relatives.
–
The local business tax base is half of the EVA base.
The introduction of the simplified enterprise tax (EVA) resulted in a substantial
reduction of administrative burdens, too. From January 2003 both limited and unlimited
partnerships paying their taxes under the simplified enterprise tax scheme may save
substantial accounting costs by paying their taxes according to the EVA rules, for they can
fulfil their ‘bookkeeping’ obligation by registering just the revenues (if they chose that
scheme when entering EVA). Limited liability companies, co-operatives, forest owners’
associations, executor offices, law offices and patent administration offices are under
obligation to apply double entry book keeping according to the Accounting Act.
Local taxes
Local taxes are governed by framework Act C of 1990 on Local Taxes, defining the
tax legislation codification activity of municipalities, including the name of the tax types to be
imposed, with restrictions applying to the highest tax rates and of exemptions and minimum
allowances. Entrepreneurs pay four types of local tax: building tax, communal tax, land tax
and local business tax. Building and land taxes can be levied on real property, but a given real
property shall only be subject to one of the two. Entrepreneurs usually pay the highest sum on
account of their local business tax. The base and extent of the business tax is defined by the
law as of 1 January 1998 so that, from 1998 to 2000, material expenses could be deducted in
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three steps, to an increasing extent, from the net sales revenue from which the tax base was
calculated (33% of material expenses in 1998, 66% in 1999 and all in 2000), but, at the same
time, the upper tax limit was also raised proportionately (1.4% of the tax base in 1998, 1.7%
in 1999 and 2% in 2000).
Taxation regime
The Taxation Regime was re-codified in 2003; the new Act XCII of 2003 came into
force on 1 January 2004 as the structural modifications affected two thirds of the previous act
and new elements were also introduced, such as the extension of electronic tax administration
and the introduction of a new method of tax statement for natural persons. The Act defines the
rights and obligations of taxpayers and taxation authorities under a uniform system, from the
rules of registration and the announcement of changes through declaration, payment, selfaudit, record-keeping and data provision obligations to control, together with the legal
consequences and the rules of taxation administration procedures.
Surveys on businesses showed that the largest reduction of administrative burdens
would be achieved by the possibility of submitting the necessary tax/contribution returns
electronically. The possibility of downloading the necessary forms from the tax authority’s
home page was a substantial step towards the accomplishment of the above goal. This option
was introduced in 2000 in respect of the corporate income tax returns relating to the year
1999. In 2003 a total of 49 forms were available online, together with aspects of interrelationships analyses and the relevant fill-in and checking programmes, accompanied by a
total of a further 38 forms available as document images. In the case of sole proprietors, the
ratio of returns downloaded from and submitted through the Internet increased from 2.8% in
2001 to 13.8% in 2002. The corresponding figures in the case of corporate income tax returns
were 18.5 and 44.5% respectively; in 2003 it was 64%,. The electronic filling in of tax return
forms makes the work of the tax authority much easier too, for example, by significantly
reducing the number of calculation and logical errors made by taxpayers: e.g. in the case of
corporate income tax returns the rate of errors dropped by about fifty percent.
The second stage of the development of an electronic tax administration consists in the
electronic handing in of tax returns. The first step towards the establishment of the legislative
background of these services was the coming into force of Act XXXV of 2001 on Electronic
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Signatures. The electronic fulfilment of tax-related obligations is regulated by the joint decree
of the Ministry of Finance and the Ministry of Informatics and Communications (No.
30/2002. (X. 11.)). The use of a qualified electronic signature in tax administration is a must.
From October 2002 the Act made it possible for customers of the Directorate for Large
Taxpayers, then from 1 February 2004 for the largest 3,000 taxpayers to use electronic tax
returns and data supply.
The regulations of Act LXXX of 1997 on Those Eligible to Social Insurance
Provisions and to Private Pension and the Coverage of Such Services, modified several times,
as well as those of Act LXVI of 1997 on Health Care Contributions changed significantly by
2001–2002, along with the acts on taxation. In order to reduce labour costs, social security
contributions to be paid by employers fell by 2% and again 2%, from 33% to 31% in 2001
and to 29% in 2002. The flat sum of health care contributions rose from a monthly HUF 3,900
to HUF 4,200 (~15 – 17 EUR) in 2001, and to HUF 4,500 (~18 EUR) in 2002, i.e. from HUF
140 per calendar day to HUF 150, and then it was reduced to a monthly HUF 3,450 (~14
EUR) or HUF 115 per calendar day. This is the first step towards the full elimination of this
obligation intended by the government over the next few years, depending on the room for
manoeuvre provided by the state budget. Collective and individual entrepreneurs in second
job holder status are still bound to pay 5% accident contribution on their incomes.
The most important payment obligations of enterprises are summed up in the
following table which also contains payments – the employees’ and employers’ contributions
and the rehabilitation and vocational training contributions – to the Labour Market Fund
which is to finance active employment measures, unemployment provisions, vocational
training and rehabilitation. In addition to these contributions, some other liabilities may be
charged to the businesses concerned, depending on their scope of activity. Such contributions
are the cultural contribution, contribution to tourism (which ceased to exist in 2002), the game
tax and the environmental product fee.
In addition to the above we should mention the new taxes and contribution payment
obligations applied from 2004. These are the registration tax that takes the place of the
consumption tax, the energy tax, the so-called ecology tax and the innovation contribution.
On the basis of Act XC of 2003 on the Research and Technological Innovation Fund, the
innovation contribution is payable by business companies which have their registered office
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in Hungary and which are subject to the Act on Accounting, excepting micro-enterprises and
business companies founded without a legal predecessor in the year of their establishment.
The Fund is intended to act as a predictable and reliable resource to encourage and support
technological innovation in the Hungarian economy, and strengthen research and
development, the exploitation of domestic and foreign research findings and the improvement
of the infrastructure of innovation. The amount of the contribution payable is a percentage of
the tax base specified in accordance with Act C of 1990 on Local Taxes.
The gross annual contribution may be reduced by direct costs, as defined, of the
research and development activities conducted by the business company itself, and the costs
of research and development activities ordered from organisations identified in Act CLVI of
the year 1997 on State Budget Financed Organisations and Organisations of Public Benefit.
All organisations are to make an advance payment every three months.
On the basis of provisions of Act LXXXIX of 2003 on the Ecology Tax, this tax
should be paid from 1 January 2004 by those who pollute the environment: the air, the waters
or the soil (soil pollution fee from 1 July 2004). The Act specifies the different forms of
ecology taxes, such as air pollution fee, soil pollution fee and water pollution fee; the rate of
fees, and the cases in which 50% of the fee can be reclaimed.
Accounting and Auditing
In Hungary, the two-level accounting regulation – based on legislation – was
introduced on 1 January 1992. The first level of regulation was Act XVIII of 1991 on
Accounting up to 31 December 2000, and Act C of 2000 from 1 January 2001. The second
level is that of Government Orders issued on the basis of authorisation by the Act, which
stipulate the specific accounting regulations applying to economic organisations that operate
according to the special regulations laid down in the legislation. From the date they became
effective, i.e. 1 January 2001, the Hungarian accounting regulations have in effect been in full
conformity with the European regulations.
Simultaneously, significant changes were made, marked by three interdependent
features. First, the framework-type approach of the previous regulation gave way to more
detailed provisions with respect to book-keeping or the assessment procedures; secondly, the
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accounting policy of the enterprise became more appreciative; and thirdly, the role of such
factors as the more decisive assertion of a reliable and realistic overview has developed even
further. The Act established the legal basis for the introduction of national accounting
standards.
The detailed nature of the Act (consisting of 178 sections, and a total of around one
thousand pages, Government Orders attached to it included) made the position of small
enterprises rather difficult, but the most acute problem of small enterprises was the
cancellation of the option of single-entry book-keeping. Until 31 December 2003, the only
entrepreneurs who were allowed to use single-account book-keeping were those who were
already using it at the time when the Act came into force. That is, companies established in
2001 were not allowed to use single-entry book-keeping. The order of magnitude of those
concerned is well indicated by the fact that in 2002, 131,000 enterprises handed in corporate
tax returns based on single-entry book-keeping by the given deadline. Thus enterprises had to
delegate their book-keeping tasks to professional accountants even more than before, and the
law imposed stricter professional requirements and also defined the book-keeping tasks
required. The Act rules that enterprises with an annual turnover in excess of HUF 10 million
(~40,000 EUR) – unless they have an employee or member with at least a chartered
accountant’s qualification in charge of accounting – shall have their annual statement
prepared by an external expert or service provider from the year 2003 on. The Act also orders
the public registration of experts and their further professional training.
The minimum reporting obligations of a business entity depend on its size, the nature
of its operations, its ownership control, its form and whether the company has a controlling
interest in other companies. The four alternative levels of statutory reporting are: full financial
statements, simplified financial statements, consolidated financial statements and highly
simplified statements (simplified reports). A simplified financial statement is allowed for
entities with less than HUF 150 million (~60,000 EUR) of total assets, up to HUF 300 million
(120,000 EUR) of annual turnover and an annual average number of employees below 50
over two consecutive years. The financial statements consist of a balance sheet, an income
statement (profit and loss accounts) and notes. The notes must include cash flow statements.
A business (director’s) report is prepared together with the financial statements, but does not
form part of the statements. This latter need not be prepared as a simplified report. From 2001
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enterprises can choose between two balance statement patterns, and they can prepare balance
statements based on the total expenditure or the trade expenditure procedure.
The provisions regarding auditing have also changed. It is mandatory for every
company keeping its books according to the double-entry system to have its books/reports
audited, unless the annual (extrapolated to annual level) net sales income did not surpass HUF
50 million (~200,000 EUR) on average during the two years preceding the given business
year, and this is also mandatory if it is required by some other law, e.g. the Act on Companies.
The Act on Accounting provides for the publicising and publication of the financial
statements. Both companies keeping their books according to the double-entry system and
those according to the single-entry system are obliged to submit their annual reports to the
Court of Registration, while only companies keeping their books according to the doubleentry system are obliged to publish their reports, a requirement that is considered to have been
met if concurrently with the submission of the annual report to the Court of Registration they
also submit it to the Company Registration and Company Information Service of the Ministry
of Justice. From 2005 the requirement of making the financial statements public can also be
fulfilled on-line.
9.4.5 Poland
The financial environment (Taxes)
When evaluating the Polish tax system it must be stressed that a characteristic feature
of the Polish tax system is its ceaseless change. The introduction of numerous corrections and
amendments to legal acts relating to this area is a serious barrier to economic activity on the
part of small and medium enterprises. Among the general forms of taxation are the income tax
on private individuals involved in non–agricultural economic activity and corporate income
tax. Small and medium businesses usually choose the first type of taxation.
The income of private individuals conducting non–agricultural economic activity,
including as a civil law partnership or a personal commercial company are subject to personal
income tax. The Act establishes tax rates at 19%, 30%, and 40%. In line with the general
225
principle, taxpayers are obliged to file tax returns with Treasury Offices regarding the level of
income achieved using an established form by 30 April of the successive year.
Corporate income tax encompasses corporate entities and capital–based companies as
well as organizational units that do not have corporate entity status, with the exception of civil
partnerships, general partnerships, partnerships, limited partnerships, mixed joint–stock and
limited companies, and capital groups. Corporate income tax amounts to 19% of the tax base.
A deferment of tax in the form of what is known as tax credit is available for taxpayers (both
those paying personal income tax and corporate income tax) which are small businesses
employing no fewer than five workers and undertaking economic activity for the first time.
The idea behind the tax credit is that entitled taxpayers are exempt from filing monthly tax
returns and making income tax advances by the deadline for filing the returns. The period of
this exemption is one tax year and is in force over the tax year immediately following the year
in which the taxpayer commenced activity (if it was conducted for at least ten months) or in
other cases two years following the year of commencement of activity.
Apart from general forms of taxation in the personal income tax system, small
enterprises may apply simplified tax forms that are characterized by their less complex
structure. The simplified form of taxation also involves simplified forms for settlement with
Treasury Offices. This eases the conducting of economic activity by the SME sector, but is an
obstacle visible in contacts with banks that would prefer to have an overview of the real state
of company turnover. Simplified forms of taxation applied in Poland include a lump–sum on
recorded revenues and the tax account.
Taxation applying a tax account is the simplest form of taxation of income on non–
agricultural economic activity. The business is allowed to decide if it wants to be taxed in this
way. The tax account is granted upon application by the taxpayer. The Treasury Office
specifies a monthly tax rate, separately for each tax year. The level of the rate is dependent on
the type and scope of activity, the number of employees, and the number of inhabitants in the
locality where economic activity is conducted. The basic advantage of the tax account is the
fixed nature of tax due over the year, regardless of actual income achieved by the business.
Beneficial effects in applying this form of taxation appear when, under given conditions, the
taxpayer achieves an income that is above average.
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Taxpayers taxed applying this form are exempt from the obligation to keep books, file
tax returns, make revenue declarations, and make advance income tax payments. They do not
disclose revenues, the costs of generating revenue, nor income. The tax account is considered
a privileged form of taxation and its objective is to initiate the emergence of small enterprises.
There are certain legislative restrictions on the possibility of applying this form of taxation,
including defined organizational–legal forms, restrictions on types of activity, and limits on
employment.
Recorded income lump–sums may be paid by taxpayers who achieved revenues from
economic activity at a level not exceeding EUR 250,000 over the previous tax year. The
lump–sum rate on recorded revenues amounts to 20%, 17%, 8.5%, 5.5%, and 3%. This form
of taxation, like the tax account, is addressed to small and medium enterprises. Taxpayers
paying a lump–sum have significantly lesser recording obligations than do businesses taxed
applying general methods. The basis for taxation using this form is revenue from economic
activities. The fact that costs of generating revenues are not taken into account in the lump–
sum system means that it is increasingly advantageous the lower the share of costs in
revenues.
Private individuals and corporate entities involved in economic activity in powiats
[county–level divisions] and municipalities particularly threatened by high structural
unemployment or in municipalities threatened by recession and social degradation are entitled
to tax deductions and preferences. The specification of such powiats and municipalities is
based on separate regulations established by the Council of Ministers. Among such
preferences are:
–
the ability to apply higher depreciation rates by taxpayers paying personal income tax
and corporate income tax involved in economic activity; and
–
the ability to increase employment on the part of taxpayers paying the lump–sum
income tax involved in economic activity or taxed through a tax account without losing
rights to such forms of taxation and without increasing the tax rate.
A problem of Polish businesses is the high basic rate of the tax on goods and services
(VAT), which amounts to 22%. This rate is in force for all activities subject to taxation by
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way of the tax on goods and services, unless it has been lowered by way of specific regulation
to 7%, 3%, or 0%. The reduced 7%, 3%, and 0% rates are exclusively applied to goods and
services defined in the Act and executive orders.
There is a possibility of exemption from the tax (Article 113 of the Act on the Tax on
Goods and Services). It applies to taxpayers whose taxable sales value did not exceed a total
over the previous tax year of the PLN amount equivalent to EUR 10,000.
Real estate tax is among local taxes that have an impact on economic activity in
Poland. Taxation by way of this tax encompasses land, buildings or parts thereof, and
facilities or parts thereof connected with the economic activities being conducted. The tax rate
is defined by the municipality council; however the tax cannot exceed PLN 0.62 per square
meter [PLN 0.058/sq. ft.] of land surface area connected with the economic activities being
conducted and PLN 17.31 per square meter [PLN 1.608/sq. ft.] of usable floor space in
buildings or their parts connected with the economic activities being conducted.
One of the methods used in Poland as support for entrepreneurship is the creation of
special economic zones.Businesses active within the limits of the special economic zones are
eligible for tax deductions and preferences, including even a complete exemption from
income tax for a period equal to one–half of the period for which the zone has been
established. Over the latter period, exemption from income tax may apply to a maximum of
50% of income. An additional advantage for businesses active in the special economic zones
is the exemption from local fees and taxes (e.g. real estate tax).
Among the more than a dozen special economic zones operating in Poland, only
one—the Kamiennogórska Special Economic Zone for Small Business—specifically targets
the SME sector. The creation and operation of special economic zones on the national level is
not specifically aimed at stimulating the SME sector.
16 August 2002 is the date on which the Act of 18 September 2001 on the Electronic
Signature came into effect. The legislation states that public bodies have four years as of the
date of its coming into force (up to the year 2006) to make possible the filing of applications
in electronic form. This also includes Treasury Offices. Most probably the ability to file tax
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returns in this form will make its appearance within the next two years. First and foremost,
this will encompass tax returns filed by economic entities.
Social Security
It is primarily the Act on the Social Security System of 13 October 1998 (Journal of
Laws of 1998, No. 137, item 887, with subsequent modifications) that regulates questions of
social insurance in the Polish legal system. People involved in economic activity are subject
to obligatory retirement, disability, accident, and health insurance. Moreover, businesses
encompassed by the obligatory retirement, disability, and accident insurance channel
premiums to the Labour Fund. Poland also has voluntary insurance, such as health insurance.
The level of insurance premiums is expressed in percentage form.
Table 9.5 Type of insurance and level of specific premiums
Type of insurance
Percentage rate
Retirement
19.52%
Disability
13.00%
Accident
0.97-3.86%
Health
8.25%
Labour Fund
2.45%
Sick leave compensation
2.45%
Worker Guaranteed Benefit Fund
0.15%
Source: Own study based on the Act on the Social Security System and information from the Social Security
Administration (ZUS).
Businesses conducting economic activity finance their premiums using their own
resources in whole. The basis for the premium level for all insurance, with the exception of
health insurance, is the amount declared by the business, which cannot be less than 60% of
the average monthly remuneration in the previous quarter. The basis for the premium on
health insurance is a declared amount that cannot be less than 75% of the average monthly
remuneration in the business sector over the previous quarter. There are no upper limits
relating to the declared amounts. Premiums for the given month must be paid by the tenth day
of the next month (in the case of a single businessperson paying for him/herself) or by the
fifteenth day of the next month in all other cases. Bank transfer is the obligatory form for
making the premium payment.
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The employer - the payer of premiums for social and health insurance - is obliged to
provide notification of any newly–employed worker to the ZUS and pay the appropriate
premiums for that worker. From the moment of entering into an employment relation with the
worker, the employer is obliged to pay the worker’s premiums on retirement, disability, sick
leave compensation, accident, and health insurance, as well as to make payments to the
Labour Fund and the Worker Guaranteed Benefit Fund.
Table 9.6 Level of specific insurance premiums and principles of their financing
Type of insurance
Percentage rate
Employer
Insured
Retirement
9.76%
9.76%
Disability
6.50%
6.50%
—
2.45%
0.97%–3.86%
—
—
8.25%
Labour Fund
2.45%
—
Worker Guaranteed Benefit Fund
0.15%
—
Sick leave compensation
Accident
Health
Source: Own study based on the Act on the Social Security System and information from the Social Security
Administration (ZUS).
The basis for the premium level on retirement, disability, sick leave compensation, and
accident insurance as well as payments for the Labour Fund and the Worker Guaranteed
Benefit Fund is the gross remuneration of the employee. However, the basis for the level of
the premium on health insurance is gross remuneration decreased by ZUS premiums paid by
the employee (retirement, disability, and sick leave compensation).
The employer is not only obliged to provide notification of an employee to be insured,
but must also see to the monthly premium calculations, withholding, settlement, and payment
of premiums to the appropriate ZUS account.
In the event of the termination of an employment contract, which signifies the
termination of title to social and health insurance, the employer should de–register the former
employee with the ZUS within seven days as of the date of such an occurrence.
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A successive instrument that must be created by a business employing the fulltime
equivalent of at least twenty employees is the Company Social Benefit Fund. The principles
of establishing a Company Social Benefit Fund by the employer as well as principles for
managing its resources are defined in the Act of 4 March 1994 on the Company Social
Benefit Fund (Journal of Laws of 1996, No. 70, item 335, with subsequent modifications).
Such a Fund is created by the employer for the financing of social activities on the part of
persons entitled to benefit from the Fund as well as for subsidizing company social facilities.
Money designated for the Fund is accumulated by the employer on a separate bank account,
deposited in line with deadlines and disbursed for purposes as defined by regulations. Social
activities as understood by the Act on the Company Social Benefit Fund are services rendered
by the employer with respect to various forms of domestic leisure, cultural and educational
activity, sporting and recreational activity, the granting of material and tangible or financial
aid, and also repayable and non–repayable assistance for housing purposes in line with terms
defined in an agreement.
An obligation of the employer with respect to the employee is training in the realm of
occupational health and safety (BHP) prior to allowing him/her to work as well as the
conducting of periodic training in this field. Occupational health and safety training takes
place during work at the expense of the employer. Following the training, the employee is
obliged to confirm in writing his/her familiarity with regulations and principles of health and
safety at work.
9.4.6 Slovakia
The financial system and financial environment affecting the development of SMEs in
Slovakia
Over the past four years, the forms of funding enterprises, including small and
medium-sized enterprises, have developed significantly.
Taxation
Income tax is governed and regulated in Act No. 595/2003 Coll. on Income Tax as
amended, which took effect on 1 January 2004. The Act deals with two types of taxes –
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income tax and corporation tax. Income tax as well as corporation tax was governed by Act
No. 366/1999 Coll. on Taxes as amended. This Act also regulated tax collection and tax
payment.
Corporation tax is charged on the total profits of legal entities as well as entities that
are not classified as individuals or legal entities as follows:
–
Public liability companies,
–
Limited liability companies,
–
Limited partnerships,
–
General commercial partnerships,
–
State enterprises,
–
Not-for profit organisations.
Unlike Act No. 286/1992 Coll., which was in effect until the end of 1999, the new Act
states that the corporation tax shall be levied on all legal entities, i.e. including general
commercial partnerships, which were not liable to corporation tax until the end of 1999. As a
result of this, general commercial partnerships have become liable to corporation tax but
pursuant to Sec. 18(6) of the Act the corporation tax shall be charged only on the profits
subject to a special tax rate (the tax base in respect of profits of a general commercial
partnership shall be distributed among individual partners who are subsequently liable to tax
on their tax base).
As from 1 January 2004 profits of all the entities (individuals, foreign entities, legal
entities and other entities) are subject to a single linear percentage tax (the so-called flat tax)
at 19%. The rules applicable to the determination of the tax base of individual entities have
changed as well. The tax base of an entrepreneur is the profit or loss that he/she posts.
Real Estate Tax
This tax was introduced within the complex tax reform in the Slovak Republic on 1
January 1993. It belongs to taxes classified as direct taxes and also property taxes. Due to the
fact that the proceeds from this tax go to municipalities and towns and that the real estate tax
is administered by the municipalities and towns, this tax is referred to as the so-called ‘local
tax’. The real estate tax comprises three elements – land tax, construction tax and house tax.
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This three-element scheme is due to the fact that the real estate subject to taxation can always
be owned or possessed by different entities. In such a case the tax return is filed and the tax is
paid separately depending on the type of the owner. The applicable legislation sets out
different rules for determining the tax base as well as different tax rates depending on each
particular segment.
Road Tax
Road Tax (Act No. 87/1994 Coll.) only applies to certain motor vehicles and their
trailers used for the purposes of pursuing one’s business or in connection therewith.
Value Added Tax (VAT)
This tax is classified as indirect tax. It is payable on a wide range of supplies of goods
and services by way of business both in straightforward sales as well as in respect of other
taxable supplies. The liability for VAT arises only at the time of the supply. VAT is included
in the price of the product sold to a final consumer; however, the final consumer only pays the
same, he/she does not have to collect it from anyone and pay it to the Customs and Excise on
a regular basis. Taxable persons collect the tax due only on the supplies that they make.
A taxable person is a person subject to the value added tax who is registered as a VAT
taxable person. As from 1 January 2004, all products and services are subject to the flat 19%
VAT rate.
Excise Taxes
Excise taxes are indirect taxes imposed on the manufacture and distribution of certain
non-essential consumer goods, such as beer, wine, tobacco and tobacco products, spirit and
mineral oils – petrol and diesel.
Administrative Fees
Administrative fees are the fees governed and regulated in Act No. 145/1995 Coll. on
Administrative Fees as amended. These fees are charged and collected by the state
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administration authorities, municipalities, state archives and embassies in consideration for
actions and procedures specified in the Administrative Fees Rules that constitute a part of the
Act.
Administrative fees charged upon taxation
Administrative taxes charged in respect of business activities:
–
Issuance of a business licence certificate,
–
Issuance of a special business licence certificate (contingent upon a special approval),
–
Issuance of the extract from the business licence register,
–
Changes and modifications in the business licence certificate or in a special business
licence certificate,
–
Revocation of the business licence in respect of one or several businesses,
–
Allocation of the company identification number.
9.4.7 Spain33
Taxes
The Spanish tax system comprises three kinds of taxes: ‘impuestos’ (true taxes),
‘tasas’ (dues and fees) and ‘contribuciones especiales’ (special levies). The ‘tasas’ and
‘contribuciones especiales’ are collected in return for a public service provided by the
authorities or for any type of benefit as a result of public works or services. In Spain taxes are
levied:
− by the Central Government,
− by the Autonomous Communities (regional),
− by local authorities.
33
The description of the Spanish tax system is based on the following source: www.us.spanishbusiness.com
234
In Spain General Tax Law covers the different types of taxes that are applicable to
companies, regardless of the legal form that is adopted. Direct taxes:
− On income,
− Corporate income tax,
− Personal income tax,
− Non-residents’ income tax,
− On assets (affecting only individuals),
− Net worth tax,
− Inheritance and gift tax.
Indirect taxes:
− Value added tax (VAT),
− Transfer tax and stamp duty,
− Excise taxes,
− Customs duties on imports,
− Tax on insurance premiums.
In the following the most important types of taxes will be presented in order to provide
a brief overview of the Spanish tax system.
Tax rates
Spain’s current standard corporate income tax rate is 35%. Special rates are applicable
to certain entities such as listed collective investment institutions, including real estate
investment funds (1%), certain cooperatives (20%) or entities engaging in oil and gas research
and exploitation activities (40%), as well as the so called asset-holding companies (40%),
which regime substituted the former fiscal transparency one.
Corporate income tax
The regulation of Corporate Income Tax is contained in the Revised Text of the
Corporate Income Tax Law, approved by Legislative Royal Decree 4/2004, of 5 March, and
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in the Regulation approved by Royal Decree 1777/2004, of 30 July. The key factor in
determining the application of corporate income tax is ‘residence’. A company is deemed to
be resident in Spain for tax purposes if it meets any of the following conditions:
− that it was incorporated under Spanish law,
− that its registered office is located in Spain,
− that its effective management headquarters are in Spain.
In the event of a conflict of residence, the provisions of Spain’s tax treaties with other
countries will, where applicable, prevail. Resident companies are taxed on their worldwide
income. Taxable income includes all the profits from business activities, income from
investments not relating to the regular business purpose, and income derived from asset
transfers. In this connection, attention should also be paid to the provisions of Spain’s tax
treaties with other countries, which, where applicable, may influence the determination of
taxation in Spain.
Non-residents’ income tax
Non-residents’ Income Tax is currently governed by the Revised Text of the Nonresidents’ Income Tax Law, approved by Legislative Royal Decree 5/2004, of 5 March. Royal
Decree 1776/2004 approved the Non-residents’ Income Tax Regulations. Both of these
establish the tax regime applicable to non-resident individuals or entities that obtain Spanishsource income.
Taxation of non-residents is dealt with separately from taxation of resident individuals
and entities. Non-resident individuals who prove that they are habitually resident in another
EU country and that they have obtained in Spain salary income and income from business
activities which amounts to at least 75% of their worldwide income, may opt to be taxed as
resident individuals.
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The key factor in determining the tax regime for non-residents is whether or not they
have a permanent establishment in Spain. This factor determines the following two ways in
which non-residents may be subject to taxation:
− income obtained through a permanent establishment:
non-resident individuals or entities that obtain income through a permanent
establishment located in Spain will be taxed on the total income attributable to said
establishment, regardless of the place where it was obtained or produced. There is a
15% tax (branch profit tax) on the remitted profits of non-residents doing business
through a permanent establishment in Spain.
− income obtained not through a permanent establishment:
Non-resident entities or individuals that obtain income in Spain not through a
permanent establishment will be taxed separately on each total or partial accrual of
Spanish-source income.
Value added tax
The Spanish VAT legislation (Law 37/1992, which came into force on 1 January,
1993) implements the EU Directives on the tax, whose main rules are harmonized in the
different Member States.
This tax is of an indirect nature, its main feature being that it does not normally imply
any cost to traders or professionals, but only to end-consumers, as traders are generally
entitled to deduct VAT borne against VAT charged.
Within the Spanish territory, VAT is not applicable in the Canary Islands, Ceuta and
Melilla. The Canary Islands Indirect General Tax (CIIGT), which came into force on 1
January 1993, is based on VAT and is an indirect general tax levied on goods and services
supplied in the Canary Islands by traders and professionals and on imports of goods. The
standard CIIGT rate is 5%. Other indirect tax (Tax on Production, Services and Imports) is
applicable in Ceuta and Melilla.
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Taxable events
The following transactions are subject to tax when carried out by traders or professionals
in the course of their business activities:
− supplies of goods, generally defined as transfers of the right to dispose of tangible
property, although certain transactions which do not imply such transfer may also be
treated as supplies of goods for the purposes of the tax,
− intra-EU acquisition of goods (in general, acquisitions of goods dispatched or
transported to the Spanish VAT territory from another Member State),
− imports of goods. These transactions are subject to the tax regardless of whether or not
the importer is a trader,
− supplies of services.
VAT rates and exemptions
VAT rates are as follows:
The standard rate is 16%, applicable to most sales of goods and services. A reduced rate of
7% is applicable, amongst others, to sales and imports of:
–
human and animal foodstuffs, except alcoholic beverages,
–
water,
–
pharmaceutical products,
–
private homes and, among others, to the following services:
•
domestic transportation of passengers and their luggage,
•
hotels,
•
restaurants,
•
theatres and cinemas.
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There is a super-reduced rate of 4% applicable to:
–
bread, flour, milk, cheese, eggs, fruits and vegetables,
–
books, newspapers and magazines not mainly containing advertising,
–
pharmaceutical specialties,
–
cars for disabled persons,
–
prostheses for disabled persons,
–
certain officially sponsored housing.
Following the EU model, certain transactions are VAT-exempt (e.g. supplies of goods
and services relating to insurance and financial activities, health, education, rental of
residential property, etc.). As these transactions imply that no VAT is charged by the trader;
their performance does not qualify for the right to deduct the VAT borne as described below.
However, other exempt transactions (mainly those related to international trade, such as
exports) give the right to deduct the VAT borne.
Place of supply of taxable transactions
Spanish VAT is levied on transactions which are considered to be performed within
the territory in which it applies. For the above purposes, the Law establishes rules to
determine the place in which a certain transaction is carried out. Thus, in the case of supplies
of goods, the general rules establish that the supply takes place in the Spanish VAT territory
when the goods are made available to the acquirer in such territory. However, if the goods are
dispatched or transported, the place of supply is generally that from which such transport is
initiated. Other specific rules apply to, for instance, supplies of goods to be installed or
assembled prior to supply, etc. With respect to services, the following cases may be
distinguished:
As a general rule, services are deemed to be supplied in the Spanish VAT territory
when the supplier has a place of business in such territory (for these purposes, see below the
concept of permanent establishment).However, there are some exceptions to this general rule,
namely:
239
–
Services related to immovable property situated in the Spanish VAT territory are
always considered to be supplied in such territory.
–
Transport services are deemed to be supplied in the Spanish VAT territory with regard
to the part of the journey taking place within the territory of application of the tax,
including its air space and territorial waters. However, specific rules apply with regard
to intra-EU transport services.
–
Certain services are considered to be supplied in Spain when physically carried out
within the Spanish VAT territory. This is the case, amongst others, of cultural, artistic,
sporting, scientific, educational, entertainment or similar activities, etc.
–
Other services are deemed to be supplied in the Spanish VAT territory when the
recipient of the service has its place of business or permanent establishment within
such territory. This is the case, for instance, with services such as transfers and
concessions of copyright, patents, licenses, manufacturer’s or commercial trademarks
and other intellectual or industrial property rights; advertising services; counselling,
audit, engineering, research, legal, consultancy, accounting, tax or other analogous
professional services; financial and insurance transactions; etc.
–
Telecommunication services and radio and television broadcasting services are also
deemed to take place in the territory in which the recipient has its place of business if
it is a trader or professional. If, on the other hand, the recipient is a non trader, Spanish
VAT will be due if the ‘effective use and enjoyment’ of the services takes place within
its territory of application.
–
Finally, other specific rules apply to services such as certain intermediation services or
works on movable tangible property, as well as for certain electronically supplied
services.
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Local taxes
A Law enacted in December, 1988, introduced a new scheme aimed at rationalizing
the local taxation system and facilitating the activity of local entities. Under this legislation,
local authorities are empowered to modify some aspects of this type of tax. This Law, which
was partially amended with effect from 1 January 2003, establishes two different types of
municipal taxes, which can be classified as follows:
Periodic taxes
− Tax on real estate (Impuesto sobre Bienes Inmuebles),
− Tax on business activity (Impuesto sobre Actividades Económicas),
− Tax on motor vehicles (Impuesto sobre Vehículos de Tracción Mecánica).
Other taxes
− Tax on erection and installation projects and construction works (Impuesto
sobre Construcciones, Instalaciones y Obras),
− Tax on increase in urban land value (Impuesto sobre el Incremento del Valor
de los Terrenos de Naturaleza Urbana).
Periodic taxes
Tax on real estate
This tax is levied annually on owners of real estate or on holders of rights ‘in rem’
thereon, based on the cadastral value determined pursuant to the Property Cadastre
regulations, at different rates up to a maximum of 1.30% for urban property and 1.22% for
rural property.
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Tax on business activity
This tax is levied annually on any business activity conducted within the territory of
the municipality. However, the following taxpayers are exempted from this tax:
− Individuals.
− Taxpayers who start a business activity within Spanish territory, during the two
first tax periods in which they carry out said activity.
− Taxpayers subject to corporate income tax and entities without legal
personality whose net sales (at group level according to article 42 of the
Commercial Code) in the previous year were under €1 million.
In the case of taxpayers subject to non-residents’ income tax, the exemption will only
apply to those operating in Spain through a permanent establishment, provided that they
obtained net sales of under €1 million in the previous year. The tax payable is calculated on
the basis of various factors (type of activity, area of premises, net revenues, etc.). The
minimum tax rates published by the Government can be adapted by the municipality.
Tax on motor vehicles
This tax is levied annually on the basis of the horsepower of the vehicle.
Municipalities may double the minimum tax rate.
Other taxes
Tax on erection and installation projects and construction work
This tax is levied on the actual cost of any work or construction activity that requires
prior municipal permission, excluding VAT and any similar taxes. The tax rate will be set by
each municipality up to a top rate of 4%.
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Tax on increase in urban land value
This tax is levied on the increase disclosed in the value of urban land whenever land is
transferred. The tax payer is the transferor of the urban immovable property. The tax rate is
set by the municipality up to a top rate of 30%. The tax base is the increase in land value
(defined as the difference between the transfer price and cadastral value). This tax is
deductible for personal income tax purposes from the transfer value of real estate.
Participation of companies in electronic administration
The Central Tax Administration and the Regional Communities have developed
systems for the liquidation of the corresponding taxes, managed by these government
administrations. Also, the use of electronic signatures allows different processes to be carried
out in different official bodies based on new technologies, with the number growing every
day.
Company accounting
Companies must maintain business accounting in order to give an accurate picture of
their assets, financial situation, and results. There is a General Accounting Plan, approved in
1990, to which companies must conform. Currently, in 2004, a Simplified Accounting System
has been approved for application to SMEs that fulfil a series of requirements.
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Social Security
The Spanish Social Security System requires businesspeople, professionals, and
workers alike to make monthly contributions to provide coverage for the following possible
events:
− Healthcare,
− Compensation for disablement,
− Unemployment Benefits,
− Wages Guarantee Fund,
− Professional Training,
− Retirement pensions and pensions for orphans and widows/widowers.
Tax rates and thresholds can alter annually in each year’s Budget. For companies it is
relatively easy to keep up-to-date with these changes by referring to the appropriate
information available from the Inland Revenue and Customs and Excise. For ease of
explanation, the data in this paragraph is for the 2004/05 tax year. Over a year, a business
owner has to make certain reports (returns) to the Inland Revenue, and to Customs and
Excise if registered for VAT. Some of these reports are made at the end of the tax year; some
are made at the end of what is called an ‘accounting period’ while others are made quarterly
or monthly. Regardless of when a return is made, it is important to ensure that the correct rate
or allowance for the relevant tax year is used, or a penalty may be faced.
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The four key tax rates
The following paragraph contains information outlining the four key tax rates and
thresholds a small business might need to be aware of.
Corporation tax
Corporation tax is the tax paid on profits in the case of a limited company or limited
liability partnership. The figures have to be declared to the Inland Revenue on a selfassessment Company Tax Return form (CT600). As an example see the Corporation tax rates
for 2004/5:
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Table 9.7 Corporate tax rates in the United Kingdom
Corporation tax rate
Starting rate
Level of profit on which rate is 2004/5
Rates
charged
allowances
On profits of £0 - £10,000
0 per cent
&
Note: from 1 April 2004
a minimum rate of 19 per
cent is charged when
profits are distributed to
non-company
shareholders. The zero
rate remains if profits are
re-invested
in
the
business.
Marginal starting rate relief
On profits of £10,001 - £50,000
19 per cent less relief
The relief is £50,000
minus the amount of
profits
multiplied
by
19/400
Small companies' rate
Marginal
small
On profits of £50,001 - £300,000
companies On profits of £300,001 - £1,500,000
19 per cent
30 per cent less relief
relief
The relief is £1,500,000
minus the amount of
profits
multiplied
11/400
Main rate
On profits of £1,500,001 and above
246
30 per cent
by
Corporation tax: The basics
Corporation tax is paid by limited companies on their profits. Corporation tax is not
payable by the self-employed but does apply to the following organisations, even if they are
not limited companies:
–
members’ clubs, societies and associations,
–
trade associations,
–
housing associations,
–
groups of individuals carrying on a business but not as a partnership (e.g. cooperatives).
If a company is liable to pay corporation tax on its profits, there are several things to
consider:
–
informing the Inland Revenue that the company exists and that it is liable for tax. This
can also be done by contacting the local Inland Revenue office,
–
filing a self-assessment Company Tax Return for the company, on which the
corporation tax liability has to be calculated and paid without prior assessment by the
Inland Revenue,
–
keeping records of all company expenditure and income in order to work out the tax
liability accurately.
Chargeable gains
Chargeable gains are the profit made when selling or otherwise disposing of any assets
owned and used by the business, which are not items bought and sold as part of normal trade.
Companies are not generally liable to capital gains tax. Instead they are liable to corporation
tax on their net chargeable gains.
247
Capital allowances
When calculating the profit chargeable to corporation tax one can claim capital
allowances for certain items of equipment and apparatus purchased for use in the business.
There are three rates of corporation tax. They are:
–
the starting rate,
–
the small companies’ rate,
–
the main rate
Calculating corporation tax
To calculate the liability for corporation tax, one is legally obliged to keep ‘sufficient’
records of the outgoings and income to make a complete and correct Company Tax Return.
Sufficient records include:
–
details of all receipts and expenses incurred in the course of a company’s activities,
–
details of all sales and purchases made in the course of trade, if the company has a
trade that involves dealing in goods,
–
all other supporting documents,
For tax purposes, the Inland Revenue requires any organisation treated as a company
to keep its records for at least six years from the end of the accounting period.
Corporation tax rates and types of allowances
Corporation tax is paid by companies and unincorporated associations (such as clubs,
societies and voluntary associations) on their profits each year. There are three key
corporation tax rates: the starting rate, the small companies’ rate and the main rate. If the
company’s profits fall between two rate bands, it will be eligible for marginal relief. This is
designed to ease the transition from one rate to the next.
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Summary of 2004/5 rates
Each of the three rates of corporation tax - starting, small companies’ and main rate relate to a level of profit. When a company’s profit level changes from one corporation tax
rate to the next, higher rate marginal relief is available to ease the transition. The table below
shows the rates for 2004/5. If the company is an associated company, i.e. it controls or is
controlled by another company then the profit levels shown in the table above may be
reduced.
Personal allowances and tax rates
For an employer, it is a responsibility to calculate and deduct the correct income tax
and National Insurance contributions (NICs) from the employees’ earnings, and to forward
these to the Inland Revenue. This is usually done on a monthly basis.
National Insurance: the basics
Most people who work have to pay National Insurance contributions (NICs). National
Insurance is distinct from income tax paid as an employed or self-employed individual.
National Insurance contributions are collected by the Inland Revenue. NICs go towards
benefits, such as a state pension and unemployment benefit - the Class of NICs an individual
pays can affect their entitlement to benefits. There are six types or classes of National
Insurance contribution.
National Insurance contribution types
There are different types of National Insurance contribution (NIC). Some are paid at a
flat rate. With others, the amount payable is linked to earnings. Class 1 NICs are calculated
using three levels of earnings set by the government - the earnings threshold, the lower
earnings limit and the upper earnings limit. The earnings threshold and the upper earnings
limit are explained below. The lower earnings limit is the level at which employees are
entitled to National Insurance benefits, even if they are not making any contributions. The
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table below shows the various different categories of National Insurance contributions and
who pays them.
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Table 9.8 National Insurance contribution (NIC) types in the United Kingdom
NIC type
Who pays it?
Basic
explanation
of
NIC type
Class
1
contributions
Primary Employees earning over
primary earnings threshold
the Employees pay Class 1
NICs at one rate on their
gross earnings over the
earnings threshold (ET)
up to the upper earning
limit (UEL) and at a
reduced rate for earnings
over the UEL. They are
‘deducted at source’
from employee's salaries.
Class 1 Secondary
contributions
Employers pay this on the salaries
of employees who earn over the
secondary earnings threshold
Class 1A contributions
Employers
Class 1B contributions
Employers
Class 2 contributions
Self-employed
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Employers pay Class 1
NICs on their
employees’ gross
earnings over the
earnings threshold at a
flat rate. There is no
UEL for employer's
NICs. These are paid to
the Inland Revenue,
usually on a monthly
basis.
Payable by employers on
their employees’ benefits
in kind which are
available for private use,
such as a company car or
private medical
insurance. These are
calculated and paid
annually.
Payable only by
employers who have
entered into a PAYE
settlement with the
Inland Revenue to
account for tax on certain
expense payments and
benefits.
Payable by the majority
of self-employed
individuals at a flat rate,
weekly, monthly or
quarterly.
Voluntary
Self-employed
Payable at a flat rate by
those who have not paid
enough NICs in the past
to qualify for certain
benefits, such as a state
pension.
Payable by selfemployed individuals
who have made a certain
amount of profit in a
year. Calculated annually
using the self assessment
tax return form.
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NICs for employers and employees
Different types of National Insurance contributions (NICs) are calculated and collected
in different ways.
Class 1 NICs
Employers are responsible for calculating, deducting and paying Class 1 primary NICs
(employees’ contributions) to the Inland Revenue on behalf of all employees earning above
the earnings threshold. These must be deducted from their salary. Employers must also
calculate and pay Class 1 secondary NICs (employers’ contributions) for all employees
earning above the earnings threshold. And employers must keep adequate records showing
how their NICs were calculated and what payments have been made for each employee.
Class 1A NICs
Employers must calculate and pay Class 1A NICs due on taxable benefits given to
employees, such as company cars or health insurance. These must be declared on form P11D
annually and a copy given to the relevant employee by 6 July after the end of the tax year.
Class 1B NICs
These are only paid by employers who have a PAYE Settlement Agreement (PSA)
with the Inland Revenue.
Class 3 NICs
These are paid voluntarily by individuals who want to protect their right to certain
benefits, for which they have not yet made sufficient contributions. Employees are
responsible for finding out if they need to pay Class 3 NICs and for setting up a method of
payment.
NICs for the self-employed
Self-employed people pay two types of National Insurance contribution (NIC): Class 2
and Class 4 NICs.
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Class 2 NICs
Most self-employed people pay Class 2 NICs, unless they earn too little or have a
certificate of exception. They are collected by the Inland Revenue National Insurance
Contributions Office, either by quarterly bills or by direct debit.
Class 4 NICs
Class 4 NICs are paid in addition to Class 2 NICs by self-employed people who make
a profit over a certain limit in the tax year. Self-employed people declare their profits annually
on a self-assessment tax return. The self-assessment supplement contains a Class 4 calculator
PAYE: The basics
PAYE (Pay As You Earn) is the Inland Revenue system for collecting income tax
from the pay of employees, including directors, as they earn it. As an employer, one needs to
deduct income tax and National Insurance contributions (NICs) from the employees’ pay and
submit the deductions to the Inland Revenue.
Employer’s responsibility for PAYE
For all employed staff, including any directors of a limited company, the employer
will need to deduct any income tax and National Insurance contributions (NICs) they owe
from their pay, before they receive it.
When to apply PAYE
PAYE (Pay As You Earn) is applied to all payments an employee receives as a result
of working for the company, including:
–
salary and wages,
–
overtime, shift pay and tips,
–
expense allowances and claims (this only applies where these are paid in cash and, for
expense payments, only if they fall within specific criteria,
–
bonuses and commission,
–
Statutory Sick Pay,
–
Statutory Maternity/Paternity/Adoption Pay,
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–
lump sum and compensation payments - such as redundancy payments - unless they
are exempt from tax.
Tax relief on other deductions
If an employee receives payments other than in cash, such as shares or vouchers,
PAYE must be applied to the cash value of such items. From April 2005, if an employee gets
childcare or childcare vouchers up to the value of £50 a week, tax and National Insurance will
not arise. This is subject to the following conditions:
–
the care used must be registered childcare or approved home childcare,
–
where a childcare benefit-in-kind scheme operates it must be available to all
employees.
Note that income tax and National Insurance contribution rates and thresholds may change
from year to year.
Employee tax codes
Each taxpayer has a personal tax code issued to them by the Inland Revenue. This will
be found on a new employee’s form P45. The code is used together with the Inland Revenue
taxable pay tables to work out how much tax to deduct from the employee.
PAYE forms - and when to use them
PAYE has to cater for many different employment and tax situations. There are basic
forms and procedures, which almost every employer needs to use to operate the system. The
entrepreneur should use these forms to keep a record of everything he/she has paid to
employees, including wages, payments and benefits. The following are some of the main
forms that are encountered.
Employee forms
There are three main forms to give to the employees, which show how much income
tax and National Insurance contributions (NICs) they have paid. These are:
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–
Wage slips - these are internal forms that are created and given to the employees to
show how their pay has been calculated.
–
Form P45 - new employees who have had a job before will bring this when they start
to work for a new employer. In turn, they receive a completed P45 when they leave,
which they pass on to their new employer.
–
Form P60 - shows the tax deducted for the whole tax year, and is given to each
employee at the end of the tax year.
Payroll administration forms
For staff employed a record must be kept of all salary payments made, including NICs.
At the end of the tax year the employer must:
–
send the Inland Revenue details of all of each employees’ pay and deductions on form
P35, together with one form P14 for each employee,
–
send the Inland Revenue details of expenses paid to employees, or benefits they have
been provided with,
–
send the Inland Revenue a completed form P11D to declare any Class 1A NICs due,
–
give each employee who has paid income tax or NICs, and is still working at the end
of the tax year, a certificate showing their pay, PAYE and NICs details,
–
give each employee a copy of the information that has been given to the Inland
Revenue about their expense payments and benefits.
Income tax rates and allowances
Those in business and employing other people or working as directors of their own
limited companies must pay income tax on the wages/salary they pay out. The amount of tax
deducted from an employee depends on how much they are paid and the current tax rates.
This is paid via the Pay As You Earn (PAYE) system. Those working for their own limited
company are taxed as an employee, so the same rules apply. If employees are paid more than
the current weekly or monthly thresholds National Insurance contributions will have to be
deducted from their wages.
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On what to pay tax on
Tax must be paid on business profits and other income. For those with more than one
business separate self-employment pages in the tax return must be completed for each one.
Business profits
The self-employed - this includes sole traders and partners in a partnership - pay tax
on their business’s profits or share of them. The first step is to add up all business income.
Then deduct all the ordinary business expenses that are allowed to be set against tax. For
example:
–
the cost of supplies,
–
rent on business premises,
–
business travel costs,
–
administrative expenses such as postage,
–
the cost of any employees
Other income
As well as the business income, other income is also taxed. For example:
–
any salary or wages, which are paid to an individual as an employee of another
business,
–
interest and dividends from any savings and investments,
–
rental income from property,
–
gains on disposals of assets.
Keeping the right record
As tax is based on business profits, it is essential to keep accurate records. By law,
business records must be kept for at least five years and ten months after the end of the tax
year the records relate to. A penalty of up to £3,000 can be charged for each failure to
maintain or retain adequate records to back up a tax return. Business records and personal
records must be kept separate. The basic records will normally include:
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–
a record of all sales, with copies of any invoices that have been issued,
–
a record of all business purchases and expenses,
–
invoices for all business purchases and expenses, unless they are for very small
amounts,
–
details of any amounts personally paid into or taken from the business,
–
copies of business bank statements.
These records are used to create a profit and loss account - which shows the sales revenue
has been received and the costs have been paid, leaving a profit or loss figure for the period
the records cover. Those registered as self-employed will be sent the Inland Revenue selfemployment pages (SA103) which must be filled in to give details of business income and
expenses. These figures are used to work out what the taxable profit is.
Income taxes
Income tax for directors
Directors of limited companies are classed as employees and will have income tax
(and National Insurance contributions) deducted from payments made to them by the business
under the PAYE (Pay As You Earn) scheme. But a company director must also complete a
self-assessment tax return. This applies even for those already taxed under PAYE or not paid
by the company at all.
Income tax for partners
In a business partnership one of the partners must complete the partnership’s tax
return. This shows how much profit the partnership has made, and how the profits are shared
between the partners. In most cases, partners in a business partnership will be taxed as selfemployed, so all partners must also complete their own self-assessment tax returns - including
the partnership pages - to show their share of partnership profit. The tax one pays as a partner:
partnership profits,
other income.
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VAT (value added tax) registration threshold and rates
VAT is a tax on sales of goods and services. VAT affects almost every business
transaction. The following paragraphs aim to explain the basics of how VAT works, what
needs to be done to meet the obligations, and where more information and advice can be
obtained.
VAT registration
An entrepreneur must register his/her business for VAT if it supplied taxable goods
and services amounting to more than £58,000 in the last 12 month period, or if it is anticipated
that it will supply taxable goods and services amounting to more than £58,000 in the next 30
day period alone. Businesses with a turnover below this threshold can register voluntarily.
Rates of VAT
Knowing how much VAT should be charged on a sale is an important part of meeting
the VAT obligations. There are three rates of VAT:
–
a standard rate, 17.5 per cent (e.g. most goods and services),
–
a reduced rate, 5 per cent (e.g. fuel and power used in the home and by charities, and
for women’s sanitary products),
–
a zero rate, 0 per cent (certain goods and services on which one does not need to
charge VAT).
Certain goods and services are classed as exempt and no VAT is charged to the customer.
The crucial difference between goods that are zero-rated and goods that are exempt is that if a
business supplies only goods and services that are exempt, then it cannot register and claim
the VAT back on purchases. If a business supplies goods or services that are both taxable and
exempt, then it is classed as ‘partly exempt’. This means that it cannot normally reclaim all
the VAT on purchases.
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VAT returns and payments
Businesses usually account for VAT on a quarterly basis. When a business registers it
will be assigned a tax period and Customs and Excise will automatically send it a VAT return
to coincide with the end of this period. Alternatively, it can submit the return via the Customs
and Excise website and arrange for an electronic payment.
Tax advantages for those starting up in business
New businesses can benefit from a variety of tax allowances and reliefs, which can cut
their tax bill. They include:
–
capital allowances for investment in equipment and premises,
–
tax relief and credits for spending on research and development,
–
stamp duty relief in disadvantaged areas.
However these tax advantages are not granted automatically. The entrepreneur needs to
find out what can be claimed and then apply for them. There is a range of tax advantages
which businesses may be able to use to reduce their tax bill. The table below gives a brief
overview of what is available and how it could benefit a business.
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Table 9.9 Tax advantages in the United Kingdom
Tax advantage
How it works
Capital allowances
A proportion of the cost of the purchase of certain
types of premises and equipment from a business’s
taxable profits is deducted over several years. Many
small and medium-sized businesses qualify for
higher rates of capital allowances on equipment in
the year of purchase.
Tax relief on computers lent to Unlike most assets loaned to employees, tax or
employees
National Insurance contributions need not be paid
on the value of any computer worth up to £2,500
that is lent to an employee.
Tax relief and credits for research Qualifying small and medium-sized companies can
and development
deduct an allowance of 150 per cent of appropriate
research
and
development
spending
when
calculating their taxable profits. If a company is not
in profit it can exchange qualifying research and
development losses for a cash payment from the
government.
Stamp
duty
exemptions
disadvantaged areas
in Businesses in specified disadvantaged areas are
exempt from stamp duty on property transactions up
to £150,000 and on all commercial property
transactions.
Enterprise Investment Scheme
This scheme helps certain types of small unquoted
companies to raise capital by providing tax relief for
investors in these companies.
Accounting and audit exemptions for small companies
Small and medium-sized companies and limited liability partnerships (LLPs) can
benefit from a relaxation of the general requirement to supply full, audited accounts once a
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year to Companies House. In many cases they can prepare and file shortened versions of their
accounts. Some very small companies and LLPs do not need to have their accounts audited at
all. The following sets out which companies and LLPs qualify for these arrangements and
details what information they must provide to Companies House. It also outlines the audit
exemption for dormant companies and LLPs.
Circumstances to file abbreviated accounts
In most cases, small and medium-sized companies and limited liability partnerships
(LLPs) are entitled to submit abbreviated accounts to Companies House - which means they
have to provide less information. Even if a company or LLP stops being small or mediumsized through expansion, it will still be regarded as such for one financial year afterwards. If it
then reverts to being small or medium-sized the following year, the exemption will continue
uninterrupted.
Abbreviated accounts for small companies and LLPs
The abbreviated accounts of a small company or LLP do not have to include the full
balance sheet, profit and loss account or director’s report normally required by Companies
House. But they must include:
–
an abbreviated balance sheet and notes explaining in more detail the make-up of the
figures in the balance sheet,
–
a special auditor's report – unless the company also claims audit exemption.
The auditor’s report must state that in the auditor’s opinion the company is entitled to
submit abbreviated accounts in line with the relevant section of the Companies Act. The
balance sheet must include a statement that the accounts are prepared in accordance with the
special provisions in part VII of the Companies Act relating to small companies and LLPs.
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What audit-exempt companies and LLPs must send to Companies House?
If a company qualifies for an audit exemption, it can deliver unaudited accounts to
Companies House in the form of an abbreviated balance sheet and notes. The notes must state
that:
–
the company or LLP was entitled to an audit exemption for that year under the
relevant section of the Companies Act,
–
in the case of companies, shareholders have not required the company to obtain an
audit,
–
the company directors or LLP members acknowledge their responsibility for preparing
accounts that comply with section 221 of the Companies Act,
–
the company directors or LLP members acknowledge their responsibility for preparing
accounts which give a ‘true and fair view’ of the state of affairs of the company and of
its profit or loss for the year,
–
the accounts have been prepared in accordance with the special provisions of the
Companies Act relating to small companies and LLPs.
The audit exemption also applies to Company Tax Returns (CT600). This means
companies can also submit the unaudited accounts they prepare for Companies House to the
Inland Revenue.
Audit exemptions for dormant companies and LLPs
A company or LLP is dormant if it has had no ‘significant’ accounting transactions
during a financial year. Some dormant companies and LLPs cannot take advantage of audit
exemptions. They include regulated financial companies and insurance market businesses. If a
company or LLP is dormant, it can generally claim exemption from sending in audited
accounts and need only prepare and deliver an abbreviated balance sheet and notes to
Companies House. A company does not have to include a profit and loss account and
directors’ report in dormant company accounts, but a directors’ report must be provided to
shareholders. Unaudited dormant accounts are much simpler than those of a trading company
or LLP. However, they must contain:
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–
an abbreviated balance sheet stating that the company or LLP was dormant throughout
the accounting period,
–
for a company - any previous year’s figures for comparison,
–
for an LLP - the previous year’s figures for comparison,
–
notes to the balance sheet - covering a wide range of information (the information
required differs for companies and for LLPs).
Additional taxes
Stamp duty: the basics
Stamp duty is chargeable in respect of:
–
transactions on the transfer of land, or interests in land,
–
grants or assignments of leases,
–
transfers of chargeable securities - such as shares in companies.
The amount of stamp duty is calculated on the amount paid - or cash value if paid other
than in cash - of the transfer and is paid by the purchaser. There are two distinct types of
stamp duty for most businesses. Stamp Duty Land Tax may be due if a business buys or
leases premises and is an additional cost to take into account when acquiring both business
and private premises. Stamp Duty Reserve Tax may be due on the purchase of shares and
securities.
Stamp Duty Land Tax
Stamp Duty Land Tax replaced stamp duty on purchases of houses, flats and other UK
land and buildings and certain leases as from 1 December 2003. In many ways, it is similar to
stamp duty but there are some differences. Under Stamp Duty Land Tax, it is no longer
necessary to send documents in for stamping - instead, a solicitor or licensed conveyancer will
ask to sign a new return. This new return is called ‘the land transaction return’. The completed
return will contain all the information required by the Inland Revenue regarding the purchase.
The buyer or tenant is responsible for the return and payment of the Stamp Duty Land Tax.
Normally the completion of the form and its submission will be handled by the solicitor or
licensed conveyancer acting for the individual making the purchase. Upon receipt of a
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completed return and payment of Stamp Duty Land Tax, the Inland Revenue will issue a
certificate. This certificate must be sent to the appropriate land registry - previously the
‘stamped’ documents had to be submitted. Stamp Duty Land Tax transactions fall broadly
into two categories - buying land or premises and lease of land or premises.
Business rates
Businesses and other people who occupy non-domestic premises pay non-domestic
rates, often called business rates, to help fund local services provided by local authorities, e.g.
police and fire fighting. Anyone using a building or part of a building for business will
probably have to pay business rates. Since 1990, businesses have been assessed differently to
domestic properties. Domestic properties pay council tax, which is set by local councils.
Businesses are given a rateable value, which, in conjunction with the multiplier, or Uniform
Business Rate (UBR) set nationally for each country in the UK, produces the business rates
liability. In England, rateable values are assessed by the Valuation Office Agency (VOA) and
the multiplier is set by the Office of the Deputy Prime Minister.
Business premises
Business or non-domestic premises include most commercial properties, such as
shops, offices, pubs, warehouses and factories. If part of a building is used for business and
part for residential purposes - such as a shop with a flat above or a solicitor’s office in a
domestic property - the part used for business counts as non-domestic premises. So, for those
living and working in the same premises, business rates are generally paid on the part of the
property used for business, and council tax on the residential part. Most business premises are
subject to business rates, but the following are exceptions:
–
churches,
–
fish farms,
–
most farmland and farm buildings,
–
moveable moorings,
–
public parks,
–
sewers,
–
some types of property used by the disabled.
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Capital Gains Tax
Capital Gains Tax (CGT) is charged to individuals on gains made from selling, or
disposing of assets. Limited companies are charged corporation tax on gains such as these.
Understanding CGT can be important for those looking to build up and then sell a business
and use the proceeds to fund retirement. For many people, selling or transferring a business
may make them liable to pay CGT on the gains, including their share of partnership assets.
The term asset covers property, shares, machinery and the goodwill of a business. CGT is
complex and varies according to the specific circumstances.
Capital gain
A capital gain is the increase in an asset’s value when one sells or disposes of it,
compared to what one paid for it. So, if an item that is sold or ‘disposed’ of is worth more
than what was originally paid for it, then Capital Gains Tax (CGT) might be chargeable. If a
capital gain is made certain allowable expenses can be offset against it. Even if no money is
actually received when disposing of an asset, giving it away to somebody might still mean it
is liable to CGT. If an asset is transferred to another person, other than as a genuine
commercial transaction, at below the market value, the chargeable gain calculation will be
based on the market value, rather than the actual proceeds received. Any gains made in a tax
year can be offset by allowable capital losses. There are other allowances and reliefs that can
reduce the amount of tax paid, including annual allowance and taper. There are also certain
situations where exemptions from CGT are allowed. CGT is complex and varies according to
circumstances.
Annual allowance and taper relief
There are various adjustments that can be made to the basic chargeable gains figures to
work out how much Capital Gains Tax (CGT) must be paid. To begin with, CGT is not
normally payable on the sale of ones own home, or on transfers between husband and wife.
Allowable losses can be offset against applicable gains, to arrive at a net total for the tax year.
The loss must have been claimed (i.e. reported to the tax office) within five years and ten
months of the end of the tax year in which they were incurred, starting from 1996/97.
However, there is no time limit on when the losses have to be used. Before losses can be
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offset against gains, the Inland Revenue must be notified of them. If the net total is equal to or
less than the annual exempt amount, it is exempt from CGT. The annual exempt amount for
the tax year 2004/05 is £8,200. Any unused losses, including those that have been brought
forward, can be carried forward again. There is also a reduction based on how long the asset
has been held. This is called taper relief. For example, if a business asset is held for one whole
year, the chargeable gain, after allowable losses, is reduced by 50 per cent. After two or more
whole years the reduction is to 25 per cent. Different sorts of assets have different taper
reliefs. For example, relief is reduced, or not allowed at all, on non-trading activities - such as
investing money in property or other businesses. There are also certain situations where
exemptions from CGT are allowed.
Taxes for specific products, services and activities
There are a series of taxes that apply to specific products, services or activities.
These include air passenger duty, duty on road fuels, environmental taxes, insurance premium
tax and gambling duties:
–
transport,
–
air passenger duty,
–
excise duty on road fuels and other oils,
–
congestion charge,
–
lorry road-user charge,
–
tobacco and alcohol duty.
Environmental taxes
Environmental taxes are designed to discourage business practices which damage the
environment and promote more environmentally-friendly ones, such as recycling waste and
aggregates, and being more energy efficient. These taxes include:
–
aggregates levy - a tax on sand, gravel and rock commercially exploited in the UK,
–
climate change levy - a tax on commercial and industrial users of energy,
–
landfill tax - a tax on any business or local authority that wants to dispose of waste
using a landfill site.
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Insurance premium tax
Insurance premium tax (IPT) is a tax on insurance premiums. There are two rates of
this tax:
–
a standard rate of 5 percent,
–
a higher rate of 17.5 percent.
All types of insurance risk located in the UK are taxable unless they are specifically
exempted.
Betting and gaming
The Government has begun to overhaul betting and gaming duties and also plans to
extend social regulation to gambling on the Internet, interactive TV and through mobile
phones for the first time.
Trading online
Conducting business online generally makes no difference to the taxes one has to pay.
One key difference is that digitised products are classed as electronically supplied services for
VAT and customs duties. These services are:
–
downloaded software,
–
downloaded images, text or information,
–
electronic publications,
–
downloaded music, films and games,
–
electronic auctions,
–
supply of websites or web-hosting services.
Research and development tax reliefs
If a company is a micro, small or medium-sized company it may be able to claim an
enhanced deduction when calculating the taxable profits of up to 150% of the qualifying
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expenditure on research and development (R&D). It may also be able to surrender losses
arising from expenditure on R&D for a payable credit. (http://www.businesslink.gov.uk)
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ANNEX IV.1 Administrative burdens as regards financial issues
Regulations ensure transparent and stable conditions for market competition of firms
but on the other hand they can impose significant burdens on firms, for example through the
high administrative requirements. These problems can be particularly true in the context of
the different taxation systems which often benefit some favoured social groups while
disadvantaging others. In addition, as the experts of the World Bank emphasize “tax
administration can be burdensome, increasing compliance costs, reducing revenues, and
opening the way to corruption” (World Bank 2005:95.).
Despite the fact that governments need revenue in order to ensure the costs of public
goods and services, taxes represent serious financial and administrative burdens to both
individuals and firms. Historically, governments and states have collected revenues in various
ways – first by introducing taxes on several domains: land, production, transactions,
consumption and income. Effective tax structures and tax rates, which vary from country to
country, may strongly influence the economic performance and competitiveness of SMEs.
Box 9.5 Who pays taxes levied on firms?
When governments levy taxes on firms, firms will often pass the costs of the tax on to
others. For example, if government levies a payroll tax on firms, increasing the cost of hiring
workers, firms will hire fewer workers. As unemployment increases, real wages will fall (or
increase more slowly than they would have otherwise), passing the cost of the tax on to
workers. So workers ultimately bear some of the tax burden in the form of lower wages, even
though the tax is levied on the firm. Part of the burden might also be passed on to the
consumers through higher prices.
The incidence of this has been especially controversial for corporate taxes. Although
corporate income tax is often seen as a tax on capital, and the popular press often suggests
that raising corporate taxes is necessary to make firms “pay their fair share”, labour bears a
large part of the burden of corporate tax in the United States. Because labour’s share of the
corporate tax burden is higher when capital is more mobile, labour may bear a greater part of
the burden in developing countries than it does in the United States. As capital becomes more
mobile – and multinational firms become more sophisticated in their tax minimalization
strategies – the share of the corporate income tax falling on labour will likely increase.
(World Bank 2005:108.)
270
ANNEX IV.2. General principles for the design of company tax systems
It is common ground between economists and tax experts that an ‘ideal’ company tax
system has to be equitable, efficient, simple, transparent, effective, and provide certainty.
These inter-related general criteria can usefully serve as basis for the analysis of company
taxation in the EU to be carried out in this study.
Equity
The requirement of equity has two dimensions. ‘Vertical equity’ refers to the redistributive feature of a tax system, i.e. to its capacity to operate a distribution of the tax
burden among taxpayers according to their contributive capacity (‘ability-to-pay-principle’).
‘Horizontal equity’ holds that taxpayers who are in the same economic circumstances should
receive an equivalent tax treatment. The concrete perception of these concepts is strongly
related to societal values such as solidarity and fairness. Vertical and horizontal equity
therefore strongly condition the political acceptability of a tax system. In the context of
international company taxation, equity mostly relates to the fair allocation of the tax base
between states in which international companies operate.
Inter-country equity traditionally involves three main principles: source-country entitlement,
non-discrimination and reciprocity. Under the ‘principle of source-country entitlement’ the
source country has the prior right to tax profits earned within its jurisdiction. This principle
can be justified for efficiency reasons and it can help to achieve some redistribution of
resources across countries, since the proportion of foreign-owned businesses is generally
higher in relatively poor countries than in richer ones. It is also sometimes justified as a quid
pro quo for the provision of public infrastructure and services in the source country. The
‘principle of non-discrimination’ implies that countries agree, usually on a bilateral basis, not
to discriminate against foreign firms and shareholders in their tax laws. This principle is
strongly linked to horizontal equity, since the same tax treatment is applied to similar
companies independently of nationality considerations. The ‘principle of reciprocity’ can, for
instance, be illustrated by the requirement of equality of the rates applied to any withholding
tax levied on interest, dividends and royalties by states involved in a tax treaty. Reciprocity
applies to any tax arrangement which leads to similar effective tax burdens on foreign-owned
investment. This is particularly relevant when states have strongly differing tax rules and
practices.
271
Efficiency
Generally, taxes should be neutral and influence in as limited a measure as possible
economic decisions, for example the choice of location of an investment. Otherwise,
economic activities may not take place in the lowest cost location by the lowest cost
producers. Investing in a low tax jurisdiction may yield higher after-tax returns on capital than
a similar investment in a high tax jurisdiction despite a lower productivity of the inputs used.
The result of locational inefficiency is thus a lower level of productivity of capital, and
reduced international competitiveness and growth for the EU as a whole. Therefore, an
efficient tax system is in principle neutral to economic decision-making.
Tax systems can however be used to correct or mitigate a market failure. To the extent
that there are other distortions or imperfections in the market economy, taxes may offset these
externalities, thereby enhancing economic efficiency. A typical example would be negative
environmental consequences, not fully taken into account by an individual agent, which an
imposed tax would mitigate by decreasing the activities harmful for the environment. There
are also other instances when national governments will try to reduce existing (non-tax)
incentives through the use of the tax system. A good company tax system should avoid
distortions with regard to location, etc., unless these are deliberately decided (e.g. in economic
‘free zones’ which are designed to boost economic development).
Under ‘capital export neutrality’ a tax system does not affect the decision by any
specific company as to which country to invest in. Resident investors in a given country have
no incentive to invest at home rather than abroad, or vice versa. The domestic/foreign
composition of the investment income does not influence the world-wide tax thereon. Other
things being equal, capital mobility would then tend to equalise the required pre-tax rates of
return on investment across Member States, thereby eliminating differences in the cost of
capital, and thus distortions in the demand for capital in the EU. Capital export neutrality
could be achieved if income were taxed only in the investors’ country of residence and if
there were no discrimination between domestic and foreign-source income in the capitalexporting country. This could be achieved if all countries applied the ‘world-wide’ or
‘residence’ principle, that is, levied taxes on the income accruing to their residents regardless
of the source of that income.
A tax system achieves ‘capital import neutrality’ when all investors, both domestic
and from foreign countries, investing in any one national economy face the same after-tax rate
of return on similar investments. This implies that the cost of capital and the tax rate for any
272
inbound investment must not depend on the home country that is the country of residence of
the investor. In fact, the application of the residence principle can lead to cases where a
domestic company investing in a given country is placed at a competitive disadvantage
compared to a similar foreign company investing in the same country – because the tax rates
applied in their home countries are different. Therefore, in order to avoid distortions of
competition and to achieve capital import neutrality, income should be taxed according to the
‘source’ or ‘territorial’ principle. According to this principle, a government should tax all
income originating within its jurisdiction at the same rate, regardless of the origin of the
beneficiary of the income. Inefficiencies do not only arise due to different tax treatments of
cross-border investments. There may also be distortions in the decisions for the types of
investment, as tax treatments applied to the assets used by companies or to the sources of
financing of investment may vary considerably within and across countries.
Effectiveness
The effectiveness of a tax system refers to its capacity to achieve its basic objectives to generate the desired level of revenues and to set the desired economic incentives. The
effectiveness of a given tax system strongly depends on its interactions with other tax
systems. For instance, measures like reduced statutory rates, accelerated depreciation
allowances or investment tax credits may improve the international competitiveness of a
country both by reducing the overall tax burden of domestic firms and by attracting foreign
investments. However, in the case of a foreign multinational firm taxed on a residence basis in
its home country, tax cuts in the country of source would have no effect on their total tax
burden and, therefore, on investment. It would merely shift tax revenues from the source
country to the home country of this firm as, under the credit method usually linked to the
residence principle, firms receive a full credit for taxes paid abroad. The reduction of the tax
liability in the host country is thus simply compensated by an increase of the tax liability in
the home country (via a smaller tax credit).
It is self-evident that tax incentives (e.g. for investment) will, when efficient, directly
reduce tax revenues, although, depending on the type of measure, the revenue reducing effects
may vary significantly. The indirect trade-off is more complex. Foregone tax revenues, i.e.
‘tax expenditures’, may be partially or fully offset as a consequence of an increase in
investment and in the international mobility of tax bases, which in turn directly and indirectly
generate increased tax revenues.
273
Simplicity, certainty and transparency
The requirement of a ‘simple’ tax system is relatively straightforward. It implies the
minimisation of the costs linked to the operation of the tax system. These costs are
‘compliance costs’ for the taxpayers and ‘administrative costs’ incurred by the administration
to enforce the law. Administrative and compliance costs are intrinsic to any tax system:
governments have to raise revenues and taxpayers have to comply with tax rules. However,
one might wonder what amount of cost is proportionate for meeting these objectives.
Generally, these costs are higher for international transactions involving more than one tax
administration than for purely domestic operations. For instance, even the mere co-existence
of two simple but conflicting principles – source or residence taxation – in principle creates
cases of double taxation or unintentional double exemption that can only be overcome by
appropriate – usually complex and costly - international agreements. The criterion of
simplicity is thus linked to efficiency and effectiveness. Simple tax systems do not only mean
relatively low costs; they usually do not provide intentional preferential tax regimes or
unintentional tax arbitrage or tax avoidance opportunities. They may, however, also imply a
loss of equity.
The requirement of simplicity also requires that the rules according to which taxes are
levied are certain and clear to the taxpayer. Certainty relates to the stability of a tax system
and of tax practices in a country. The uncertainty resulting from frequent changes in tax
legislation and its interpretation has, as such, a negative or delaying impact on investment
decisions. Simplicity and certainty are generally linked to the criterion of transparency of the
laws, regulations and administrative procedures of a tax system. Transparency usually
supports equity. For instance, it can help to avoid the replacement of direct State aid by tax
incentives offered by administrations on a discretionary basis. Moreover, the transparency of
a tax system is generally important for ensuring the accountability of policy-makers.
Source: European Commission 2001:26-28.
274
ANNEX IV.3 Tax measures to improve labour market performance since
the mid-1990s: individual countries’ experiences
Shifting the tax burden from labour to capital or to a broader tax base
Several countries have recently shifted the tax burden away from labour intensive
activities in order to give a further boost to the demand for labour. Some EU countries have
recently lowered the generous tax allowances granted through corporate income tax for the
depreciation of equipment investment, thus rebalancing the relative cost of labour and capital
(e.g. Germany and Denmark). Since 1999, the French government has been gradually
removing the wage component from the base of the local business tax (taxe professionelle), a
process which is supposed to be completed in 2003. Furthermore, the tax base to fund
contributions for health insurance and family allowances has been progressively extended
from labour to capital income (Contribution sociale généralisée). In Italy, the 1997-98 tax
reform eliminated some employers’ compulsory health contributions, bringing the overall
employers’ contribution rate down to 34.1 from 46.4 per cent. At the same time a new tax,
IRAP, based on expenditure was introduced.
Lowering indirect taxes on labour intensive activities.
The European Council adopted in 1999 an EC directive granting an option to those EU
countries who wish to do so to apply a reduced VAT rate to certain labour intensive services,
for the period 2000-02. The objective is to stimulate demand for these services, and thus
employment, and to bring part of the informal economy back to the surface. Activities
targeted are: (i) small repairs to bicycles, footwear, leather articles, clothing and household
linens; (ii) renovation and repairs to private housing; (iii) window washing and cleaning of
private homes; (iv) home health care; (v) hairdressing. Nine countries have seized this
opportunity: Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal,
and the United Kingdom (for the Isle of Man only).
… and enhanced tax incentives to work
EU countries have implemented a large array of tax measures to enhance incentives to
enter into employment or to increase work efforts. Cuts in marginal rates on labour income
have been a key device aimed at boosting the supply of labour across the board (Austria,
275
Germany, Ireland, the Netherlands, Spain, Sweden and the United Kingdom), or targeted on
the lower income groups (Denmark, France, Finland, Italy and Portugal).
Tax reliefs to make work more attractive for targeted groups of the population (spouses and
low-paid workers in most cases).
An earned income tax credit (EITC) and/or a tax relief for childcare expenses have
been introduced or raised in Belgium, Finland, Germany, Italy, the Netherlands and the
United Kingdom. To improve a second earner’s incentives to enter work, Ireland is switching
gradually from a joint to an individual assessment of married couple income. France,
Germany, Greece, and Spain have also recently raised the general personal income tax
allowance, thus exempting the income of most low-qualified workers from taxation. In
addition, to lessen the unemployment trap, a few countries have removed some of the tax
privileges granted to out-of-work benefits, or introduced a progressive phase-out scheme for
means-tested benefits or tax breaks. Unemployment benefits became taxed in Spain in 1994.
In France from 1999, people who qualify for the basic income support (Revenu Minimum
d’Insertion), are granted a temporary exemption for the tax on rented flats (taxe d’habitation)
once they find a job. In 2001, an employment bonus (Prime pour l’emploi) delivered through
the tax system is being introduced and is expected to benefit up to 10 million people. As a key
element of the United Kingdom’s Welfare to Work programme, the qualifying ceiling for
several in-work support schemes has been raised and the phase-out rate lowered.
Source: Joumard 2001:12-13.
276
ANNEX IV.4 Reforming VAT: moving from the destination to the origin
principle?
50. Since the common VAT system was introduced in the 1970s, its declared objective
has been to create the conditions necessary for the establishment of an internal market
characterised by healthy competition, under which the taxation of imports and the nontaxation of exports in intra-Community trade would be abolished. This commitment
underpinned the objective of designing a VAT system which was tailored to the internal
market and operated within the EU area in the same way as it would within a single country,
i.e. to introduce a system of taxation where goods and services would be taxed in the Member
State of origin. However, in practice, such a radical change has not secured the necessary
support from Member States. Foremost amongst the reasons for this are reservations about the
efficiency of the necessary clearing mechanism for the distribution of VAT receipts, and the
degree of harmonisation of rates that such a regime would necessitate. Nevertheless, the
elimination of custom controls within the EU area in 1993 made it necessary to reform the
VAT system operating up to then according to the destination principle. It was thus decided to
adopt a ‘transitional’ system which would enable controls at the Community’s internal
borders to be abolished whilst allowing tax, in most instances, to continue to be collected in
the Member State of destination.
51. The destination principle. The destination principle implies that consumption taxes are
levied where the products are consumed, for both final consumers and producers. This system
ensures production neutrality, since indirect taxes do not discriminate between foreign and
domestic producers, and exports are exempt from domestic taxation. However, this principle
requires the monitoring of cross-border trade flows and administrative co-operation since
goods and services travel free of tax.
52. The origin principle. The origin principle implies the taxation of goods and services
where produced, regardless of where they are consumed. It has advantages in that it can be
applied without border controls, and since exports would no longer travel tax free, the
potential for tax fraud would be lower. However, the origin principle introduces the
possibility for the tax system to discriminate between domestically-produced goods and
277
imports. A full move from the destination to origin principle would also induce significant
changes in the distribution of VAT revenues across countries. EU countries with a trade
surplus vis-à-vis the EU area would thus collect extra VAT revenues, compared with the
existing regime of export zero-rating, while deficit countries would have to be granted a VAT
credit on their intra-community business purchases. To ensure that VAT receipts accrue to the
country where consumption takes place, a mechanism to redistribute VAT revenues across
countries would thus be required. In 1987, the Commission proposed to set up a ‘clearing
house’ which would make the necessary adjustments based on detailed records of individual
transactions. This would have required numerous information exchanges and transaction
costs. The Commission thus later proposed a mechanism to reallocate VAT collected, using as
a basis aggregate consumption, to ensure that VAT receipts accrue to the EU country where
consumption takes place, thus compensating countries for VAT paid on goods that are
exported. However, the choice of a method, and statistical sources, to measure aggregate
consumption would become a delicate issue, in particular as to the size of the underground
economy, each country preferring an estimate of taxable consumption which would maximise
its share of the redistribution of overall VAT income (European Commission, 1998b). In
addition, such a system would have the drawback (ECO/WKP(2001)27 47) of disconnecting
tax collected in a particular country from its tax revenues, thus reducing national tax
authorities’ incentives to improve compliance.
53. A ‘transitional’ dual system. Instead, the European Union has kept a dual system since
1993: the destination principle has remained intact for the business sector, but the origin
principle now applies to cross-border purchases by individuals. Individuals can now purchase
goods anywhere in the EU area, without any further tax liability being incurred when they
move the goods from one EU country to another (with the exceptions of new vehicles and
mail order transactions). Such a dual system attempts to fulfil the requirements of an internal
market without frontiers whilst allowing room for manoeuvre at the national level as regards
the establishment of VAT rates and the collection and auditing of the tax (European
Commission, 1998b). The transitional regime replaced custom controls by the obligation, for
all EU firms exporting to another EU country (B2B and B2C distance selling), to declare their
exports to the tax administration, identifying the buyer by a VAT identification number (or
giving their own identification number in the country of destination in the case of distance
selling). A computerised system for automatic exchange of information on the value of intra-
278
EU trade was set up among the national authorities (VAT information exchange system,
VIES.
Source: Joumard 2001:46-47.
279
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281
PART V. LABOUR RELATIONS IN A COMPARATIVE
PERSPECTIVE – SPECIAL FOCUS ON THE SME SECTOR
10. Varieties of patterns in European labour relations
Prior to identifying and understanding the main features and trends in the development
of labour relations34, we would like to stress the core importance of social dialogue in the
construction of the European social and economic space. Adopting the importance of the
partnership approach both at EU- and national level (Member States), we recognise the joint
responsibility of various actors for the necessary social and economic changes within the
context of intense globalised competitive pressure.
Implementing new forms of working and employment conditions often referred to as the
‘flexible’ practice of knowledge and manpower use requires permanent efforts from the social
actors to make a consensus both on the new priorities and on the transformation of the old
ones. In this context of change, we intend to draw attention to the strong interactions taking
place between social actors and institutions of the Labour Relations System (LRS). In
mapping the changing diversity of the characteristics of the LRS, we would like to use the
following analytical dimensions:
1. Social actors, that is trade unions, employers’ organisations, and other types of interest
representatives associations.
2. Institutions, that is collective agreements (e.g. coverage rate, level of coordination),
wage bargaining, institutions of employees’ participation (e.g. works council), national
tripartite institutions, industrial action (e.g. strikes).
3. Reciprocal conditioning relation between social actors and institutions.
34
In the publications representing the mainstream views the term ‘industrial relations’ is used almost
exclusively. Contrary to this practice, we intend to use ‘labour relations’ instead of the notion of ‘industrial
relations’. In our view, the term ‘labour relations’ seems to us to be more general and it indicates the growing
importance of the idea and practice of social partnership not only in the field of traditional industrial economic
activities but in the service sector and especially in the fast growing branches of the New Economy.
282
Beside the descriptive analyses of the roles of actors and institutions, we intend to
identify and illustrate several trends (decentralisation, changing forms of coordination and
cooperation, etc.) which are shaping the present and future practice of labour relations at
European and country level, and especially in the SME sector. In other words, we would like
to give some insights both into the dynamic process of social relations between actors and
institutions and in their changing social and economic environment. The first section (10.1.)
of this chapter provides a general overview of the up-to-date analysis of the actors (e.g.
interest representative organisations both of employees and employers) and the formal
institutions of the LRS (e.g. collective bargaining coverage rate, etc.). The second section
(10.2.) offers a review of the actors’ on the everyday social and employment practice of SMEs
in relation to various institutional characteristics of the LRS.
10.1 Actors and institutions: an international comparison at European and country levels
10.1.1. Trade unions and institutions (Works Councils) of employees’ participation
Before giving a general outline of the main characteristics of actors and institutions it
is necessary to make a distinction among national LRS according to the roles of the trade
unions and the employees’ participation in the firm. According to these two dimensions the
following patterns should be distinguished at the European social space (Industrial Relations
in Europe 2004: 21):
1. The ‘single channel system’, where the workplace representation of employees (i.e.
rights to information, consultation or co-determination) is controlled exclusively by
the trade unions. The advantage of this system for employees’ representation relies in
its simplicity and the lack of rivalry between the two channels of employees’
workplace representation (e.g. Poland and UK illustrate well the ‘single channel
systems’, but based on the voluntary principle.) However, the ‘single channel system’
of employees’ representation does not deal with the problems of non-union members,
and employees in non-unionised firms are excluded from the collective representation
(e.g information, consultation and/or co-decisions).
283
2. The so-called ‘mixed’ channel system in which the workplace representation of the
non-union members is achieved by the trade unions or through a supplementary
channel in the non-unionised companies (e.g. in Poland the government supports the
establishment of works councils, independent from the trade unions because of the
opposition of both certain unions and employers.)
3. In the case of the of the ‘dual channel system’ the Labour Law provides a separate
channel of employees’ participation – additional to trade union representation. This
duality of LRS characterises the majority of countries participating in the Leonardo
Project: Belgium, France, Germany, Hungary, Slovakia, Spain and Poland (in this
latter country works councils exist only in publicly owned firms). In the countries
where the ‘dual channel system’ operates, a kind of rivalry was found between the
works council and trade unions. (Makó 2001.) However, “in reality lay union officials
and representatives tend to play a leading role in the councils and councils may be a
recruitment ground for trade unions. Works councils tend to be highly unionised and
in council elections the trade union candidates tend to attract votes from members and
non-members alike. Another encouraging sign is that voter turnout in workplace
election tends to be high, between 65 and 85 % …in the new Member States (NMS)
only …in Hungary and Slovenia are councils comparable with the fully-fledged types
in EU-15.” (Industrial Relations in Europe 2004: 21 - 23).
This section provides an overview of the trade union density rates35 and on union
structures and affiliation. In relation to density rates, significant differences were identified
betweens the global economies of Europe, USA and Japan and among the countries of the EU
25. As we expected, the union density rate (2001) is much higher in the EU (25) 26.4 % in
comparison with USA 12.9 % and Japan 20.9 %. Among the countries participating in the
Leonardo project substantial differences were found, too. The highest unionisation rate was
registered in Belgium 55.8 % (2001) followed by Slovakia 35.4 % (2002) and the UK 30.4 %
(2002), then Germany 23.2 % (2002) and Hungary 19.9 % (2002). (2001). The lowest trade
union density rates were identified in Poland 14.7 % (2001) and France 9.7 % (2001). In
addition, we must note that the union density rates vary substantially in the private and public
sectors. For example in Hungary, France, Poland and Slovakia more than every second union
35
‘Density rate’ or ‘unionisation rate’ reflect to the number of trade union members.
284
members works in the public sector. The higher density rates in the public sector are
explained partly by the institutional heritage of the past in the post-socialist countries which
became EU members (1st May 2004) and the difficulties of trade unions in recruiting
members in the private sector, especially in the SME sector and in the newly established firms
(i.e. companies established in the form of “green-field” investments). (Makó-Novoszáth
1995.) (Table 10.1) It is worth mentioning that density rate is only one proxy indicator of the
trade union influence. Beside this indicator there are other indices like mobilisation rate and
the organisational comprehensiveness. For example militant trade unions with low density
rate may increase their bargaining power using strong mobilisation capacity. Similarly, trade
union confederations which are individually rather weak, but able to cooperate and coordinate
their policies and activity with other confederations (i.e. organisational comprehensiveness)
could strengthen their bargaining position towards with employers’ association and
government.
285
Table 10.1 Trade union density rates and membership composition, 1995-2002
Union density rates
1990
1995
2002
Belgium
53.9
55.7
55.8*
Change
19952002
+0.1
France
10.1
9.8
9.7*
Germany
31.2
29.2
Spain
14.7
Hungary
Share of all members
Female
Public
n. d.
n. d.
-0.1
48.3**
66.3**
23.2
-0.9
31.2
39.3
16.3
14.9 (1999)
-0.1
n. d.
31.2**
n. d.
63.4
19.9
-6.2
48.7**
70.3**
Poland
n. d.
32.9
14.7
-18.2
55.1**
76.6**
Slovakia
78.7
57.3
35.4
-43.3
49.6**
70.9**
UK
39.3
34.1
30.4
-8.9
43.7
47.4
n. d.
32.6
26.4*
-6.2
n. d.
n. d.
32.8
31.0
27.3*
-5.5
n. d.
n. d.
n. d.
42.7
20.4*
-22.3
n. d.
n. d.
Average EU25***
Average EU15***
Average EU10***
NB: Density rates for EU-15 countries are standardised, i.e. without unemployed and self-employed, retired
employees and student members, along the model in B. Ebbinghaus and J. Visser (2000) The societies of
Europe, op.cit. In the case of the UK, figures are calculated from the labour force survey. Elsewhere they are
recalculated from administrative sources. See also OECD, Employment Outlook 2004, Chapter 3 (‘Wage-setting
outcomes and institutions’), Paris, July 2004. The EU-10 figures are non-standardised and follow nationally
based statistics collected by the Institut des Sciences du Travail of the Université Catholique de Louvain,
Monographs on the Situation of social partners in the candidate countries, Brussels, December 2003, a research
project conducted on behalf of the Employment and Social Affairs DG of the European Commission. Quoted by
‘Industrial Relations in Europe’ (2004), p. 19. Table 10.1 is an edited version of the original one containing data
only for countries involved in the Leonardo Project.
*Data available only from 2001.
** The data on membership composition (share of female members; share of members in the public sector) are
calculated from sample surveys of the International Social Science Programme (ISSP) and relate to 1998.
***Weighted averages. In the case of missing data, the nearest year is taken into account.
Evaluating the patterns of trade union structures and affiliations in the countries
involved in the Leonardo Project we distinguished the following two structural settings. In the
first group of the countries surveyed, a ‘single or dominant’ trade union confederation
coordinates the activities of the branch organisations. This group of countries comprises
Germany, UK and Slovakia. In the second group of countries trade union centres are divided
286
on political and ideological bases. For example in France and Spain a ‘political divide’ exists
within the broad left; other divisions relate to ideological orientations such as Christian and
Social Democratic values. In NMS countries like Hungary and Poland trade union centres
have links with both right and left parties (e.g. in Hungary, the ‘National Alliance of Works
Councils’ has links with the Democratic Forum and the ‘National Association of Hungarian
Trade Unions’ maintains quite strong links with the Hungarian Socialist Party.) Further
fragmentation of the trade union centres can be observed in some countries. For example in
France, there are separate centres for managerial and white collar staff and a regional division
is noticeable in Spain. (See the Table 10.2.)36
Table 10.2. Union structure and affiliation patterns in the EU
Country
Belgium
Main union confederations(1)
Main divisions Share
N°
between
of
confederations largest
political3
50
religious
polit-
N°
Affiliates(2)
Main divisions
Share of all
between
members
confederations
17
sector&status
2
28
20
sector
12
France
6(7)
Germany
1(2)
private&public
83
8
sector
17
Spain
2(3)
Political
41
12
sector
19
Hungary
6
Political
31
42
sector
1
Poland
3
Political
43
110 sector&company
?
Slovakia
1
?
95
37
sector
5
UK
1
?
84
71
occup.&sector
16
relig&occup.
1
Only confederations that organise in several sectors and organise 5% or more of total membership.
Affiliates or member unions belonging to the largest confederation, only national unions (without local
organisations).
3
Without 36 affiliated unions in Northern Ireland.
4
Including Turkish Cypriot organisations in Northern Cyprus.
2
Source: B. Ebbinghaus and J. Visser (2000) The societies of Europe. Trade unions in western Europe since
1945, Palgrave for the main divisions and demarcations in EU-15, updates with information from unions’
websites (number of unions) and AIAS union file. For EU-10 Member States, information is obtained from
Commission research (UCL). Quoted by Industrial Relations in Europe 2004: 15. The table 10.2 is an edited
version of the original one containing data only for countries involved in the Leonardo Project.
36
Naturally there are other organizational principles of the interest representative organisations. For example in
another group of the countries – whose members did not participate in the Leonardo Project – trade union centres
are created on an occupational basis (e.g. Finland, Sweden, Denmark etc.).
287
Comparing the patterns of trade union structures, affiliation and characteristics of the
recent modernisation of the union organisation (e.g. organisational decentralisation –
fragmentation or concentration-merger) we may identify not only contrasting but nonsynchronised movements. For example, at the beginning of the XXIst century (2001) in
Germany, the autonomous general trade union of white-collar employees merged with the
well-known German Confederation of Trade Unions (DGB). A similar major union merger
took place in the UK (2002), too. The creation of these ‘conglomerate’ unions was the answer
of the trade unions in the EU-15 countries to the external social and economic changes (e.g. to
better cope with the growing need for coordination among trade unions in their confrontationcooperation with the employers and their associations.) The creation of the ‘conglomerate’ or
‘super’ trade unions should be interpreted as an initiative which may counterbalance the
increased discretionary power of employers opened to them by the disintegration of both
external and internal constraints. In other words, the merger process of trade unions can be
evaluated as an institutional answer of the employees’ interest representative organisations to
counterbalance the effects of deregulation and the associated destabilisation of rules and
procedures of the labour market within and outside firms. The concentration – merger of trade
union confederations was partly an attempt to cope with the difficulties resulting from
growing internal financial difficulties and the declining trade union membership, too. In the
NMS participating in the Leonardo Project we may identify contradictory tendencies. During
state socialism employees were forced to be trade union members (e.g. the unionisation rate
was artificially high, over 90 %) and the trade unions operating in various economic branches
were centralised into one national level centre (e.g. in Hungary this ‘mega’ centre was called
the ‘National Council of Trade Unions’, in Hungarian: “Szakszervezetek Országos
Tanácsa”=SZOT). As a natural reaction to this kind of ‘forced’ centralizationbureaucratization of trade unions, following the collapse of the state-socialist politicaleconomical regime, in these countries the ‘decentralization-fragmentation’ became the
mainstream tendency. As a result of the breaking down of the former single-centre, we
witnessed the emergence of numerous new trade union centres. (See the Table 10.3.)
However, in the last years there has been an attempt to rationalise and centralise the
decentralised and fragmented trade union structures (e.g. in Hungary and Poland).
288
Table 10.3. Employees Representation and Employees Rights: Single, Mixed and Dual
Versions of the LRS
L&C
Y
Separate
union
workplace
representation
Considerable
Normally
France
L
Y
Very strong
Frequently
Germany
L
Y
Marginal
Sometimes
Spain
L
Y
Very strong
Normally
Hungary
L
Y
Very strong
Normally
Poland
L
Very strong
N.A.
Slovakia
L
Marginal
Sometimes
UK
A
-
N.A.
Country
Belgium
Basis
Single
Mixed
Dual
Y
Union
competition
Y
Some
NB: Basis for employees representation rights: central agreement = C; agreement (sector/company) = A; law =
L, Yes = Y, Not applicable = N.A.
Source: Industrial Relations in Europe 2004, p. 22.
Evaluating the existence of the employees’ participation institutions (e.g. works
councils) beside the interest representative roles of the trade unions, we made a distinction
between ‘single’, ‘mixed’ and ‘dual systems’ (Table 10.3). In the majority of the Leonardo
Project countries the ‘dual’ - Belgium, France, Germany, Hungary and Slovakia - and in
Poland and the UK the ‘single’ version of the Labour Relations System operates. Even in the
countries where works councils as an institution of employees’ information and consultation
systems do exist, “…differs significantly from country to country in terms of composition,
decision-making, election procedures, thresholds, roles and power of the employees
representative bodies.” (Carley – Baradel – Weltz 2004: 4).
The common elements of the various national works council definitions found in the
EU-15 countries are summarised in Box 10.1 and in Annex V.3
289
Box 10.1. Works councils definition
Permanent elected bodies of workforce representatives (or occasionally a joint
committee with employees representatives), set-up on the basis of law or collective
agreements with the overall task of promoting cooperation within the enterprise for the benefit
of the enterprise itself and employees, by creating and maintaining good and stable
employment conditions, increasing the welfare and security of employees and their
understanding of enterprise operations, finance and competitiveness.
Source: Carley – Baradel – Weltz 2004: 9)
In the context of the establishment of works councils, in all European countries – with
the exception of Sweden – there is a minimum workforce-size threshold for the creation of this
institution of the participation. In the Leonardo Project countries, the lowest threshold for
works councils’ establishment is in Germany with 5 employees; in France, Hungary and
Spain it is 50 and in Belgium 100 employees. In UK there is no general or statutory system of
information and consultation. Beside the ‘threshold’ the other essential distinctive feature of
works councils is the following: whether or not these institutions of employees’ participation
are established automatically in all establishments satisfying the threshold criteria or must be
triggered (or initiated) by social actors of labour relations (e.g. employees, trade unions or
employers). The establishment process in these countries is basically automatic in Belgium
and France but in the majority of the countries must be initiated by employees/trade unions,
e.g. in Hungary, Germany, Poland, Spain.
The statistical analysis of the works councils does not provide information on the
difficulties of everyday company practice related to the functioning of this employees’
participatory institution. For example, in countries where the labour code guarantees the rights
of works councils (and their members) in regulating the fields of co-decision (e.g. social
infrastructure), these rights are sometimes violated even in large firms operating in such a
well-established sector as the chemical industry. See the Hungarian example on the violation
of works councils’ prerogatives in the next box!
290
Box 10.2 Council members sacked
NITROGÉNMŐVEK Rt, Hungary's largest fertilizer manufacturer, has sacked four
members of its Workers’ Consultation Council after they launched legal proceedings against
the company. The other five members have resigned from their council posts, but have been
permitted to remain with the company. The dispute between the workers and management
erupted after the company decided to cut employee benefits. Sándor Falussy, a member of the
council, told Népszabadság that the company had unilaterally decided to cut employees’
benefits and had sold off a workers’ hostel, a cultural center, and an open-air swimming pool
that had previously been available for employees’ use. Hungarian employment law, which in
this respect is based on the German model, specifies that companies must consult their
Workers’ Councils over major decisions affecting employees’ welfare. In this case, the
Workers’ Council argues, this was not done, leading the council to launch legal proceedings
against the company.
The Supreme Court ruled that the Workers’ Council should have been consulted over
the sales. The Council then launched a civil case against the company, demanding that the
sales agreements be annulled. According to human resources director József Medve, the four
dismissed employees had been unwilling to cooperate with the firm and had informed the
buyers of the employee welfare facilities of their intention to seek an annulment. This had
damaged the company’s reputation. The five who were not dismissed had displayed a more
cooperative attitude and had agreed to resign from their council positions.
The Fidesz Workers Branch reacted on September 1, expressing solidarity with the
sacked workers. The sackings were the result of “money-centered thinking”, they argued,
adding that this was another example of what happens to workers “if privatization is not
carried out with sufficient circumspection.”
Gábor Csizmár, the Minister for Labour, also admitted to being disturbed by the news.
The Government had just given Nitrogénmővek Ft100m ($500,000) to help it preserve jobs,
he said, giving it added reason to expect the firm to resolve its labor relations problems in a
“civilized” fashion. He called on the company to “respect European Union norms”, adding
that a law was being drafted which would permit only firms with healthy labour relations to
benefit from state subsidies.
Source: Thomas Escritt, The Budapest Sun, September 8, 2005 - Volume XIII, Issue 36
291
10.1.2. Affiliations and organisations of employers: European and national level
comparisons
The existence and activities of employers’ interest representative associations
(organisations) influence the practice of singular or multi-employers’ bargaining and,
consequently, the coverage rate of collective agreements. The organisational building up of
employers’ associations varies across the countries participating in the Leonardo Project. In
relation to the employers’ organisations, it is worth noting the dual structure of these
organisations. The single structure operating at cross-industry level exists in Belgium, France,
Slovakia, Spain and in the UK. Unlike the previously mentioned countries, Germany has
employer organisations with a division of tasks and responsibilities – at the national level –
between collective interest representation (i.e. partners in collective bargaining) and trade
interests (i.e. chamber of trade and commerce, etc.)37.
In addition to the process of mergers of trade unions briefly outlined earlier, in the
case of employers’ interest representative organisations there is a new trend towards the
integration of Human Resource Management, social policy, and labour relations into general
business services. However, the organisation of ‘le Patronat’ (employers’ organisations) had
actually never separated these functions in such countries as Belgium, France and Spain.
The most radical restructuring process took place in the post-socialist economies
during the 1990s following the collapse of state-socialist ‘regimes’. In the aftermath of
privatisation, in relation to the deconstruction-decentralisation of the former mono-system of
employers’ organisations, a proliferation of employers’ organisations have taken place.38 As a
result of this process, there are three employers’ organisations in Poland and six or more in
Hungary. Among various problems related to the role of business and employers’ associations
37
Note: in some regions, for instance in Bavaria, the two structures have been integrated. In this context, we
should mention that rationalisation processes have been identified at the levels below the peak associations. This
process includes on one hand mergers of employers’ organisations and trade interests, and on the other hand
integration of employers’ associations representing neighbouring sectors (e.g. a notable number of mergers at the
levels below peak associations were reported in the UK). Source: Industrial Relations in Europe 2004: 26.
38
In relation to the membership of employers’ organisations, we would like to note the following: not counting
countries where the membership of employers’ organisation is obligatory by law, the average organisation rate is
60%. Though, this average hides significant differences across countries participating in the Leonardo Project.
For example, extremely high organisation rates (70% or more) were found in Belgium, France and Spain. A
below average rate (40%) characterises the British employers’ organisations. In some countries no data were
available (e.g. Hungary, Poland).
292
in the New Member States, we would like to stress the underdevelopment of sector level
bargaining: “This is due to the fact that in most of these countries sectoral employers’
organisations are either weak and lack the necessary resources to participate, or are denied the
authority to conclude sectoral agreements on behalf of their members, as is often the case for
instance in Hungary and in Poland.”39 However, in Hungary, to overcome the lack of sector
level social dialogue, an EU-funded (PHARE, 2001-2004) project was launched aimed at
creating an autonomous sector (branch) level institution of social dialogue. This new
institution within the Hungarian LRS would have a role in supporting sector level
consultations among the social actors, increasing the number of sector level collective
agreements.40
Evaluating the representation of employers’ interests at EU level, the ‘Union des
Industries de la Communauté Européenne’ (UNICE – since 1987 this organisation fulfils the
role of an ‘Industrial and Employers’ Association’) covers almost all the main national crossindustry confederations of competitive (private) sector employers. In addition to the EU-15
countries, the majority of the NMS are also represented in this organisation (e.g. Hungary,
Poland and Slovakia). Continuing the distinctions we have made between employers’
organisations and trade associations, the UNICE acts as both types of organisation. In other
words, it is engaged in social dialogue and negotiations with the European Trade Union
Confederation (ETUC) and as a trade association promoting its members’ interests in
influencing EU decision-makers on great variety of issues (e.g. see the debate on the Chinese
textile quota in the European Union in August-September 2005).
Reviewing the situation of European level representation of employers’ organisations in the
SME sector, it is important to stress the following characteristics. There is a separate
European-level institution representing the particular interests of the SME sector: the
European Association of Craft and Small and Medium-sized Enterprises (UEAPME). This
European-level body representing SMEs has 77 national member organisations in EU-15
countries. Of the NMS only Hungary is admitted as a full member. All other NMS have only
observer status. (See in details Table 10.4.)
39
40
Source: Industrial relations in Europe, 2004. p.27.
Foglalkoztatáspolitikai és Munkaügyi Minisztérium (Ministry for Employment Policy and Labour) 2004: 5.
293
Table 10.4 Europe’s business and employers’ association affiliation, organisation rates and
participation in social dialogue
Participation in
CEEP
(1) Member Affiliates Organisation
social dialogue
Nº
UEAPME
UNICE
Nº (2)
rate (3)
member?
Bipartite Tripartite
UNIZO,
Belgium
1
VBOFEB
33
72
Y
Y
UCM,
CC, PME-
Y(4)
SDI, KAN
APCM,
France
1
MEDEF
87
74
N
Y
UPA,
Y
CGPME
ZDHGermany
2
BDA,
BDI
54
63
N
Y
BFD,
BDS-
Y
DgeV
CEPYME,
Spain
1
CEOE
148
72
Y
Y
PIME,
PIMEC
Y
SEFES
Hungary
4
Poland
2
Slovakia
1
UK
1
(CEHIC)
KPP,
(PKPP)
AZZR
SR
CBI
43
..
N
Y
(IPOSZ)
Y
..
..
Y
Y
(ZRP)
N
37
65
N
Y
(SZZ)
N
150
40
N
(Y)
UIC
Y
NB: (1) General associations, without organisations specialising in representing agriculture, horticulture and fishery;
cooperatives; SMEs, financial enterprises, and nationalised firms or local government; public sector, organisations
representing public firms or special sectors, such as finance and banking. (2) Only sectoral affiliates or companies,
without regional affiliates. (3) Expressed as a percentage of wage and salaried employees working in organised firms.
Members with observer status between brackets. (4) Benelux.
Sources: Reports and websites of UNICE, CEEP and UEAPME; supplemented with information from F.Traxler, S.
Blaschke and B. Kittel (2001), National labour relations in internationalised markets, op.cit., and the Institut des
Sciences du Travail of the Université Catholique de Louvain, Representativeness of Social Partners at Sector Level in the
EU and Monographes on the Situation of Social Partners in the Candidate Countries (VC/2004/0547) Brussels,
December 2003, a research project conducted on behalf of the Employment and Social Affairs DG of the European
Commission. Quoted by ‘Industrial Relations in Europe’ 2004: 25. Table 10.4 is an edited version of the original one
containing data only for countries involved in the Leonardo Project.
294
10.1.3. Collective bargaining and social dialogue: collective bargaining as case in point
This section reviews the key institutions regulating the relations between employers
(employers’ organisations) and employees’ interest representative associations (trade unions).
In this context, we have to distinguish between the following insitutions:
1. Collective bargaining
2. Consultation
3. Social dialogue.
In dealing with these institutions, we intend to focus mainly on the issues of collective
bargaining (for example: coverage rate, legal extension of collective agreements, wage
bargaining, etc.) and the role of tripartite bodies as a particular form of social dialogue. In the
previous section we have already given details of various features of works councils as a key
form of consultation; therefore this section does not deal with this form of collective
representation.
Evaluating the practice of collective bargaining, there are noticeable differences in the
conditions and the impacts of collective bargaining both in EU-15 and NMS countries
involved in the Leonardo Project.
Box 10.3 ILO definition of Collective Agreement
ILO Convention No 98 of 1949 defines collective bargaining as ‘voluntary
negotiations between employers or employers’ organisations and workers’ organisations, with
a view to the regulation of terms and conditions by collective agreements’. Collective
bargaining is thus a rulemaking process based on joint decisions between independent
organisations. When successful, it results in agreements which specify the collective rules and
conditions applying to employment and employment relations in firms, i.e. conditions of work
and rules governing the relations between employees and managers. Additionally, agreements
usually also define the relationship between the negotiating organisations, for instance with
regard to the renewal of agreements, dispute procedures, peace obligations, recognition and
facilities. All this has no counterpart in individual bargaining between workers and managers.
Source: Industrial Relations in Europe 2004: 29.
Prior to the presentation of the coverage rate of collective bargaining both at European
and country levels, we have to raise briefly some methodological problems. The collective
295
bargaining coverage rate operationally refers to the number of employees covered by a
collective agreement (CA) as a proportion of all wage- and salary-earners employed. At a
general level, the collective bargaining measures the “… extent to which the terms of
employment in an economy are regulated by collective agreement.” (Industrial Relations in
Europe 2004: 30.) It is a widely accepted view among labour relations experts that the
bargaining coverage rate indicates the real bargaining strengths of the trade unions concerning
employment and working conditions (the union density rate reflects only the potential
bargaining power of organised employees).
There are several important factors influencing the collective bargaining coverage rate
and its measurement (see in detail these methodological problems, in Industrial Relations in
Europe 2004: 30). Table 10.5 illustrates the national (aggregate) rates of collective bargaining
coverage, the employers’ organisations and union density.
Table 10.5 Collective bargaining coverage, employers’ organisations and union density
1-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-100
Belgium
France
U
U
Germany
U
Hungary
U
Poland
U
E
Cov
E
E
Cov
Cov
Cov,
E
Slovakia
UK
Cov
Cov,
U
Spain
E
U
U
Cov
Cov,
E
NB: Cov = bargaining coverage rate; E = employer organisation rate (private sector); U = Union density rate.
Quoted by ‘Industrial Relations in Europe’ 2004: 31. Table 10.5 is an edited version of the original one containing
data only for countries involved in the Leonardo Project.
296
When comparing the collective bargaining coverage rates with the union density rates, we
identified patterns:
1. The collective bargaining coverage rate is not only more stable but at least twice as
high as the union density rate. This difference draws attention to the importance of a
careful interpretation of the union density rate in relation to the strengths and
mobilisation capacity of trade unions.
2. Comparing the coverage rate of the EU-15 and NMS countries we found a striking
gap: in the EU-15 countries – in spite of their massive variation from 100% (France)
to 36% (the UK) – the aggregated average rate is quite high (the weighted average rate
for EU-15 countries is 78%). In the case of NMSs – with the exception of Slovenia
(100%) – a decline in collective bargaining coverage has been identified during the
transformation from the early 1990s to today. For example, “a recent statistical study
of the Ministry of Employment and Labour in Hungary reported a further 5-point drop
in the coverage rate from 45 to 40% between 2001 and 2002 (unadjusted rates).
According to the study, this suggests that private-sector employers may be
withdrawing from wage negotiations and that the current company bargaining
structure provides no stable framework”. (Industrial Relations in Europe, 2004, p.
32.)41
3. In relation to the lower collective bargaining coverage rate in the NMS countries, we
should note that the declining coverage rate was especially strong in the so-called
post-socialist economies. This decline was particularly deep in comparison with the
former 100% coverage rate of the state-socialist firms based on the obligatory
membership of both trade unions and chambers of commerce, trade and industry.
41
It is necessary to mention that in many cases employees are coping with the problem of the delays in payment
and underpayment, even where collective agreements exist. In Poland, for example, we have found only one
government survey. Two thirds of audited companies were in breach of contract, including both small and large
sized companies (Industrial Relations in Europe, 2004, p. 32.)
297
10.1.3.1 The role of extension in collective bargaining
It is not unusual for employers to voluntarily extend negotiating agreements to both
unionised and non-union workers. This non-discriminatory extension of collective agreements
to employees working in the same firms is recommended as a ‘best practice’ by the ILO
Recommendation N°91 of 1951. The following box describes the legal or administrative
regulations concerning the extension of negotiated agreements to both union and non-union
members.
Box 10.4 ILO Recommendation on the Extension of Collective Agreements
(1) Where appropriate, having regard to established collective bargaining practice, measures,
to be determined by national laws or regulations and suited to the conditions of each country,
should be taken to extend the application of all or certain stipulations of a collective
agreement to all the employers and workers included within the industrial and territorial scope
of the agreement.
(2) National laws or regulations may make the extension of a collective agreement subject to
the following, among other, conditions;
(a) that the collective agreement already covers a number of the employers and workers
concerned which is, in the opinion of the competent authority, sufficiently representative;
(b) that, as a general rule, the request for extension of the agreement shall be made by one or
more organisations of workers or employers who are parties to the agreement;
(c) that, prior to the extension of the agreement, the employers and workers to whom the
agreement would be made applicable by its extension should be given an opportunity to
submit their observations.
Source: http://www.ilo.org/ilolex/english/recdisp1.htm
There are great variations in the procedures related to the extension of collective
agreements. Public authorities, such as Ministries of Labour, play a decisive role in initiating
the extension in France, in Spain and to some extent in Slovakia. “Several countries have
established minimum requirements for extension, most commonly minimum rates for
coverage of the relevant agreement prior to extension” (Industrial Relations in Europe
2004:34) – this practice is used for example in Germany, Hungary and Spain. Table 10.6
summarises the various procedures related to the legal and administrative regulation of the
extension of collective agreements.
298
Table 10.6 Legal or administrative extension of collective agreements
Extension is automatic if agreements are signed by all parties in Joint Industry
Belgium
Councils or in the National Labour Council. If not, the Ministry can extend multiemployer agreements by royal decree following application from one or more
bargaining parties.
At the request of one or more of the bargaining parties, addressed to the National
France
Commission on Collective Bargaining, the Minister can extend agreements to
entire sectors and/or enlarge agreements to different geographical regions or other
economic sectors.
On the application of one or more of the bargaining parties and approved by a
special committee for extensions, and if more than 50 % of the workforce is
Germany
already covered, the Ministry can extend agreements to the entire sector. Since
1998, and only in the construction industry, the Ministry can extend minimum
wage provisions on its own initiative.
Extension is automatic throughout the agreement’s domain if signed by a
Spain
majority of the representatives of each party to the agreement. Upon request by
unions and/or employers, the Ministry can enlarge the agreement in cases where
no bargaining exists.
On application of one or more of the bargaining parties and after consultation
Hungary
with the subcommittee of the National Interest Reconciliation Committee, the
Ministry can extend agreements to the entire sector. Applicants must provide
proof of their representativity in the sector concerned.
Poland
The Ministry can extend multi-employer agreements to cover unaffiliated
employers in a particular sector, if considered ‘a vital social interest’.
On the application of one or more of the bargaining parties and recommended by
Slovakia
a special tripartite committee for extension, the Ministry can extend agreements
to employers with similar business activities and economic and social conditions.
UK
No practice of extension of private-sector wage agreements. All extension
provisions were abolished in the 1980s.
Source: F.Traxler and M. Behrens (2002), ‘Collective bargaining coverage and extension procedures’; EIRO - Eironline;
OECD (2004),‘Wagesetting institutions’, in Employment outlook, Paris, 17. Quoted in ‘Industrial Relations in Europe’
2004: 33. Table 10.6 is an edited version of the original one containing data only for countries involved in the Leonardo
Project.
299
A 2002 EIRO study provides a general view on the practice of the extension of
collective agreements. The key lessons of this survey should be summarised in the following
way: high stability and continuity of extension provisions characterise the EU-15 and some of
the NMS. Before presenting interesting cases covering some of the countries participating in
the Leonardo Project, we should point out that the last few years have been characterised by
intensified debates on the extension of collective bargaining (e.g. France, Germany, Hungary
and Poland). In the following brackets, we would like to illustrate both the procedural and
substantive dimensions of these debates:
Box 10.5 Common guiding principle of employers: more possibilities for optouts
(‘hardship clausal’)
France and Germany
In France, in the context of several initiatives to reform the existing collective
bargaining system and make it more autonomous and representative, employers have
proposed to create more possibilities for optouts, with the possibility of offering terms and
conditions of employment below agreed, and in some cases, legally established minima. This
issue has also emerged in other Member States. In the context of the Agenda 2010 labour
market reform programme of the German Government, the issue has arisen whether sectoral
agreements should legally be required to contain ‘opening’, ‘hardship’ or ‘inability to pay’
clauses. Unions, both in France and Germany, are strongly opposed. At present, the reform
project of the French employers confederation, MEDEF, seems stalled and in Germany the
issue has been left to the social partners.
Poland
In Poland, however, after months of debate, Parliament responded to employers’
wishes and adopted a revised labour code introducing a far-reaching statutory ‘hardship’
clause. Accordingly, the signatory parties can agree to suspend a collective agreement for up
to three years, if a company faces financial problems. This change presupposes the existence
of worker representatives who can sign the suspension, but that there is no statutory
workplace representation in Poland and there are no representatives in most firms.
Spain
In Spain, the previous government had wanted to reform collective bargaining and
scrap the principle of ‘ultra-activity’ (ultraactividad) which means that a collective agreement
remains valid after its expiry, if it has not been renewed. If the end of an agreement would
restore the status quo ante, employers would have less reason to speedily negotiate a new
agreement. In the face of strong trade union opposition, the Spanish employers confederation
(CEOE) backed off and signed in 2002 an agreement with the trade unions in which the
principle of continued application of agreements was retained.
Source: ‘Industrial Relations in Europe’ 2004: 34-35
300
10.1.3.2 Changing forms of coordination in the bargaining process: the case of wage
bargaining
From the 1990s, the pattern of decentralisation became the mainstream feature of
industrial relations. Under the pressure of global competition, the restructuring process of
companies on a national, European or global level is further driven by the utilisation of fast
changes in the global value chain. European integration speeded up in the last year (1st May
2004), in particular making it possible for companies to re-orientate their activities directly at
a supranational market. Costs can be cut by selecting the most favourable locations using such
enablers as ICT (e.g. through outsourcing or delocalisation of generic business functions).
Companies are focusing on their core activities and seeking to outsource others. Cooperation
between small and medium-sized companies can be facilitated both by technological and
social innovations. These are tools to improve both employment and organisational flexibility.
Unfortunately, in the flexibility debate relatively little attention was paid to the role of wage
bargaining.42 However, wage issues had and continue to have a central importance in the
debates and wage-related conflicts often occurring in relation to employers’ and employees’
everyday working practices.43
In the last quarter of the century, in many countries bargaining on working time
reduction followed the trend of decentralisation. Beside the working time reduction, wage
negotiations are shifting into the focus of decentralisation of collective bargaining. The next
quotation illustrates well the underlying economic, technological and organisational
drivers/enablers favouring the decentralisation of labour relations: “(…) internationalisation,
technological and organisational change, multi-tasking, teamwork and client-related work
processes have made standardised solutions, negotiated for entire sectors, less feasible and
efficient (…) it has become more important for internationally competing firms to have the
freedom to react speedily to wage competition from foreign firms. The introduction of
performance related pay, and payment by results, has also supported the demand for company
level bargaining.” (Industrial Relations in Europe 2004:36-37)
42
The works representing the exceptions are the followings: Crouch, C. J. – Traxler, F. (eds.) (1995), Lindbeck,
A. and Snower, D. J. (2001), Yamamura, K. and Streeck, W. (eds.) (2003).
43
See for example the table in Annex V. 3 presenting the continuing key importance of wage bargaining in
labour related disputes between employers and employees at firm level.
301
Table 10.8 reviewing the levels and duration of collective bargaining in the last survey
(2003) indicates that sector or branch level collective bargaining together with firm level
bargaining dominate in nearly half of the countries of Europe. The so-called ‘multi-employer
collective bargaining’ at sector level still prevails the wage-setting in the EU-15 countries.
There are big differences concerning the importance of various bargaining levels within the
national bargaining structures. In the EU-15 countries involved in the Leonardo Project,
cross-industry level wage bargaining was found in Belgium and company level bargaining
was dominant in France and in the UK. As concerns the UK, we should note that this is the
only country from among the EU-15 countries where almost all bargaining takes place at firm
level. Similarly to the British case, in the new Member States, company level bargaining
dominates, with the exception of Slovakia. (See in details the Table 10.7.)
Table 10.7 Levels of wage bargaining and duration of collective agreements, 2003
Belgium
National
Sector
Company
***
**
*
Duration of
contracts (year)
2
*
***
2?
***
*
1-2
France
Germany
Spain
*
**
**
2-3
Hungary
*
*
***
2
*
***
Variable
**
**
2
***
Variable
Poland
Slovakia
*
UK
NB: *** = principle or dominant bargaining level; ** = important but not dominant level; * = existing level
of bargaining. Sources: Adapted from EIRO publications. Quoted by ‘Industrial Relations in Europe’ 2004:
39. Table 10.7 is an edited version of the original one containing data only for countries involved in the
Leonardo Project.
Beside the various forms of the decentralisation of wage bargaining, there are other
tools of wage regulation which may improve the flexibility of employment and knowledge
use. Various forms of coordination may improve flexibility of the labour relation system:
“Coordination based on shared understanding and mutual trust may be more important than
centralisation of wage-setting. This is perhaps the strongest lesson from the experience of
social pacts (many of which were fully unexpected and negotiated in rather fragmented and
decentralised wage-setting structures). A shared understanding of the economic and social
context, and of key mechanisms driving growth, productivity and employment, greatly
302
increases the probability of wage-bargaining being conducted in a cooperative way, in which
each party has an eye on their own long-term self-interest and the common good, and not only
to their short-term interest or purely sectional concerns.” (Industrial Relations in Europe
2004:44)
Evaluating the types of coordination, we may use the following scale. One extreme of
the scale represents the ‘explicit’ coordination. However, this type of coordination covers
various forms: firstly, coordination exists between peak organisations of either trade unions or
employers materialised in agreements at national or sectoral level (i.e. bipartite interest
concertation). Secondly, explicit coordination may develop in cases when social partners
agree to behave according to commonly accepted rules with or without government
participation (i.e. tripartite interest concertation). On the middle of the scale of coordination of
wage bargaining are located various forms of ‘implicit’ coordination. The strongest form of
this type of coordination is based on the norm or trend-setting role of a leading trade union or
employers’ group dominating one sector at national or regional level. In other cases (which
represent the weaker versions of ‘implicit’ coordination), social partners intend to inform each
other of their ambitions for the wage-setting. When social partners rely on this form of
coordination, they do not wish either to set a clear guideline or to reach agreement on wage
related issues. The fifth type equals no coordination. Table 10.8 illustrates the location of the
countries participating in the Leonardo project on the scale of wage-bargaining coordination.
303
Table 10.8 Coordination of wage bargaining
Country
Belgium
Types of coordination
Explicit coordination in National Labour Council, little sectoral
4
coordination
France
Irregular implicit coordination through pattern-setting in the
public sector and nationalised industries
Germany
1.5
Implicit coordination through comprehensive sectoral bargaining
and pattern-setting
Spain
3
Some explicit coordination between confederations of unions
and employers in recent years and weak pattern-setting in
3
sectoral bargaining
Hungary
Some national coordination through the tripartite body, no
sectoral coordination
2
Poland
No national or sectoral coordination
1
Slovakia
No national coordination since 2000, some sectoral coordination
2
UK
No national or sectoral coordination
1
NB: 5 = Explicit coordination between and within the peak association of unions and employers, through
agreements at the national and sectoral level; 4 = Explicit coordination between peak federations through
agreements at national level only, or implicit coordination in confederations (unions or employers) at the
national and sectoral level; 3 = Implicit coordination through synchronisation of sectoral bargaining and patternsetting; 2 = Some coordination through supervision and weak, irregular or incomplete pattern-setting; 1= No
coordination at the national or sectoral level. Weighted with coverage rate.
Quoted by ‘Industrial Relations in Europe’ 2004: 45. Table 10.8 is an edited version of the original one
containing data only for countries involved in the Leonardo Project.
The findings of Table 10.8 draw attention to the following three groups of countries in
relation to wage-bargaining coordination. Only Belgium maintained or reintroduced some
forms of explicit coordination at the national level. In Germany and Spain – where central
agreements have set guidelines for wage conduct since 2001 – the implicit coordination
characterises the relations between social partners. Pattern setting practice exists in Germany
and implicit coordination characterises the French wage-bargaining coordination. Finally, in
the UK, similarly to Poland, both national and sectoral level coordination are missing.
It is worth noting that: “The tradition of national wage agreements, existing in
Slovakia, faltered in the late 1990s and the last such agreement was concluded in 2000.
Attempts to reach agreement in Poland stalled in 2003. In Hungary, however, there have been
304
fresh initiatives. Usually the legal status of a national agreement is a non-binding
recommendation to lower level bargainers, but there is little coordination, within or between
confederations, or in sectors, to put pressure behind such recommendations or monitor their
follow-up.” (Industrial Relations in Europe 2004:46)
The review of the various coordination forms of wage bargaining calls attention to the
active role of national governments in influencing the outcomes of this bargaining. Evaluating
the degree of government intervention in wage bargaining, we used a 5-point scale
measurement (Industrial relations in Europe, 2005, p.52.).44 Assessing the degree of
government intervention in wage bargaining in the Leonardo countries, the results show
considerable variations. The highest scores were reached in Belgium (4.1) and in France (3.1),
followed by Hungary (3.0). The lowest level of government intervention was registered in
such countries as the UK (1.2), Germany (1.9) and Spain (1.9). The scores on government
intervention occupy the middle position in Poland (2.5) and in Slovakia (2.5). Due to the
important regulatory role of statutory minimum wages45, it is important to know which
countries have such a practice. All EU-15 countries involved in the Leonardo project now
have a minimum wage. In Belgium, the minimum wage is set by national level collective
agreements but in the other countries (France, Spain, UK), the minimum wage is regulated by
law. Similarly to the EU-15 countries, a statutory minimum wage was adopted in all new
Member States (Hungary, Poland, Slovakia).
44
The five-point scale proposed by the report is as follows: 5 = government imposes private sector wage
settlements or suspends bargaining (involuntary wage freeze); 4 = government participates directly in private
sector wage-bargaining and provides norms or ceilings, or tax-based compensation to achieve particular
outcomes (social pacts); 3 = government determines wage bargaining outcomes indirectly through minimum
wage-setting, wage-setting in the public sector, or through threats of sanction (for instance, withholding
extension or recognition); 2 = government sets a minimum wage and provides a institutional framework for
national or sectoral collective bargaining (legal protection of agreements, extension), consultation or dialogue
(recognition and consultation). (1.5 if only one of these applies); 1 = no role of government in wage-setting.
(Industrial relations in Europe 2004: 50.)
45
‘The (statutory) national minimum wage can also be seen as a form of coordination, since it functions as a
reference point for the whole wage system.’ (Industrial relations in Europe 2004:51.)
305
10.1.4. National level concertation and consultation institutions: a brief overview
The unions’ and employers’ national level representative bodies dealing with
consultation may take the form of bipartite, tripartite or a wider membership. As concerns
their function, they may have the following roles:
1. Advisory role
2. Consultative or negotiating role
3. Standard setting function
In relation to the various roles of these consultation bodies, we must emphasise the
particular situation relating to tripartite consultation in the post-socialist countries
participating in the Leonardo project. Without exception, in theses economies the tripartite
consultation and representation became institutionalised either on the eve or in the aftermath
of the democratisation process. For example, Hungary’s OÉT – National Council of
Reconciliation Interests – was established in 1987. In the case of Poland, the national forum
for social dialogue, the ‘Tripartite Commission for Social and Economic Issues’, was
established in 1994. In Slovakia, the tripartite dialogue between the social partners (the state,
trade unions and employers’ associations) has been operating for more than a decade. In the
EU-15 countries the presence of the national bodies for consultation and representation is
general. In the majority of cases, participation in such institutions is practiced by national
peak associations of both trade unions and employers’ organisations.46 These statutory bodies
which could be bipartite, tripartite etc., deal with general issues (Belgium, Hungary) or
specific issues such as social security administration (e.g. France, Germany) or with the
application of labour law and the extension of collective agreements (as is the case in
Germany). The next table provides a list of tripartite bodies in the Leonardo countries.
46
Note: trade union officers and employer representatives in the UK are appointed not as official representatives
of their associations, but as ‘competent individuals’. (Industrial relations in Europe 2004: 53.)
306
Table 10.9 Participation of unions and employers in tripartite bodies
Belgium
France
Germany
Spain
Tripartite bodies
National Labour Council (CNT/NAR); various bodies at sectoral and regional
level
National Commission on Collective Bargaining; Unemployment insurance
fund (UNEDIC); various social security fund-holding bodies
Parity committee for extension of collective agreements; social security
administrative boards; labour courts and labour market board
Economic and Social Council (CES); National Institute of Employment
(INEM); State Commission for Continuing Training (CEFC)
Hungary
National Council of Reconciliation Interests (OÉT)
Poland
Commission for Social and Economic Issues
Slovakia
UK
Council for Economic and Social Concertation (RHSD); Agreement
Extension Committee
Participation of individual representatives in Low Pay Commission (LPC),
Learning and Skills Council (LSC) and Health and Safety Executive (HSE)
Source: Database of the Institut des Sciences du Travail of the Université Catholique de Louvain (1997–2003)
on behalf of the Employment and Social Affairs DG of the European Commission. Quoted by ‘Industrial
Relations in Europe’ 2004: 54. Table 10.9 is an edited version of the original one containing data only for
countries involved in the Leonardo Project.
307
10.1.5. A highly sensitive feature of labour relations: industrial action
The number of strikes, lock-outs, sabotage, etc. as various forms of industrial action is
one of the most high-profile characteristics of industrial relations. Beside the very intensive
media coverage or public attention, the intensity of the industrial action – measured by
working days lost, number of employees involved, number of industrial disputes, etc. – is an
important indicator of whether or not labour relations systems are functioning. The intensity
of industrial action in itself does not reflect automatically a malfunctioning system, indeed
according to other features of employment relations it may even reflect a well-functioning
system. For example, in the later part of this section, we will present the surprisingly low level
of industrial action measured by working day lost by strikes per 1,000 employees in Germany
(4.0) and in Poland (2.1). Despite the low level of this indicator, the explanatory factors are
rather different. In the first case (Germany), the level can be attributed to the regulated nature
of the coordinated market economy, while in Poland it could be a consequence of two
interrelated factors. On the one hand the deterioration of the employees’ labour market
position (a double-digit unemployment level), and on the other hand the radically weakened
positions of trade unions.
The highest rate of working days lost by industrial action per 1,000 employees was
registered in Spain (219.7), followed by Hungary (60.2), France (40.5) and the UK (27.5).
(See details in Figure 10.1 and Table 10.10.)
308
Figure 10.1 Working days lost through industrial action per 1,000 employees in
countries participating in the Leonardo project
Spain
220
60
Hungary
France
41
UK
28
Germany 4
Poland 2
0
50
100
150
Working days lost
200
250
Source: EIRO, 2005:9.
Table 10.10 Working days lost through industrial action
Country
Belgium
2000
n. d.
2001
n. d.
2002
17.6
2003
n. d.
2004*
n. d.
France
54.0
45.0
32.0
31.0
n. d.
Germany
0.3
0.8
9.6
5.1
1.6
Spain
292.5
151.0
377.1
58.1
35.6
UK
20.0
20.0
51.0
19.0
34.0
Hungary
236.0
4.0
0.4
0.3
3.0
7.4
0.4
0
0.7
n. d.
Poland
* In some cases, extrapolations from partial figures only - see notes.
Source: EIRO 2005:7
Table 10.10 highlights the following notable points:
1. The very low level of industrial action – even a complete absence in some years – in
some of New Member States (Hungary, with the exception of the year 2000, and
Poland) and in such EU-15 countries as Germany.
309
2. Very different patterns were registered in the broadly comparable (in size terms) ‘big
four’ old European States: France, Germany, Spain and the UK. Spain shows a
considerably higher level of industrial action than France, the UK and Germany,
although Spain appears to have experienced a rapid decline in working days lost by
strikes from 2002 to 2003 and the fall continues.
3. The lack of any consistent trend in the majority of countries characterised by figures
often rising and falling from year to year.
Another important characteristic of industrial action is that it does not spread evenly
through the various sectors of the economy. Reviewing the three sectors most affected by
industrial action (from 2000-2004) we get the following picture. The sectors most affected by
industrial action were ‘transport and communication’ (with railways often playing a leading
role) and ‘manufacturing’ (with metal working playing a prominent role). The ‘public sector’
in a broad sense (especially health care and social work, and education) follows closely the
two first sectors. It is interesting to note that in Spain the ‘construction industry’ plays a major
role in industrial action following the key role of this sector in the Spanish economy.
According to international experiences, private sector services are rarely involved in the top
three sectors in the majority of countries. In Germany too, the ‘commerce-retail’ sector did
not figure among the sectors most affected by industrial action. Unfortunately, the statistical
data on industrial action do not always allow comparison between private and public sectors
(in terms of ownership). Despite this methodological shortcoming, the share of industrial
action by ownership varies considerably in the countries observed. Countries where a
relatively high proportion of the ‘most strike-prone industries’ are in the public sector include
France, Hungary and the UK. Another group of countries has the most strike-affected
industries in the private sector; this group includes Germany and Spain. Poland and Slovakia
present a mixed-pattern of industrial action (i.e. it is not possible to clearly identify either a
private or public ‘dominance’ in industrial action).
Evaluating the types of sectors dominating industrial action in a given year, we found
the following syndrome. A single sector accounted for half or more of all working days lost
in: Belgium in 2002 (manufacturing); France in 2000-2001 (the civil service); Germany 2001
and 2003 (manufacturing); Hungary in 2001 (non-commercial services). (See in detail Table
10.11.)
310
Table 10.11 Patterns of industrial action in the countries participating in the Leonardo
Project (2000-2004)
Country
Patterns of industrial action
Belgium
Mixed
France
Germany
Spain
Public sector
Manufacturing/private sector
Mixed
UK
Public sector
Hungary
Public sector
Poland
Mixed
Slovakia
Mixed
Sectors most affected by industrial
action
Manufacturing + Transport +
Business Service
Civil Service + Transport
Car Industry (especially in the year
of 2000, 2003 and 2004)
Manufacturing/Construction and
Broad Public Sector (Transport +
Public Administration + Medical
Care)
Public Administration +
Health/Social Care + Education +
Transport
Broad Public Sector (Health Care +
Education + Transport)
Broad Public Sector (Health Care +
Public Transport + Railways) and
Steel and Coal Mining Industries
Manufacturing and Transport
(Railways and Public Transport
Source: EIRO 2005: 11-16, Table 10.11 is an edited version only containing data for countries participating in
the Leonardo Project.
Finally, it is necessary to identify the main causes of industrial action. Evaluating the
three main reasons for industrial action in the countries participating in the Leonardo project
(2000-2004), unsurprisingly, the number one reason for industrial action is unquestionably
pay. It features among the leading issues in all countries, but especially in Spain. Pay is
consistently the leading single issue in industrial action in France, in Hungary, in Poland and
in the UK. Employment is the next most important cause for industrial action in Slovakia
which could be attributed to the extremely high (double-digit) level of unemployment. In the
context of unemployment, we may note that dismissals are prominent in the UK, and
redundancies and job losses are the main source of industrial conflicts in France, Hungary and
Poland. Plant closures and company restructuring, which are important reasons for industrial
action in Hungary, probably also fall under the broad heading ‘employment’. The next most
common reasons are broadly political issues concerned with generic or specific government
policies (e.g. social security, labour law reforms, privatisations and sector restructuring), these
being the main reasons for such action both in Slovakia and in Hungary. Political issues are
311
often the source of industrial action in Spain. Working time and working conditions are the
least important factors of industrial action in France and in the UK. Table 10.13 provides a
general overview of reasons for industrial action by country.
In relation with the industrial actions we may find differences not only between the
OMS and the NMS but within the group of countries participating in the Leonardo project.
Firstly, comparing OMS and NMS, the, the industrial actions are rather weak in he later group
of countries. Within the NMS, it is interesting to note the extremely low rate of strikes in
Poland between 2000 and 2003. With the exception of 2000, the same is true for Hungary as
well. However, at the beginning of the 1990’s the industrial actions in Poland were much
more frequent compared to Hungary. Within the former EU-15 the highest intensity of
industrial actions were registered in Spain, France and in the UK.
312
Table 10.12 Main causes of industrial action in the countries participating in the
Leonardo project
WEIGHT
Country
Belgium
Effective number
of confederations
3
1
2
n. d.
n. d.
2000
Pay (33%)
Working time (29%)
2001
Pay (37%)
Job losses (21%)
2002
Pay (39%)
Job losses (29%)
2003
Pay (37%)
Job losses (27%)
n. d.
Issue not strictly linked to
employment relationship
(24%)
2003
n. d.
Not arising from
collective bargaining
(57%)
Not arising from
(69%)
Issue not strictly linked
to employment
relationship (88%)
Arising from collective
bargaining (63%)
2004*
bargaining (87%)
Not arising from collective
bargaining (12%)
2000
Pay (77%)
Redundancy (11%)
2001
Working conditions and
supervision (33%)
Pay (27%)
Redundancy (17%)
2002
Pay (89%)
Working conditions and
supervision (8%)
Redundancy (1%)
2003
Pay (84%)
Working time (13%)
2004
2000
2001
2002
2003
2004
2003
2004
2001
Pay (84%)
Pay
Pay
Pay
Pay
Pay
Wage arrears
Wage arrears
Pay
2002
Labour law reforms
2003
2004
Rail restructuring
Transport subsidies
Redundancy (12%)
Plant closures
Plant closures
Privatisation
Plant closures
Privatisation
Job losses
Privatisation
Employment
Government social policy
and budget
Overall government policy
Pay
Year
France
Germany
2000
2001
Spain
2002
UK
Hungary
Poland
Slovakia
n. d.
Working conditions
(15%)
Working time (15%)
Working conditions
(21%)
Working conditions
(20%)
n. d.
bargaining (19%)
bargaining (31%)
-
bargaining (6%)
Not arising from
(5%)
Not arising from collective
bargaining (37%)
-
*First 8 months
Source: EIRO 2005
313
Issue not strictly linked
to employment
relationship (2%)
Staffing and work
allocation (5%)
Staffing and work
allocation (1%)
Working time (2%)
Plant closures
Job losses
Job losses
-
10.2 Actors and institutions in the SME-sector: an international comparison at European and
country level
The previous sections gave a general overview of the social actors and institutions
(trade unions and employers’ associations, collective bargaining – with a special focus on
wage bargaining, employees’ representation and participation, tripartite consultation and
concertation bodies, etc.) which may play a benchmarking role for SMEs in relation to labour
relation standards. We are aware that it is not possible to copy in a mechanical way actors and
institutions of labour relations functioning in medium- and large-scale firms, therefore we
suggest to use the so-called ‘intelligent or reflexive benchmarking’ instead of a mechanical
version of it.47 The other important issue reviewed in the previous section was related to the
similar and distinctive characteristics of the labour relations system between the EU-15
countries and the new Member States involved in the Leonardo Project.
The analysis of the importance and dynamism of the SME sector has frequently
highlighted their significant contribution to job creation. For example, the second chapter
indicated that both at the EU- and individual country-level SMEs generate at least two thirds
of employment. The factors explaining the employment generating capacity of SMEs are the
following:
•
The increasing share of the ‘service sector’ within the economy, in which SMEs are
dominant in comparison with the industrial sector.
•
The tendency for ‘de-mergers’ of large firms, which speeds up the outsourcing of noncore activities, and means a variety of different forms of organisation disagregation
becomes increasingly common; this process results in a shift in the importance of the
SME sector.
47
“Reflexive benchmarking or intelligent benchmarking as it is also called is less about deciding ‘what is best’
or ‘what universal truth’ can be derived from comparison. The identification of best practice is not a primary
goal of reflexive benchmarking; instead it has to do with getting to know more about various institutional
solutions in different economic structures. Particularly, in a situation of fundamental transformation processes,
mechanistic benchmarking is hardly possible, as institutions are becoming increasingly fragile. The aim of
reflexive benchmarking is to be able to gain a better understanding of one’s own solutions, their strengths and
weaknesses, when seen in the light of what others do, and what options they see. Such an understanding can
cause policy-makers to assess institutional solutions of their own system much more critically and may help
them to deliberately imagine and act on different strategies.” Schienstock. 2004: 18.
314
•
SMEs are predominant in certain new economic sectors such as new media, software
development, etc.
•
The dynamism of ‘industrial clusters’ or ‘industrial districts’ or ‘growth poles’
representing old and new forms of network type cooperation characterising both the
Old and the New Economy. In this type of cooperation, SMEs are playing a key role.
This is not at all a new phenomenon. “The developing entrepreneurship pillar of the
Commission’s 1999 Employment Guidelines states that: «The development of new
enterprises, and the growth of SMEs, is essential for job creation. This process must be
promoted by encouraging greater entrepreneurial awareness across society, by providing a
clear, stable and predictable set of rules (…) The Member States should also reduce and
simplify the administrative and tax burdens on SMEs.»”48
Despite the intensive interest regarding SMEs, the quality of our knowledge about
labour relations within this sector seems to be generally low. The aim of this section is to
identify some characteristics and recent developments in the labour relation practices of
SMEs, with a special focus on collective bargaining, relationships between employers and
employees and employees’ participation. The issues investigated include
•
Collective bargaining coverage rate in SMEs.
•
Employees’ direct representative organisations (e.g. works councils).
•
Employers’ and trade unions’ attitudes towards labour relations institutions:
individualisation and informality of employer-employee relationships.
10.2.1 Collective bargaining: coverage rate and procedures
The national system of labour relations reviewed in the previous sections is an
important factor in shaping the position of SMEs with regard to bargaining coverage. As
might be expected the coverage rate of collective bargaining in the SME sector is higher in
those countries participating in the Leonardo project which, despite the recent tendencies
towards decentralisation, still have a more centralised bargaining structure, like France,
48
Source: EIRO 1999: 1.
315
Germany and Spain. In these countries collective agreements signed at national or sectoral
level tend to be applied in small enterprises as well as in larger ones, because such agreements
may be extended to become binding on all companies in a sector, whether members of the
signatory organisation or not, and regardless of size (e.g. in France). In Spain, SMEs are
covered by collective agreements in the same way as other companies, since sectoral
agreements are applicable to all companies and workers in an industry and not only to
members of the signatory organisations (however, labour relations experts and trade unions
doubt whether sectoral agreements are actually implemented in the majority of small firms).
Following the logic of the interdependency of the centralised or decentralised
character of the national labour relation system and the bargaining coverage rate in SMEs, it
is not surprising that the collective bargaining coverage rate in SMEs is extremely low in the
UK. In this country the labour relation system is voluntaristic or deregulated. When we want
to quantify the bargaining coverage rate in the SME sector, only a limited amount of data is
available and therefore these are scarcely comparable. This is true in the case of our project
too. In spite of these methodological difficulties, we may identify the following common
patterns. There is a direct relationship between the company size and collective bargaining
coverage rate. As the size of the companies increases, so does the bargaining coverage rate. In
the smaller firms, and especially in those with fewer than 20 employees, collective
agreements are the exception. The ‘size-category effect’ is valid in the Hungarian case too; for
an example, see the following table.
Table 10. 13 Collective bargaining by company size (1998)
Size categories of firms
(number of employees)
5–20 persons1
Share of companies with collective
agreements
0.1%
20–49 persons
1.1%
50–299 persons
11.7%
300–499 persons
46.4%
500–999 persons
67.3%
1000 and more
75.4%
Source: Neumann 2002: 6
1
Data on collective bargaining is often not available in the case of firms employing less than four
persons.
316
10.2.2 Collective representation: the case of works councils
As far as the establishment of works councils is concerned, in all European countries –
with the exception of Sweden – there is a minimum workforce-size threshold for the creation
of this institution of participation. In the Leonardo Project countries, the lowest threshold for
works councils’ establishment is in Germany, with 5 employees; in France, Hungary and
Spain it is 50 and in Belgium 100. In UK there is no general or statutory system of
information and consultation. Beside the ‘threshold’ the other essential feature of works
councils is the following: whether these institutions of employees’ participation are
established automatically in all establishments satisfying the threshold criteria or must be
triggered (or initiated) by the social actors of labour relations (e.g. employees, trade unions or
employers). The establishment process is basically automatic in Belgium and France but in
the majority of the countries must be initiated by employees/trade unions; e.g. as in Hungary,
Germany, Poland and Spain.
In spite of the fact that in the majority of the countries involved in the Leonardo
Project, the threshold is 5, 50 or 100 employees, works councils are important participatory
forums mainly for employees in the large firms (LSE). Even though the law provides the basis
for works councils in such countries as Germany, France, Hungary and Spain, in SMEs only a
tiny minority of firms establishes works councils. “In Germany, for example, the law provides
statutory rights in firms with five or more employees. The establishment of a works council is
not mandatory and according to survey figures from 2002, works councils cover just 11 % of
all firms and 50 % of all employees within the law’s scope. Coverage is related to the size and
the age of the firm, with smaller and newer firms much less likely to have established a works
council….In France, the Ministry of Labour estimates that of small firms (10-19 employees)
less than 20 % have a form of workplace representation for employees. This percentage
increases to 56 % for firms with 20-49 employees and to 90 % in firms with more than 50
employees.” (Industrial Relations in Europe 2004:22.) The situation is rather similar in
Hungary. However, the relationship between the size of the firm and works councils points to
another vital issue. The rate of the presence of the works councils has a close connection with
the trade union presence in the firms surveyed. According to the data from a statistically
representative survey carried out in 2002 in Hungary, the share of works councils, trade
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unions and collective agreements indicate a similar trend: their share increases with the size of
the firm. (See Table 10.14.)
Table 10.14 Distribution of works councils, trade unions and collective agreements by size category of
firms in the manufacturing sector in Hungary (2002)
Size of the
firm
(persons)
50-99
100-249
More than
249
Total
N° of
responders
Works councils
Trade Unions
Collective
agreements
N°
%
N°
%
N°
%
1,082
288
27
261
26
243
23
882
456
52
389
46
359
41
632
531
84
511
82
469
74
2,596
1,275
1,161
1,071
Source: Benyó, B. A munkavállalói részvétel intézménye: az üzemi tanácsok helyzete Magyarországon, (Institution of
Employees’ Participation: Situation of Works Councils in Hungary), PhD Dissertation, Budapest: Budapest University of
Economic Sciences and Business Administration – Department of Social Policy and Sociology, p.75.
10.2.3 Employers’ and trade unions’ attitudes towards labour relations institutions in the
SME sector
Employers’ organisations generally view favourably the fact that small firms, unlike
their larger counterparts, represent a high level of flexibility in regulating the employment
relationship. This high level of flexibility is the main factor responsible for their economic
success. Employers’ organisations are in favour of even further deregulation of SMEs. See
two examples of this attitude of employers’ organisations towards SMEs in the following box.
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Box 10.6 Employers’ organisations and SMEs
Most UK employers’ associations have traditionally preferred a deregulatory approach
to industrial relations. Since the current Labour Party government made public in 1998 its
various proposals for legislation to provide a minimum floor of employment rights,
employers’ associations have lobbied for the legislation to be watered down, especially where
it applies to SMEs. Thus, for instance, firms with under 20 employees have been removed
from the scope of proposed trade union recognition regulations.
In France, employers’ organisations, and particularly the SME-specific CGPME, have
demanded that social security contributions levied on SMEs should be reduced, and that they
should be given more flexibility by alleviating their legal obligations, simplifying
bureaucratic procedures, and raising the thresholds for obligatory employee representation.
Source: EIRO 1999: 10
However, in some cases the employers are positive towards trade union activities,
especially in sectors which have a strong institutional heritage of collective interest
representation, as shown by the example of a Belgian employer operating in the construction
sector:
Belgian construction sector company, 100 employees
“I totally agree that my workers are members of a trade union. They need to have
their rights defended. But dialogue needs to be always the main way of
communication. In our company there are also many ways of informal contact;
we go and have a drink together regularly, f.i. There is an open atmosphere.”
(owner/employer)
In spite of the favourable opinion of employers’ organisations concerning small firms,
these associations have various problems in the SME sector. In terms of their own
membership among the SMEs, mainstream employers’ organisations often face several
problems. For example, in Germany a key issue is the representation of the interests of SMEs.
According to the survey results, important segments of the small firm sector feel that they are
not represented in the traditional employers’ associations.
In relation to the trade unions’ attitudes towards SMEs, the mainstream opinion is as
follows. They have difficulties in creating both workplace interest representation institutions
(e.g. collective bargaining) and employees’ participation structure (e.g. works councils)
especially in smaller firms. The opinion of a Hungarian trade union leader interviewed in the
clothing industry sector summarises well the difficulties of implementing collective interest
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representation structures in the workplace in the post-socialist economies of the NMS
countries.
Hungarian Trade Union of Workers in the Garment Trade
“When big clothes factories closed down many people registered themselves for
unemployment benefit, but at the same time they started working in the black
economy. It is hard to make these people understand what disadvantages they
can suffer without being registered employees because until they have no other
alternatives they will not leave their black sector job. Frightening them with the
ghost of being without a pension and health insurance is fairly useless until they
are forced somehow to deal with this question. Many of those who are employed
in the black economy are retired or have this as a part-time or a second job. This
system works reasonably well as long as employers pay correctly, but alongside
this there are many unstable elements. (…)The badly defined job contracts and
unregistered salaries press employers to exclude any third party from the
relationship between themselves and the employees. This often leads to the high
vulnerability of workers. “Many people who contact us report delayed or unpaid
salaries.” (Vice President)
In addition, in the case of post-socialist (NMS) countries involved in the Leonardo
project, the company case studies indicated intention of owners/managers of small firms to
individualise employment relationships with their workers was in line with the ambition of
their employees too. This latter phenomenon can be attributed to employees’ lack of trust
towards their trade unions and due to the informal character of the employer-employee
relationship.
In relation to the trade unions’ role in the SME sector, the issue of worker protection
in smaller firms is important in the EU-15 countries too. For example, Belgian trade unions
are seeking to have the thresholds for the creation of various representative structures or the
application of other employment rights lowered. It is interesting to note that the French trade
unions are acting to reduce inequalities of working an employment conditions between
employees of SMEs and larger sized companies. In the UK the Trade Union Council (TUC)
has campaigned during the 1980s and 1990s for the establishment of minimum standards in
the work place, including for SMEs. Another recent British initiative to strengthen the trade
union presence at firm level is the Union Learning Fund (ULF). This fund was established in
1998 by the new Labour Government with the purpose of involving trade unions in the
government’s lifelong learning programme. Money is provided that generates capacitybuilding by these trade unions to encourage and enable learning that promotes employability
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and inclusion for individuals, and helps employers with productivity and competitiveness. The
most obvious manifestation of this capacity-building has been the creation of Union Learning
Representatives (ULRs), who, since 2002, have the same rights as other workplace trade
union representatives, such as shop stewards. Working with employers, the function of these
ULRs is to facilitate and encourage employees to participate in learning. It has been suggested
that these ULRs offer “potentially the most significant statutory role for workplace unionism
since the recognition of health and safety representatives in the mid-1970s [and] may have the
potential for furthering union revitalisation.” (Warhurst 2005:2)
For the opinion of employers and employees on labour relation institutions, see the
following box containing quotations from the company case studies.
Polish ICT firm, 120 employees
There are no trade unions in the firm (and never were). In the intervewee’s
opinion, there is no need for the existence of such a representation for employees,
because “as the employers, we try to fulfill our obligations towards our
employees consistently”. The owner thinks that trade unions should function;
however, “they should be created outside the firm’s structures”. There are
neither informal employees’ groups nor individuals representing the whole staff.
Polish funeral service firm, 64 employees
No workers’ organization exists in the enterprise; there are no trade unions. Trade
unions are viewed by the owner as a threat to the functioning of the enterprise
(“If there were trade unions I would have to finish my activity. Firstly, the firm is
too small, and secondly, it could not survive the trade unionists’ economic
demands”). The existence of trade unions is also viewed as an obstacle in the
present functioning of the firm (“If trade unions had developed, I would have to
negotiate, discuss things etc. I would not be able to concentrate on the firm’s
management”). At the same time, there is no representative of the whole staff of
the enterprise. The entrepreneur is of the opinion that maintaining individual
contacts with all the employees is sufficient.
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Polish tourist company, 23 employees
The company studied has no official trade union representation. There is also no
one who, informally, might represent the staff. It is the view of the owner that there
is neither such a need nor any desire on the part of employees. “This is a small
company. Employees can turn to me at any time. The door is always open for them.
Moreover, they are all aware of the fact that I did not build this company at their
expense, at the expense of their earnings. I meet my obligations with respect to
employees 100%.” (owner/employer)
Hungarian clothing company, 6 employees
The following opinion can be said to be typical: “I do not think we need trade
unions, we can handle things informally. If we cannot we can still quit and choose
to be home-workers.”(employee, sewer)
Spanish food company, 165 employees on average, but 320 in the summer
season
“At the moment, we don’t have any conflict. Over the five years that I’ve been here,
there hasn’t been any conflict on the labour level. There is no trade union. I don’t
know if this gives us advantages or not. The CCOO, the UGT have been here... but
they didn’t hold a meeting. Sometimes this brings us problems in respect of labour
risks... I’m not going to tell you that the relations are too good, because nothing is
ever too good, but we can’t complain and this is also reflected in the proper
working of the company. On a labour level, the company works extremely well and
also, more than ever, in one of the most important aspects: the daily working
atmosphere. We also have to bear in mind that this is a small town. The people who
work here are familiar, they know each other... and it’s normal for there to be a
relationship on the work level and also on the level of the town. An influencing
factor in the good atmosphere is that the friendly atmosphere has always been
here” (employer)
Spanish tourist company, 3 employees
“Mónica and I don’t have what you would call a purely boss-employee
relationship. We worked together at another company for some time, so our
relationship is more like two heads are better than one. And together we will be
able to achieve more than a single person. There is a lot of trust and confidence,
and I’ve asked her opinion on all of the changes that I have thought about making,
and other times she has convinced me that it would be better to do something else
that I hadn’t thought of. I think that the relationship has to be like that. It doesn’t
mean that if everything up until now has been white, it is now going to be green.
And I even think that it is better for her. Since we spend so many hours together
and have hit it off so well, when she has to do something, she doesn’t have to ask
my permission or ask what I think if she does it – the final cause is going to be the
same as if I had decided myself. She has demonstrated to me that she is a total
professional and knows how to do things, and I have full confidence in whatever
she does” (owner/employer)
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The interviews quoted above from the company case studies indicate the low
awareness or the lack of need both on the part of employers and employees for the
establishment and role of official institutions and collective actors of labour relations. The
lack of official institutions of labour relations does not mean a lack of social consent between
the actors involved in the labour process. In other words, we have to stress the informality of
employment relations and the rather paternalistic pattern of management in the firms
surveyed. In addition we have to note that in the ICT sector where the smooth communication
and the employees expressed their interest in a more intensive participation in the workrelated decision-making. For example, the lack of involvement which employees criticised in
the managerial decisions is reflected by the following opinion of a manager working in the
Hungarian interactive media company:
Hungarian ICT company, 62 employees
“Compared with my previous workplace it is a very bad thing that here we don’t
know where we are going. We give a lot of information to the management, but they
inform us sometimes just at the last minute. Often in a given situation we don’t
know what to do to help the company’s long-term aims.” (digital media manager)
Summarising the key patterns of the Labour Relations Systems in the countries
participating in the project, the following general characteristics should be stressed.
Evaluating the widely known collective actors (i.e. trade unions, employers’ associations) and
institutions of the LRS we found varieties of practices. In this relation it is worth noting the
dominance of the so-called dual-character of LRS (.e.g in Belgium, France, Germany,
Hungary, Slovakia and Spain). In these countries trade union and the institutions of
employees’ participation (Works Council) co-exist in the company practice. The single (UK,
Poland) or mixed system function only in the minority of countries. In the case of the
employees’ participation the size-related threshold varies, too. For example in Germany the
threshold is 5 employees and in Belgium 100 persons. The coverage rate of collective
bargaining is more stabile and better proxy indicator of trade union influence than the density
rate. The collective bargaining rate is higher in the former EU-15 countries compared to the
NMS. In the latter group of countries the firm-level bargaining dominates. Evaluating the
collective bargaining coverage rate and the presence of collective representation in firms
(collective representation = presence of trade unions and/or Works Council), a clear impact of
size-category of the firms was identified: as the size of the firms grows, the presence of the
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official collective representation is weaker. However the lack of ‘official’ collective
representation in the SME sector does not mean the lack of efforts to create social consent in
the workplace. The company case study experiences revealed varieties of practices. In some
countries (e.g. Belgium) the employers’ attitude towards trade unions was rather positive. In
other countries (e.g. France, UK) trade unions support such new initiatives which may
improve the employees’ “labour market value” independently of the size of firms (e.g the
example of the British Union Learning Found). This initiative reflects the new role seeking
efforts of trade unions how to adapt to the global competition pressure which is marked
growing uncertainty and instability of employment and forced employees to improve their
flexibility via participation in the life-long learning. However in the majority of firms
investigated in the NMS – with the exception of the ICT sector –, both owners/employers and
employees preferred the “informal regulation” of employment relations. In this respect we
have to note that the extremely fast development process of SMEs in these emerging market
economies in Central Europe did not allow the social and economic actors of the LRS to focus
on building of institutional framework in the sector. The core interest of the economic and
social policy makers was devoted to various aspects of the Foreign Direct Investment based
modernisation and the development of the SME sector received peripheral attention.
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ANNEX V.1 Varieties of forms of control/supervision in the firms
investigated
The previous section on the Labour Relations System characterising of the SME sector
informed us about the complexity of regulations instead of lack of them. However, even in the
most surveyed countries in the EU we dispose very little precise data on this institution.
Similarly on the forms of control in the micro, small and medium sized firms very limited
internationally comparable experiences are found. In this respect we share the following
opinion: “… the conventional wisdom often suggests that employment relations in micro and
small enterprises are easier and happier, since they are based on ‘ease communication,
flexibility of work roles and identification of worker with company objectives’. Obviously,
this is not always the case, but nevertheless it certainly can be argued that the small size
associated to micro and small enterprises imply certain set of characteristics that make this
type of enterprise different from the larger ones.”49 The core evidence of the literature review
suggests that especially in the micro and the small sized firms – in comparison with both
medium and large sized companies – the functions of ownership and management are blurred
and the owner/mangers often themselves are practicing the various business functions (e.g.
production, planning, organising, marketing, administration, etc.). This combination of
business functions in the small firms has often interpreted – mistakenly – as easier or
harmonious employer-employees relations.
The experiences learned from the company case studies carried out in various sectors
(e.g. manufacturing, services, ICT etc.) are indicating a great variety in forms of management
and control in the labour process. On the basis of the case-study evidences we would like to
avoid over-generalisation of the lessons learned from our findings. However, these examples
are illustrating the important roles of such variables - in shaping patterns of control – as
family role50, size, types of activity, sector, age of the firm or cycle of the development
trajectory of the company etc.
49
Employment Relations in Micro and Small Enterprises in the EU – Literature Review (2002) Dublin:
European Foundations for the Improvement of Living and Working Conditions – Main Results, p. 1
50
In spite its „anecdotic character”, it is interesting to note, that when Berlusconi the Italian Prime Minister –
who has well-know entrepreneurial background – was asked why he keeps monopolistic position in the Italian
media (especially in the TV) having such high position in the country political arena, he answered to the
question: „I am eager to give up, but my „family does not let me to do it.” (See in details: Stille, A. (2003) Italy:
The Family Business, The New York Review of Books, Vol. 1, Number 15, pp. 23-24.
325
Before presenting the empirical results of the company case studies carried out in the
Leonardo Project countries, it is worth to briefly present an attempt to develop a typology of
control in the labour process in the small firms. This classification is based on the
combination of the following two dimensions of control: “extent of employer’s economic
dependence upon employees” and “ability of employees to resist the exercise of the owners’
prerogative”. (Goss 1991, quoted by Employment Relations 2002:4-5.)
“‘Fraternalism’: This control strategy is common where is high level of employer
dependence on employees who provide skills and other inputs crucial to the success of the
enterprise. This form of relation is typical in certain high-tech or advanced service enterprises,
where differences between worker and boss are relatively modest. As it can be seen, this form
of relation is not due to the personalities of those involved or good person-to-person relations,
but rather an outcome of the particular productive circumstances.
‘Paternalism’: …this employment relation exclusively from the agricultural sector, where the
employer is of higher social standing and the employees are dependent on employers for their
livelihoods and even for housing, with little alternatives of employment in the area.
Meanwhile, the employer is responsible for the well-being of the employees in a wide sense.
This, paternalism as a control strategy tries to secure employee identification with the
employer’s aims by strong personal relations and mutual duties extending beyond work to life
in general.
‘Benevolent autocracy’. Here, the employers’ control is based on, actually, their role as
employer. The closeness of the links between employers and employees is emphasised but
only within the employment relationship, since the relation is not extended beyond the
workplace. In this relation, people involved accept the imbalance of power between employer
and employee as a fact of life rather than as a basis for struggle or negotiation where, at the
same time, relations are relatively informal and friendly but always restricted to the
enterprise’s boundaries… this type of employment relation is the most typical amongst micro
and small enterprises.
‘Sweating’: This … form of employment relations is characterised by a dominant power by
the employer and a weak position by the employee. Here, employers can replace employees
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easily and therefore have no incentive to develop narrow market relationships. Therefore,
labour costs are more critical than labour stability or trustworthiness.” (Goss 1991:8-10.)
Evaluating the results of the company case studies, we may only partly use these
categories of control. Naturally, due to the fact that the agriculture as a sector was omitted
from the investigation, the ‘paternalism’ was not found in any company cases. However, such
forms control as ‘Fraternalism’, ‘Benevolent autocracy’ and ‘Sweating’ were identified in the
firm-level practice. In addition, there are other particular factors shaping the forms of control
and management, such as the form of ownership (more exactly corporate governance), types
of activities (i.e. sector-specificity), size and the “cycle of the development path” of the firm.
The case of the Belgian construction firm the so-called ‘benevolent autocracy’ of the
“family ownership”, as a kind of control strategy was identified51.
Belgian construction-sector company, 100 employees
“One subdivision is managed by my daughter’s husband. First he has been
working for three years with us in the flooring. Now he has the management over
Multistep. After that we started the subdivision Multidecor, targeted exclusively
to private clients. My son Peter is the manager and there are now working 25
high-skilled painters. Our electricity division is called Electrolyse.” (…) “We
have a large office upstairs where we work with three people, including my son.”
(owner/employer)
Similar form of control was identified in some other micro-firms, like in the Spanish
tourist company, in which the owner/manager is doing everything. The experiences learned
from these and other company case studies indicate that micro-firms do not represent singletype of control. In these relations we would like to stress the role of the following important
dimensions. In the early life cycle of the micro-firm owner (manager) is practicing almost all
business functions (e.g. organising activities, dealing with administration, supervising
finances, taking care of client relations, etc.). In relation with the employment relations it is
worth noting the importance of close and personal character of the human relations.52
51
The detailed description of company case studies see in ANNEX I. 1!
This personal ‘nexus’ in the micro-firms is quite often erroneously identified with the harmonious social
relations, and conflicts raised in these relations are mainly interpreted as merely emotional/cognitive and/or
communicational in nature. This approach of the employment relations in the micro-firms underestimates the
role of interest and power in the employers-employees relations.
52
327
Spanish travel agency, 3 employees
“We are a small company where you are the managing director,
administration…human resources…everything” (…) “In very large companies,
targets are set. I worked with sales targets, but since we are a small company, I
don’t set sales goals. If the company was bigger, and I could pay more…I’d love
it. If I could give the workers everything that the Social Security takes, I think it
would be great. But I see the job motivation as the freedom that they have and the
flexible schedule”. (owner/employer)
Particular form of control was found in such ‘Old Economy’ sector as the food
processing. The Spanish food cooperative case reflects the particular institutional influence of
the well-known “Mondragon-model” of industrial cooperatives. The so-called “self-managed”
or “collective representation” model works well in this medium-sized company.
season
“From among all members, twelve are elected to form the management board. Of
these twelve members, one is appointed chairman, who holds the highest position
in the cooperative. Board members hold the representative and decision-making
powers of the cooperative. Then there is the technical team and the workers: the
manager, the commercial department, the administrative department and the
technical agricultural department... more or less the same organization chart as
in any other company. Based on the management board, we operate like a
company.”
“We implement shared management, a double-headed management, between my
companion and me. He goes where I can’t and vice versa. We work as a team.
Nothing is defined. No, there is one defined area, that of marketing, which is
carried out by my companion and a defined area of administration that I deal
with, both in our section and in the other two. He is the person responsible for
marketing fruit and vegetable products but there are certain things that get mixed
together but for the moment, and after five years, there isn’t any conflict.”
“Our democratisation of the company isn’t common practice in other companies,
in other words, anyone can be chairman, irrespective of his economic strength,
his productive strength, or anything... you are simply a farmer with just one
hanegada and very little production and you can be chairman of the cooperative,
you can succeed in being elected.” (manager)
In some cases we could identified the management style which takes the form of
‘paternalism’ which is limited exclusively to the working activity and does not take care the
non-working activity of employees.
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Polish tourist company, 23 employees
There is no formalized system of employee’s evaluation. This businessman
maintains that in his treatment of employees, he tries to be “like a father.” He is
aware of the fact that there are people working in his company who have various
types of problems, but most of the staff is reliable people who have never let him
down. “I rarely have any reservations with respect to tour guides. They usually
know exactly how to manage customers, they know how to approach them, make
contact, and it is necessary to remember that these are very diverse people—bank
directors once, doctors another time, and bricklayers yet another time. However,
drivers do not always know how to get to a customer psychologically.” (owner)
The company is organized like a family where the proprietor (father) knows all
the faults, weaknesses, and involvement of people at work. Thus, formalizing
such assessments is totally unnecessary. “I know perfectly well how a given
worker does his job because I am with him every day. I am the only one in the
company who decides who gets what kind of a bonus.” (owner)
In the original sense of ‘sweating’ type of control employees have asymmetrical
dependency from the employer. However the cases of the Hungarian clothing firms and of the
Polish funereal company are representing only partially this type of control strategy. Even in
these cases, in spite to the close supervision methods, employees have certain amount of
autonomy.
329
Hungarian clothing company, 6 employees
Four employees work in the manufactory of the company and the other 2
employees work as a home-worker. All of the employees are female, and the
average age is 52 years. Beside their professional qualification, all of them have
great experiences as a sewer and dressmaker as well. In this profession the older
employees are the more appreciated they are. The owner works only with older
women, because their functions in their family are not too emphasized anymore.
“I’m not willing to employ young women, because I know how things going if you
have a kid! I prefer elderly workers, because they are got over it.” (owner,
managing director) The other reason of the high average age of the employees is
the low legal salary. “I had three employees, who had left this company, but I
could absolutely understand them. I could pay them just a minimum wage legally,
and they were young, so in theirs case, because of the low amount of the social
security payment their maternity or child care leave benefits would be low as
too.” (owner, managing director) These employees have left not just this job, but
the whole sector as well.
Polish funeral service firm, 64 employees
There is no formal system of performance appraisal. The employees’
performance assessment is not formalized, because in the entrepreneur’s opinion
he “knows his workers well enough; they have been working for me for years,
know my requirements and keep trying to comply with them”. Performance
appraisal and thus usefulness of the employee is usually done on basis of the
criteria connected with a competence for consumer service and work
involvement. It is also important that the employees do not become routine,
which regarding the activity’s specification is the most important criterion for the
owner. “I keep observing whether they are not routine and become robots, who
do their jobs without any emotions.” (owner)
Here we have to stress the significance of size category of firms in shaping the patterns
control strategy. However the ‘size category’ – in our interpretation – is only a proxy
indicator. Its content covers heterogeneous development trajectories. Using the results of our
company case studies carried out in the Leonardo project, one type of the growth pattern is
represented in sectors where various business functions are well formalised and based on an
already accumulated and codified knowledge (for example: activities organised by ‘fordist’ or
‘neo-fordist’ paradigms, in both manufacturing and service sectors. In this case growth is
reflected in increasing complexity of relations between employers/owners and employees and
requires the use of new but already available and largely standardized management tools to
organise work and create social consent in the firm. This situation is well illustrated by the
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Polish pasta company characterised by closed supervision practice based on the combination
of financial incentives and personal control.
Polish food (pasta) company, 110 employees
“I care less for efficiency than for the quality of work. Unfortunately, employees
are paid for efficiency. The quality of work cannot be executed with the help of
rewards, and that is why, I’m forced to punish employees for bad quality of work.
If I don’t punish an employee financially, he won’t comply with all the rules.
Unfortunately, it is necessary because in production, exact cycle is essential.”
(managing director)
The company case studies call the attention to the growing importance of the
outsourcing of the non-core activities of firms. Although outsourcing is a relatively new
phenomenon in the transition economies (Poland, Slovakia, Hungary), it seems to us that it is
diffusing quite fast among SMEs. Here must be stressed that, on one hand, it can provide
greater flexibility in use of resources, on the other hand, it requires the adoption of new
coordination types between the forms of core functions retained within the firm and the
outsourced ones.
Polish ICT firm, 120 employees
„We outsource some things, like security and safety of health services, or
cleaning. We are considering outsourcing accountancy and personnel
management activities.” (owner/managing director)
As we have already mentioned the ‘size category’ is a proxy indicator which in itself
can hide other important aspects like the nature of activities which could be predominantly
new and in many cases not formalised. In the New Economy sectors such as ICT, New Media,
etc the owners/managers cannot use easily available and ‘ready-made’ management tools;
they have to cope with several particular problems related to the growth of their companies. It
means that they have to make more efforts to create social consent with their employees. In
addition they must invent new forms of coordination, including of creation of new roles in
organising work – using the method of ‘trial and error’ –, to ensure the successful
coordination in production or service providing process. Due to the lack of available
management methods and lack of time to create, and use new ones, these companies are often
forced to imitate and copy untested management methods borrowed from abroad which often
require learning efforts from the participants of the labour process.
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Hungarian ICT company, 62 employees
In the period of fast growth, the owners hired an organizational consultant.
In cooperation with an international auditor firm the company tried to create a more
efficient organisational model.
First they tried to implement a matrix-organisation, later they used the
project-based work organization, and presently this type of organisation is
functioning. According to this model working of the functionally separated
organizational units (Production, Development, Conception, Operation, Back
Office, and Project management) is harmonized according to the needs of the
incoming projects. The work and the related tasks are distributed at the weekly
project meetings. The preconditions of the system’s operation are the effective
information flow, the correct documentation and tracking of the individual tasks,
and the definition and maintenance of the norms regulating cooperation.
Because of the rapidly changing external conditions it is hard to identify the
necessary sources in advance, which results numerous organizational/logistic
conflicts. At the operational level of project type work these are reflecting in
information disorders, delay in carrying out tasks and problems in competence
shortage. Frequently happens during the project that the priority of the tasks is
changing in the progress.
In relation with the creation of new coordination-control mechanisms we intend to
indicate the growing importance of such organisational innovation as ‘communities of
practice’ In the case of the ICT sector, the knowledge development and transfer have
particular significance. Such new forms of coordination are emerging as “autonomous
working group” where the collective (social) norms are regulating the working practice. I
addition the so-called “communities of practices” as a special form of cooperation based on
developed social capital facilitates the creation and sharing non-coded knowledge and skills.
See the examples of the Spanish ICT firm playing leading role in the ICT sector.
“Social capital is a resource for individual and collective actors created by the
configuration and the content of the network of their more or less durable social relations.
Comparing social capital with other forms of capital (e.g. financial, physical) the following
similarities exist:
–
Social capital is a resource into which other resources can be invested with expectation
of future, albeit uncertain retains (e.g. conference participation → network creation →
trust building)
–
Social capital is ‘appropriate’ and to some degree ‘convertible’ (e.g. practice transfer)
332
–
Like physical and human capital, but unlike financial capital, social capital requires
maintenance to remain productive.” (Lesser 2000:5.)
Spanish ICT company, 30 employees
“The technical personnel are not responsible for selling, but they help sell. For
example, to sell a CAD system, the salesperson detects that a company may have
a need, but as part of the sales process, has to convince the customer technically,
and this is where the technical personnel come into play, demonstrating the
product, showing it to the company’s technicians, and clarifying any doubts…and
therefore the sales process is a combination, with a commercial facet and
another technical facet.”
“Here we try to get people to work as a team, although each has a role, the
borders are not completely defined, there are more or less a series of limits, but
they aren’t defined. There are certain jobs that can be done by technical
personnel or that can be done by a salesperson. It almost depends more on the
person than the definition of the role.” (general manager)
In relation of the maintenance of the social capital it is necessary to stress that its
content is radically different from other forms of capital (e.g. financial, human, etc). “Without
providing time, energy or other resources into social capital, the connection between
individuals tend to erode over time, much like oxidation on a piece of steel. However, unlike
human capital, maintaining social capital requires participation of least two parties; the
recipient alone can not update it independently from others.” (Adler – Kwon 2000:33.)
The ’community of practice’ can help to develop social capital in the following way
(Lesser 2000):
1. “The community serves as an intra-network clearinghouse by identifying those with
relevant knowledge and helping individuals within the community make connections
with one other. This is particularly valuable as the organisation grows and goes virtual
and individuals find it increasingly difficult to know who knows what.
2. The community acts as a reference mechanism, quickly enabling individuals to
evaluate the knowledge of other members without having to contact each individual
within network.
3. Communities of practice can help connect individuals from outside network to those
who are already identified as community members. This function can be critical,
333
especially for new employees who are looking to identify individuals who hold the
firm-specific knowledge needed to be successful in their new roles.
4. By being able to bring people together to develop and share knowledge, the
community creates the condition where individuals can test the trustworthiness and the
commitment of other community members. Through this process, the community
builds its new form of informal currency, with norms and values that are commonly
held and serves as conditions of payment that are generally accepted. It is through
these repeated interactions that individuals can develop empathy for the situations of
others and can develop the rapport with individuals in the community.
5. Communities of practice help shape the actual terminology used by group members in
everyday work communication. In addition, they generate and share the knowledge
objects or artefacts that are used by community members. Equally as important,
communities generate stories that communicate the norms and values of the
community and of the organisation as a whole. These stories enable new members to
take cues from more experienced personnel and allow the development of a
community memory that perpetuates itself long after the original community members
have departed.” (Lesser 2000:13-14.)
334
In summarising the company case study experiences and other research evidences, the
following Box presents the key features and rationales characterising the control strategy or
managerial style in the SMEs.
Distinctive Characteristics of forms of Control and Management Supervision
–
Size category of firms in close relation with close relation with the type of their activity
–
Core role of the Entrepreneur (Owner/manager)
–
Close personal ties between owner/manager and employees (but this does not mean
permanent “harmony” of employment relations)
–
Strong presence of social relations modelled by the institution of family
–
The SMEs represent a heterogeneous group of firms – Avoid the over-generalisation of
the firms belonging into this sector
Rationales
–
The key role of the sector and activity in shaping the forms the management and
supervision
–
The nature of knowledge and skill exploited in the firms’ activity (the share and
importance of the formal and non-formalised knowledge)
–
The time-dimension: firms’ development cycles
–
The role of the market segments: global (European), regional and local
335
ANNEX V.2 Recent developments in wage bargaining: examples from the
countries involved in the Leonardo project
Countries from the EU-15
Wage-bargaining in Belgium follows a pattern of biennial national agreements, the
last of which was concluded in January 2003, applying to 2003 and 2004. The agreement had
to be within the parameters set by the government, based on the benchmarks of Belgium’s
three neighbours — Germany, France and the Netherlands. The negotiators settled for an
indicative rate of 5.4 % cost increase over two years. Other issues related to harmonising
conditions for blue- and white-collar staff, training and greater flexibility in the application of
the government’s quota system for employment creation for young people and trainees in
small and medium-sized firms.
In February 2004, the collective bargaining parties in the metalworking industry in the
German region of Baden-Württemberg signed new collective agreements. The settlement,
which was subsequently adopted as a ‘pilot agreement’ for other regions, provides for a pay
increase of 2.2 % in 2004 and 2.7 % in 2005. Of each annual pay increase, 0.7 percentage
points will serve to allow for a ‘costneutral’ adjustment to the introduction of the new pay
framework agreement of 2002, which merges blue- and white-collar job categories into a
single grading system. As part of the compromise, it was agreed that, deviating from the
industry standard 35-hours working week, up to 50 % of the employees in an enterprise can
work up to 40 hours. Originally, the employers had asked for longer working hours and a
general ‘opening clause’, with unlimited authority for local management and works councils
to decide such matters. In the final settlement, the unions gained the concession that they and
the employers’ federation need to be informed and give their consent. Against the background
of its defeat on the 35-hour week issue in eastern Germany in 2003, IG Metall regarded the
outcome of the 2004 bargaining round as a moderate success. The dispute in the East German
steel and metal industry had ended after four weeks when the trade union called off the strike.
While employers in the steel industry conceded a gradual reduction, in the metalworking
industry, employers conceded no reduction in the working week. It was IG Metall’s worst
defeat in decades.
336
The central organisations in Spain concluded a cross-industry agreement in January
2003, laying down guidelines and criteria for lower-level collective bargaining in 2003. Like a
similar one in 2002, the agreement puts pay moderation at the centre of bargaining, explicitly
referring to the requirements of stability in the EMU. The agreement also advises lower-level
bargaining to promote increased employment stability in exchange for more flexible working
time. As in 2002, this was a typical ‘agreement to agree’, emphasising the value of “dialogue
and social concertation on criteria and content applicable at the different levels of collective
bargaining”. The agreement is valid for one year with the possibility of renewal or extension.
An innovation is that it provides for the creation of a Monitoring Commission (Comisión de
Seguimiento) for the purpose of promoting social dialogue; gathering and disseminating good
practices related to equal opportunities; promoting the European-level social partners’ July
2002 framework agreement on telework; and fostering the promotion of ‘observatories’ at
national sectoral level. The new agreement reflects the spirit of various EU directives in
calling for ‘a suitable balance between flexibility and security, establishing frameworks that
allow companies to adapt internally to changing circumstances’. Also in line with EU
directives, the 2003 agreement calls for equal treatment and non-discrimination on grounds of
gender, ethnic group or race, while promoting the content of the European declaration on the
employment of people with disabilities, signed in May 1999 by EU-level social partners.
Countries from the new Member States
In late 2002, on the prompting of the government, a tripartite agreement was reached
in Hungary’s re-established National Interest Reconciliation Council. The agreement
recommended to sector and company bargainers a 4.5 % wage increase in real terms, and a
standstill in raising the level of the statutory minimum wage. In 2003, fewer than half of the
collective agreements reported to the Ministry included provisions on an annual wage
increase, in contrast to 60 % in the previous year. The negotiated increases, however, were
usually higher than the recommendations.
In February 2003, Poland’s Minister of Labour proposed a ‘pact for labour and
development’ and from May 2003 the Tripartite Commission for Social Issues has been
involved. In September, employers’ organisations and some trade unions reached a partial
agreement on minimum wages, public sector pay increases and cuts in business taxes, which
was accepted by the government. However, the NSZZ Solidarnoch trade union rejected the
337
deal and withdrew from further negotiations. The future of the social agreement initiative is
uncertain.
Although national-level tripartism is operational again in Slovakia, after a two-year
break in 1997 and 1998, the social partners and the government have not been able to reach a
new general agreement since 2000. The government determined the rise of minimum wages
(currently at 41 % of the estimated average monthly wage) unilaterally, setting an increase of
over 10 % for 2003.
Source: ‘Industrial Relations in Europe’ 2004: 47-50.
338
ANNEX V.3 Key provisions of EU Directive (2002/14/EC) establishing a
general framework for informing and consulting employees in the
European Community
The Directive applies to undertakings with at least 50 employees or establishments having at
least 20 employees (the choice is left to the Member States). It provides employees with the
following rights to information and consultation:
•
Information on the recent and probable development of the undertaking’s or
establishment’s activities and economic situation;
•
Information and consultation on the situation, structure and probable development of
employment within the undertaking and on any anticipatory measures envisaged, in
particular, where there is a threat to employment; and
•
Information and consultation, with a view to reaching an agreement, on decisions
likely to lead to substantial changes in work organisation or in contractual relations.
Information and consultation arrangements set out in agreements between management and
labour, including at undertaking or establishment level, may differ from those laid down in
the Directive.
While the Directive does not stipulate that information and consultation must be provided
through any particular channel or structure, it defines such information and consultation as
taking place between the employer and employee representatives provided for by national
laws and/or practices. Member States shall ensure that employees’ representatives, when
carrying out their functions, enjoy adequate protection against dismissal.
The Directive must be transposed in the Member States by 23 March 2005 – though countries
which currently have no general, permanent and statutory system of information and
consultation or employee representation may phase in the Directive's application to smaller
firms up until 2008.
339
ANNEX V.4 Labour disputes in the countries participating in the Leonardo
project
Table 10.15 Number of disputes referred to arbitration in the countries participating in
the Leonardo project
Country
Belgium
2000
n. d.
2001
n. d.
2002
n. d.
2003
n. d.
2004*
n. d.
France
n. d.
n. d.
n. d.
n. d.
n. d.
Germany
n. d.
n. d.
n. d.
n. d.
n. d.
6
0
4
10
n. d.
65 settled
62
68
80
60
2
1
0
1
1
n. d.
n. d.
n. d.
n. d.
n. d.
0
0
0
1
2
Spain
UK
Hungary
Poland
Slovakia
Source: Developments in Industrial Actions: 2000 – 2004
Table 10.16 Number of disputes referred to mediation in the countries participating in
Country
Belgium
2000
n. d.
2001
n. d.
2002
n. d.
2003
n. d.
2004*
n. d.
France
2,768
2,131
n. d.
1,479
n. d.
Germany
n. d.
n. d.
n. d.
n. d.
n. d.
Spain
115
125
149
172
n. d.
UK
1
5
n. d.
n. d.
6
Hungary
6
5
9
8
11
Poland
160
102
65
39
n. d.
Slovakia
23
13
18
10
9
340
Table 10.17 Number of disputes referred to conciliation in the countries participating in
Country
Belgium
France
Germany
Spain
UK
Hungary
Poland
Slovakia
2000
n. d.
1,556
n. d.
1,070
1,500
(1,152
settled or
progress
towards
settlement)
n. d.
n. d.
n. d.
2001
n. d.
1,089
n. d.
839
2002
n. d.
n. d.
n. d.
815
2003
n. d.
917
n. d.
784
2004*
n. d.
n. d.
n. d.
605
1,284
(1,075
resolved)
1,326
(1,166
resolved)
1,381
(1,241
resolved)
1,271
(1,149
resolved)
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
n. d.
Table 10.18 Labour Disputes before and after the Changes in the Political-Economic
Transition (the number of debates)
The topic of the dispute
Re-organization of the company
before 1990
96
after 1990
117
30
114
24
109
The security of the working place
85
175
Wage issues
245
213
Benefits
196
158
Working time, shift-work etc.
84
54
Working hours (overtime)
84
64
Benefits in case of dismissal, lay-off
39
122
Privatization
The introduction of the Employee Share
Ownership Program
Source: Makó-Novoszáth-Veréb 1998:172.
341
Table 10.19 Attitudes to trade unions and LRS institutions – experiences based on
company case studies
Number
of case
studies
2
Manufacturing/
Construction
(+)
France
4
Poland
Countries
Sectors
Service
ICT
Other
n.d.
n.d.
—
n.d.
n.d.
n.d.
n.d.
4
(—)
(—)
(—)
(—)
Hungary
3
(—)
(—)
(O)
—
Germany
4
(O)
(O)
(O)
(O)
Spain
4
(O)
—
(O)
—
Slovakia
3
(O)
(O)
(O)
(O)
UK
4
n.d.
n.d.
n.d.
n.d.
Total
28
Belgium
Notes: (—) indicates negative attitude
(O) indicates ambiguous attitude
(+) indicates positive attitude
n.d. indicates no data available
342
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346
PART VI. KNOWLEDGE USE AND INNOVATION IN THE
SME SECTOR
11. Characteristics of SMEs’ Knowledge and Competence Development
Evaluating training practice in general, and particularly in the SME sector, no social
actors would question the importance of developing human resources – including skill and
knowledge improvement as a part of life-long learning – in order to increase the
competitiveness of the European economy (Lisbon Summit guidelines, 2000). This consensus
among social actors is based on the new growth theories53, according to which economic
development or wealth accumulation is dependent more on the intensity of the accumulation
of human capital (defined by the combination of levels of knowledge, skills and competencies
of the workforce) than on the rate of accumulation of physical capital.
11.1 Training and knowledge use practices at a European and national level
One of the core problems concerning SMEs’ training practices is the lack of financial
resources and the low-motivation of managers to invest in skill development. This is the socalled ‘competence paradox’, according to which firms investing in the development of their
employees’ competence simultaneously increase the risk that these employees will leave the
company. Contrary to the traditional quantitative, survey based approach on SMEs’ training
practices, this analysis aims to better understand this kind of non-formalised learning in
company practice, using the empirical experiences of case studies in three selected sectors.
One of the most important methodological messages of this research project is that the ‘right
mix’ of both quantitative and qualitative research techniques is able to describe the variety of
competence development and training in SMEs.
53
“In the traditional theory, new knowledge plays no role; rather, static efficiency, determined largely by the
ability to exhaust scale economies supports economic growth. By contrast, the new theories are dynamic in
nature and emphasize the role that knowledge plays. Because knowledge is inherently uncertain, asymmetric and
associated with high transaction costs, divergences emerge concerning the expected value of new ideas. People
therefore have an incentive to leave an enterprise and start a new enterprise in an attempt to commercialise the
perceived value of their knowledge. A distinguishing feature of these evolutionary theories is the focus on
change as a central phenomenon. Innovative activity, one of the central manifestations of change, is at the heart
of much of this work. Entry, growth, survival, and the way enterprises and entire industries change over time are
linked to innovation. The dynamic performance of regions and even entire economies is linked to how well the
potential from innovation is tapped.” Source: Observatory of European SMEs (2004), p. 12.
347
In identifying and evaluating the importance of the non-formal elements of knowledge
creation and development, there is a growing interest in the notion of competence, which “can
be defined as the synthesis of knowledge (what you can learn in education), skills (what you
gather in your job, at your workplace and in social life from your daily experiences) and
aptitude (this is the ability to use this knowledge and skills)” (Argyris 1993). The EU
Commission definition of competence basically covers the above listed elements, or some of
them, considering competence as the capacity to use qualifications, experience and knowledge
efficiently. In our analysis we adopt Nordhaug’s so-called ‘Competence Chain Model’ in
focusing on the activities of SMEs aimed at upgrading their pool of competence in the
following main fields (Observatory 2003):
a) ‘Development of in-house competence’, which represents the measures a firm takes to
develop the competence base they have available within their in-house human
resources,
b) ‘External competence acquisition’, where firms acquire (buy or access by other
means) different external competencies that are outside the firms’ boundaries and
which are missing internally, but may be considered as essential to maintain
competitiveness or simply the survival of the firm (Makó – Nemes 2003).
Apart from this general consensus among social actors on the increasing role of human
capital in economic and social development there are many problems, both theoretical and
methodological, which make it difficult to understand and assess the role of knowledge in the
performance of business organizations in general and in the SME sector in particular. We
have to face further problems, when we try to compare and evaluate the situation of SMEs in
the EU (15) countries and the New Member States (NMS). The recent phase of enlargement
of the EU, which includes countries from Central and Eastern Europe and from the
Mediterranean, took place in 1st May 2004. The enlargement certainly opened a new
challenging area for social and economic actors, both in the Old and New Member States. In
the EU (25), the variety of legal, social and cultural norms both in human resource utilisation
and working conditions in a large sense across Europe create unprecedented pressure on
policy makers to better understand the new realities. Among many challenges, one of the most
348
important is how to create a more competitive/flexible and at the same time socially
stable/cohesive New Europe. To avoid illusions and elaborate comprehensive and workable
policies in the field of knowledge and competence development, it is necessary to understand
the heterogeneity of practices in EU (25) countries involved in the Leonardo project.
Unfortunately, none of the comparative statistical analyses or comparative data
collections includes all EU (15) and NMS. In addition, there is no data for Slovakia in the
Continuing Vocational Training Survey (CVTS: 1999) organised by Eurostat, nor in the
European Working and Life Conditions Survey (2001).
Before presenting the general picture of vocational training in the Leonardo countries
and in the SME sector it is worth presenting briefly the notions and definitions closely related
to training practice. The key reason for this exercise is to improve the theoretical and
methodological foundations of knowledge creation, development and use in the practice of
business organisations in general and in the SME sector in particular. Another important
practical argument is that so far, the overwhelming majority of studies dealing with firm-level
training practices have focused their attention mainly on formal training activities that are
easy to understand and measure by such formal indicators as the time and financial resources
spent on the training, etc. This training supply is provided by educational and training
institutions and usually legitimated by various forms of certificates. Finally, it is necessary to
mention that the empirical studies conducted in the SME sector have failed to demonstrate a
positive relationship between firms’ participation in formal training activities and their
economic performance and competitiveness.
Unfortunately, there is relatively little comparable data on the knowledge use and
training practices of SMEs among the EU-15 and the New Member States (NMS). For
example the latest European Continuing Vocational Training Survey (CVTS) covered only
the period from 1996 to 2001, and only the following NMS were involved in the project: the
Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Romania and Slovenia.
Slovakia, Malta, and Cyprus were missing. No new CVTS has been organised since 2001.
The new CVTS was carried out in 2005 and the results of the data analyses will only be
published in 2007. The other comprehensive survey on working conditions which covered
both NMS and ACC surveyed 12,000 workers and was carried out between 2001 and 2002.
(The results of this working conditions survey were compared to the EU-15 country working
349
conditions survey carried out in 2000 on a sample of 21,500 workers.) Unfortunately, there
was no independent section dealing with training; the issue was analysed only in the ‘work
organization’ section.
The latest CVTS (1999) gives a general overview on various formal (measurable)
characteristics of company training practice. These are for example: fields of training, hours
spent on CVT courses per 1,000 working hours, internal versus external training courses,
types of training provider institutions, composition of employees participating in training
courses, relations between training and technology used by the company, etc.
Evaluating the time spent on CVT courses by fields of training – comparing the
countries participating in the Leonardo project – the following rank order was identified54:
1. Computer Science (computer use) – EU-15 average: 17 hours
2. Engineering and Manufacturing – EU-15 average: 16 hours
3. Personal skill development – EU-15 average: 12 hours
4. Management and Administration – EU-15 average: 11 hours
5. Environmental protection, occupational health and safety – EU-15 average: 9 hours
6. Sales and Marketing – EU-15 average: 9 hours
7. Accounting, Finance – EU-15 average: 5 hours
8. Languages – EU-15 average: 4 hours
54
In the original CVTS 10 fields of training were distinguished, but for the purpose of our analysis, we omitted –
due to lack of more precise information or significance in hours spent on training – such fields of training as
‘other’ and ‘office work’.
350
Table 11.1a Hours Spent in CVT Courses by Field of Training, (1999*)
Size
category
of firms
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
EU
-15 Belgium France Germany Spain UK Hungary Poland Slovakia
Accounting, finance
7
4
9
12
4
6
14
11
n.d.
6
4
5
5
3
9
15
8
n.d.
5
5
8
6
9
11
3
6
n.d.
n.d.
2
3
2
0
1
5
1
7
1
3
1
4
1
7
1
6
1
0
9
9
9
4
2
7
4
5
4
5
5
Computer Science/computer use
23
31
21
17
29
11
13
n.d.
17
29
24
17
13
11
9
n.d.
14
17
20
15
13
14
5
n.d.
16
20
21
16
15
13
Engineering and manufacturing
8
n.d.
32
10
13
17
7
14
16
n.d.
28
15
10
12
15
16
23
n.d.
29
15
11
14
21
27
26
n.d.
29
14
11
14
19
22
23
Environmental protection, occupational health and safety
1
6
5
6
11
5
1
4
1
7
7
4
9
3
5
3
1
5
5
3
8
6
7
2
1
6
5
4
8
5
6
2
n.d.
n.d.
n.d.
n.d.
n.d.
* Activity coverage is NACE Sections C to K and O. In: SMEs in Europe, Competitiveness, Innovation and the KnowledgeDriven Society, (2002) (Data 1996 – 2001) Brussels: Eurostat – EU Commission – Theme 4, Industry, trade and services, pp. 51
and 60.
351
Table 11.1b Hours Spent in CVT Courses by Field of Training, (1999*)
Size
category
of firms
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Small
(10– 49)
Medium
(50– 249)
Large
(250+)
Average
Average
EU
-15 Belgium
France Germany Spain
Languages
UK Hungary Poland Slovakia
3
5
3
2
11
1
8
4
n.d.
5
10
6
6
20
0
8
6
n.d.
4
4
4
6
7
7
8
6
n.d.
n.d.
7
4
7
8
5
9
5
4
n.d.
9
7
5
10
7
13
6
4
n.d.
12
11
8
7
7
11
7
16
7
10
6
15
Personal skills development
5
5
7
5
n.d.
n.d.
10
8
6
7
6
15
2
13
n.d.
11
13
8
7
10
15
5
9
n.d.
12
12
13
12
10
9
13
14
4
4
33
22
n.d.
n.d.
10
8
7
12
8
12
14
10
n.d.
8
4
8
11
10
5
11
11
n.d.
9
9
15
9
7
8
11
10
23
11
11
22
10
10
16
8
8
6
8
9
21
3
7
20
n.d.
n.d.
n.d.
7
8
13
1
6
7
14
1
Management and Administration
10
10
9
9
Sales and Marketing
* Activity coverage is NACE Sections C to K and O. In: SMEs in Europe, Competitiveness, Innovation and the Knowledge-Driven
Society, (2002) (Data 1996 – 2001) Brussels: Eurostat – EU Commission – Theme 4, Industry, trade and services, pp. 51 and 60.
352
Time devoted to computer related training is above the EU-15 average (17 hours) in
Germany (21h) and France (20h). Next come Belgium and Spain (16h), followed by the UK
(15h), Hungary (13h) and finally Poland (8h). Evaluating the relations between firm size and
hours spent on computer related training, with the exception of Hungary, smaller companies
are spending more time than larger ones. In relation to computer skills, it is worth
emphasising the rate of Internet usage of the whole population, which is an important resource
in the New Economy. The importance of a general diffusion of Internet usage – given the lack
of resources of SMEs available for training – may facilitate the diffusion of the new working
methods enabled by the ICTs. (Koike – Inoki 1990). Comparing individual and company
Internet usage, the following asymmetric pattern was found. With individual usage, striking
inequalities were identified between countries belonging to the EU-15 and NMS. On the
contrary, differences in company Internet usage are still visible but rather modest. (See Figure
11.1!)
Figure 11.1 Individual and company Internet usage
Source: Ottens 2005:2.
Interestingly enough, in spite of the ‘hype’ surrounding the Knowledge Economy in
the debate, such traditional fields of training as ‘engineering and manufacturing’ still play a
353
dominant role in company training practice. These courses occupy the second position in
terms of hours spent on CVT courses. On the one hand, companies in Belgium (29h), Poland
(23h), Hungary (22h) and the UK (19h) spend more time than the EU-15 average (16h) on
this kind of training. On the other hand, in the remaining three countries (France, Spain and
Germany) the time spent on ‘engineering and manufacturing’ related courses was below the
EU-average. With the exception of Hungary, Poland, the UK and France, there is no linear
relation between the size category of firms and the time spent on training.
‘Personal skill development’ comes third in the ranking of training fields. However,
we must treat this data with caution because the category of ‘personal skill development’
seems to be interpreted differently from country to country. This is shown most explicitly in
the data for Poland; although in Hungary only 4 hours were spent on average on this kind of
training, in Poland the same indicator is more than five times higher, especially in the case of
large firms, where the differences are even higher. Beside Poland, this type of training is of
particular importance in UK firms.
Training in the field of ‘Management and Administration’ was the fourth most popular
in the countries investigated. However, it is interesting to note that there are relatively big
differences between the countries. Thus, only the UK (15h) is above the EU-15 average (11h),
all other countries lag behind, usually with less than 10 hours devoted to this field. It is
interesting to note that in emerging market economies like Hungary and Poland, the time
spent on ‘Management and Administration’ related training is the lowest among the countries
surveyed.
‘Environmental protection, occupational health and safety’ and ‘Sales and Marketing’
occupy the next two positions in the rank order of training fields, with 9 hours dedicated to
them. It is interesting to note that while ‘Environmental protection, occupational health and
safety’ shows a fairly equal distribution according to the size category of firms within a
country, in the case of ‘Sales and Marketing’ there are larger differences. This may be due to
the ‘obligatory character’ of some of these courses (e.g. in the majority of the countries, the
law defines what kind of environmental or occupational health and safety training is required
in a given type of work). Notwithstanding this ‘obligatory character’ of the these types of
training, we identified a significant degree of difference in the awareness of environment
protection and occupational health and safety, which is well reflected by the time devoted to
354
them: British entrepreneurs/owners spend far more time on environment protection and
occupational health and safety related training courses than their Polish counterparts. In
addition, the importance of ‘Sales and Marketing’ training varies greatly from country to
country and according to the size category of firms. For example, in the UK, Hungary and
Poland this kind of training is relatively popular among small companies, while it less
important among medium-sized and large firms. On the contrary, in France, large enterprises
spend more time on it than medium-sized and small firms.
Time spent on ‘Accounting and finance’ related training – interestingly enough – is
the highest in Hungary, due to the complicated and unstable character of financial rules. If we
compare this type of training only within the category of small firms – which is the core topic
of our investigation, again, Hungarian firms spend most time on this issue, surprisingly
followed by Germany and Poland.
It is widely accepted in the community of experts studying and evaluating the roles
and new opportunities of SMEs in the fast growing global knowledge economy, that beside
‘computer sciences/computer use’ knowledge – which is ranked number one among the
training fields measured by time spent on CVT courses – time spent on ‘foreign language’
related learning is located at the bottom-end of the ranking. The time spent on languagerelated CVT courses indicates a rather similar pattern: all countries (with the exception of
British firms) are aware of the importance of language skills. They spend more time –
especially Spanish firms – than the EU-15 average on this kind of training. In addition to the
time spent on language training, it is worth briefly reviewing the English-language reading
ability of the whole population.
355
Figure 11.2 English reading ability in the Leonardo countries
(question: How well do you read English? – percentage of the population)
100%
90%
80%
46
70%
60%
67
80
42
26
19
24
23
30%
17
11
9
8
16
22
22
31
13
48
73
80
40%
10%
37
59
50%
20%
38
36
44
14
19
34
30
13
0%
Poland Hungary Slovakia
Spain
very or quite well
France Germany Belgium
not very well
NMS-9
EU-13
EU-22
not at all
Source: European Foundation for the Improvement of Living and Working Conditions 2004:29.
Note: English speaking countries (Ireland, Malta and the UK) are excluded.
The Figure 11.2 presents details on the English reading ability of the population of the
countries involved in the Leonardo project. A sharp difference between the nine NMS and the
EU-13 is clearly demonstrated. Among the NMS countries a higher proportion of the
population who can read English was found in Slovakia than in Hungary. Despite the
significant gap in the English reading ability of the EU-13 versus NMS-9, we must note that
the gap in the ability to read English is wider among older people: differences in the 50-64
age group were up to three or four times (10% vs. 38% of the population speaks very well or
quite well) whereas for the 18-24 age group the difference was less than double (32% vs.
63%).
Comparing the practices of enterprises providing internal and external CVT courses by
size category of firm, size visibly matters more in the case of internal CVT courses. For
example, firms employing 250 or more staff make more intensive use of their own training
resources. Alongside similar patterns identified in the relative differences (by size category) in
the provision of internal CVT courses, we found significant variations in the share of
companies organising in-house training courses. The proportion of this type of internal CVT
course is above both the EU-15 and EU-25 average in Germany and the UK. Hungary, Spain
356
and Poland represent the bottom-end of countries organising internal courses, whilst France
and Belgium are located between these two groups of countries. See in detail in Table 11.2
Table 11.2 Percentage of all enterprises providing Internal CVT courses, by size class
Country
Total
Size of enterprise (number of persons employed)
0-9
10-49
50-249
250 or more
EU-25
55
45
49
66
85
EU-15
56
46
50
68
86
Belgium
42
33
38
51
73
France
49
38
42
56
87
Germany
59
48
53
74
85
Spain
33
19
25
47
74
Hungary
36
27
30
39
71
Poland
36
33
33
36
63
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
68
57
62
80
89
Source: Continuing Vocational Training Survey (CVTS), data set available on the EUROSTAT portal
The data presented in the next table suggests that there are no significant differences in
the share of firms organising external CVT courses, because all enterprises rely heavily on
external channels of knowledge transfer. See in detail in the Table 11.3
357
Table 11.3 Percentage of all enterprises providing External CVT courses, by size class
Country Total
0-9
10-49
50-249
250 or more
EU-25
91
89
90
94
96
EU-15
91
89
90
93
96
Belgium
93
95
93
93
93
France
95
94
94
97
99
Germany
91
90
90
92
98
Spain
92
93
92
91
90
Hungary
88
88
87
89
89
Poland
92
89
91
95
93
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
89
84
87
93
95
Source: Continuing Vocational Training Survey (CVTS), data set available on the EUROSTAT portal.
Evaluating the importance of training providers supplying external CVT courses, the
following two patterns can be identified. According to the results of the CVTS (1999) at both
EU-25 and EU-15 levels the rank order of training providers was similar. However, a country
level comparison of the rank order of different types of training providers revealed significant
differences, with the exception of private training organisations, which occupied the first
position in each country. The training provider institutions are listed below in rank order:
1. Private training organisations
2. Specialised training institutions
3. Equipment suppliers
4. Public schools and colleges
5. Chambers of Commerce, sector bodies and employers’ organisations
6. Parent/associate companies
7. Universities and other higher education institutions
8. Trade unions
The data in the Table 11.4 indicates both similarities and visible differences in the
relative importance of external CVT course providers. In terms of similarities, the first
position in all countries investigated is occupied by ‘private training organisations’. In the
358
case of all other training providers, we identified great differences in their roles in different
countries. Assessing training providers in second and third positions, the following patterns
were identified: ‘specialised training institutions’ are in second or third position in Belgium,
Hungary, Poland and the UK. ‘Equipment suppliers’ are in second or third position in France,
Germany, Belgium and Spain. Interestingly, universities and other higher education
institutions are in second position only in Hungary, and third in Poland, while in all other
countries, these institutions occupy the bottom of the hierarchy of training providers, together
with the trade unions.
Beside the unquestionably pre-eminent position of ‘private training organisations’, in
the case of all other training providers, we identified the following double pattern. The first
group of countries is characterised by ‘institutional sickness’: in these countries training is
concentrated in the activity of one or two training providers (e.g. in Poland, ‘chambers of
commerce, sector bodies and employers’ organisations’ (21%), in Germany, ‘specialised
training institutions’ (20%) in Belgium and ‘public schools and colleges’ (15%) in the UK. In
the other group of countries, instead of ‘institutional sickness’ we found institutional
proliferation (e.g. ‘universities and other higher education institutions’ (19%), ‘specialised
training institutions’ (17%) and ‘public schools and colleges’ (14%) in Hungary)
Table 11.4 Rank order of training provider institutions supplying external CVT courses
1
EU-25
priv
EU-15
Priv
Belgium
priv
France
priv
Germany
priv
Spain
priv
Hungary
priv
Poland
priv
UK
priv
2
spec
Spec
spec
equip
choc
par
univ
spec
pub
3
equip
Equip
equip
par
equip
equip
spec
univ
spec
4
pub
Pub
par
choc
spec
choc
pub
equip
equip
5
choc
choc
choc
pub
par
spec
equip
par
univ
6
par
Par
pub
spec
pub
univ
par
pub
par
7
univ
Univ
univ
univ
union
union
choc
union
choc
8
union
Union
union
union
univ
pub
union
choc
union
Legend: pub = Public schools and colleges; univ = Universities and other higher education institutions; spec = specialised training
institutions; priv = Private training organisations; equip = Equipment suppliers; par = Parent/associate companies; union =
Unions; choc = Chambers of commerce, sector bodies, employers’ organisations.
359
The following quotations from the company case studies illustrate well the importance
of the role different training providers play in supplying the necessary knowledge:
Belgian construction firm, 100 employees
The sector has a lot of partnerships with educational institutes. There are a lot of
work placements, fully integrated in the curricula and of sufficient duration. The
professional profiles define the final terms of the curriculum. (…) The FVB, The
Flemish Fund for Vocational Training in the building and construction industry is
also contributing to the promotion of job opportunities in schools. Since 1996
they have been cooperating intensively with educational institutes. More than 200
schools, i.e. 380 building and construction departments with a total of 12,000
third grade students, have a partnership with the FVB. Frequently the integration
of work placements, the fine-tuning of curricula to the needs of the professional
world, infrastructure, logistics and course materials are jointly evaluated.
Training for trainers is offered as well as seminars on safety issues. The annual
budget of the FVB for these partnerships is circa 2 million euro.
Belgian travel agency, 2 employees
“First of all, I contact schools because it is a plus to recruit somebody with a
basic knowledge of all tourism aspects. Apart from that, I always pass the
advertisement to the VDAB (Flemish Service for Employment and Vocational
Training) and specific federations. They have a magazine and a website. Working
this way, you have more possibilities to find someone with experience.” (owner)
Polish funeral company, 64 employees
“I’m furious, because the workers don’t pay attention during courses and make
stupid mistakes later on. I paid a lot of attention to such courses until the year
2000. After that I was of an opinion that the workers fulfil their duties properly
and that there is no point in over–training them. (…) I got discouraged because
in one instance, I paid 50% of the costs for one promising employee throughout
three years, and, on finishing his studies, he went over to our competitor.”
(owner)
Hungarian travel agency, 6 employees
“As regards tourism education in Hungary, the National Tourism Development
Strategy notes ‘it is a general contradiction that there are fresh graduates coming
from the various schools which (also) teach tourism, but the agencies would
rather have a labour force with particularly specialized training and practical
knowledge.’ This is reinforced by the regional leader of Turizmus Rt., too,
according to whom, ‘at the college level of training, many subjects provide
knowledge for which there is no, or hardly any, need in practice. […] There is no
course book on travel agency management in Hungary either.’ ”(managing
director)
360
Spanish ICT company, 30 employees
“We are continually training our employees. The technical personnel receive
continuous training because the products are constantly evolving; more than
once a year they receive some training. They have a product that is very
extensive and that they have to know very well; they work on it, take courses,
receive documentation, receive a large amount of information; just like the
salespeople, they have a meeting at least once a year where they hear about all of
the new developments, the new products being incorporated into the company,
new functions…all paid for by the company.” (general manager)
Spanish travel agency, 3 employees
“When you work at a travel agency, it is necessary to take additional training
courses, but in the case of wholesalers, no. If I were an IATA travel agency, yes,
because when you get your degree, you don’t come out ready to enter data for the
first time in a screen, to read the initials for each city, and look up flights, then, in
that case, it is necessary. IATA also gives courses so that your employees can learn
to handle its tools. In my case, no. It is much more comfortable not being in IATA.
The minute I become part of IATA, I’ll have to go to a course, and we’ll all have to
go, and whoever else has to go. As soon as I start selling airline tickets, yes,
because they change AMADEUS, or because it is necessary because of whatever
may come up, but now, in my current situation, it isn’t necessary”.
(owner/employer)
After systematically reviewing the key actors in supplying knowledge, we need to
measure the efficiency of knowledge transfer. We are aware that there is no generally
accepted single indicator to assess the efficiency of training. In European practice, the
following methods of evaluation were used to assess the effect of Continuing Vocational
training courses: measuring the satisfaction level of participants, carrying out tests to verify
new skills, formal validation or certification of skills acquired, measuring if new skills are
applied at work, and using indicators of any improvements in production.
361
Reviewing the various methods used to evaluate the effects of CVT courses, the
results can be compared in various dimensions. Firstly, we compared the results on an EUlevel and country level. Secondly, we tried to identify the impact of the size-category of firms
in relation to the performance measurement of CVT courses. For the first dimension, we
found the following rank order:
1. Level of satisfaction of participants
2. Measuring if new skills are applied at work
3. Formal validation or certification of skills acquired
4. Carrying out tests to verify new skills
5. Using indicators of any improvements in production
In relation to the EU-level comparison, we must point out that there are no noticeable
differences in the rank order between EU-15 and EU-25 countries. In addition, we should
mention that ‘using indicators of any improvements in production’ is the most rarely used
method of course evaluation. Comparing the country-level differences, the following patterns
were identified: in the UK all methods of evaluation, with the exception of ‘using indicators
of any improvements in production’, were used at a higher rate than the EU average (both
EU-15 and EU-25). In the case of Poland, ‘formal validation or certification of skills required’
and ‘measuring if new skills are applied at work’ are more frequently applied than the EU
average. In France, the following two indicators were used more frequently than the EU
average: ‘Measuring satisfaction level of participants’ and ‘Carrying out tests to verify new
skills’. Finally, it should be pointed out that in the Hungarian practice, ‘measuring if new
skills are applied at work’ and in Spain, ‘formal validation or certification of skills required’
were used at a higher rate than the EU average. See the detailed statistical data in the Table
11.5
362
Table 11.5 Methods enterprises use to evaluate the effect of CVT courses by type of
evaluation and size class
UK
Slovakia
Poland
Hungary
Spain
Germany
France
Belgium
Country
Methods of Evaluation
Firm Size
(N° of
employees)
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
Measuring
satisfaction
level of
participants
+
+
++
+
+
+
0
TOTAL
-
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
-----------n.d.
n.d.
n.d.
n.d.
++
++
+
++
Formal
Carrying
Measuring
Using
validation
out tests
if new
indicators of
or
to verify
skills are
any
certification
new
applied at improvements
of skills
skills
work
in production
acquired
--0
+
---0
--+
0
+
--++
--++
++
-+
-0
-0
-0
--------0
-n.d.
n.d.
n.d.
n.d.
++
++
++
++
+
++
++
+
--+
-+++
+++
+++
+++
n.d.
n.d.
n.d.
n.d.
+++
++
++
+++
-+
+
+
+
+
0
++
+
n.d.
n.d.
n.d.
n.d.
+
++
+
+
0
0
----n.d.
n.d.
n.d.
n.d.
0
-
Notes: + indicates that the rate is higher than the EU average (and the degree is represented by the number of
crosses); 0 = EU average; - indicates that the rate is lower than EU average (and the degree is represented by the
number of dashes).
363
Comparing the use of various methods of evaluation, we identified a greatly varying
distribution of percentages, both by country and by size category of firm. In relation to the
satisfaction level of participants, the following patterns were discovered. As we expected, we
could not trace any trace of size category effect in the British and French cases. The method
of measuring participants’ satisfaction was more extensively used in large firms in
comparison with SMEs in the case of Germany, Hungary, Spain and Poland. Finally, Belgium
is the only country where the size effect can be visibly demonstrated.
With the ‘measuring if new skills are applied at work’ method of assessment, the
following two groups of countries were distinguished. An inverse size effect (use of this
evaluation method decreases by increasing size category of firms) was detected in Belgium,
France, Germany and Spain. This method of evaluation is more often employed by SMEs in
comparison with LSE in Hungary, Poland and the UK.
In the case of the ‘formal validation or certification of skills acquired’, the pattern of
size effect was found in the majority of countries: Belgium, Germany, Spain, Hungary and
Poland. Size does not have a significant impact on the use of this method in the British and
French practice. Finally, with ‘carrying out tests to verify new skills’, the following mixed
picture was identified. In one group of countries (Belgium, Germany, Spain, Poland) the size
effect is visible. It is interesting to note that both in the French and British company practice,
small firms were more likely to test new skills compared to medium and large firms. In
Hungary, no clear size effect exists. See in details in the tables in the Annex VI.1.
364
To diminish the risks of interpretation and evaluation of formal training practices in
SMEs, it is necessary to draw attention to the particular importance of non-formal training
practices such as ‘on-the-job training’ (OJT) ‘learning from others’ or ‘learning by doing and
using’. In this respect we share the following view concerning learning practice in the small
enterprises: “most of the learning is based on ‘learning by doing’. Such training practices
result in recognition by standard measures (i.e. education level or diplomas). Traditional
literature on SMEs training practices has very often ignored these non-formal methods such as
learning by doing, visits to other enterprises, dialogue with customers and suppliers, personal
development meetings, work rotation, staff meetings, etc. which are very important for
SMEs” (Ylinenpaa 1997).
This situation indicates the underdevelopment of systematic and formal training
practice
in
SMEs.
However,
the
non-formal
practice
of
‘tacit’,
‘non-coded’
knowledge/competence development and transfer are present in these firms; but the
assessment of their impact requires qualitative research tools, e.g. case studies. Beside the
difficulties of measuring and surveying these quantitative research methods of knowledge
development practice in SMEs, we must point out another shortcoming related to the problem
of knowledge spillovers in the SME sector. Unlike in the large sized firm sector, the SME
literature identifying channels/mechanisms for transmitting knowledge spillovers is sparse
and remains underdeveloped. Despite these inconsistencies and the lack of empirical
evidence, experience acquired from the company case studies – presented below – could serve
as an important resource to enrich present knowledge and also as an important source of
inspiration for future research projects.
Evaluating the results of the company case studies concerning training practices, we
intend to review the following sources and forms of knowledge generation. Before presenting
various features of skill use practices, it is necessary to stress the important impact of the
sector in which firms investigated operate (e.g. manufacturing, services, tourism and ICT).
For example, according to the company case studies the firms operating in the tourism and
manufacturing sector are representing the so-called “low-skill equilibrium” in comparison
with ICT-related firms which support more the training of their employees. These latter ones
represent the so-called “high-skill equilibrium” model.
365
The importance of various aspects of On-the-job-training was mentioned during the
interviews both by owners/managers and other stakeholders. The following quotations clearly
illustrate the various forms of On-the-job-training (OJT).
Hungarian ICT company, 62 empolyees
Learning by doing
‘Nowadays we are looking for PHP and HTML editors, and it is not really knowledge you
can learn at school. It depends on how much time you spend on it at home.’ Acquiring
knowledge usually means self-education: on-the-job training or ‘learning by doing’. One
of the company’s important problems is the lack of an internal training system – there is no
resource for that. “Fortunately we do many types of tasks that require us to update all the
time. This is true mainly on the higher professional levels, but we do not have time to train
the others on the lower levels. We do not have any resources for that and we don’t even
get any. The situation has changed recently; for the implementation of a new product
special knowledge is needed which we have to take forward. But we can only train them
with difficulty, they are partly alone.’ (senior developer)
Learning by using
In this sector you cannot get the necessary training through the formal education system.
“What we do one can’t learn at the secondary schools and colleges. What we know it took
one hard year to learn at work. If the material you possibly can know is 100%, than we
know 80%. We could improve this, for example with foreign ad server technology, but
really we are the only ones who could do the training both for the clients and for the high
school students.” (digital media manager)
Learning by interacting
Business information exchange can happen only in close micro communities. “Everybody
knows each other; the informal relationships are very important. We discuss everything
that happens in the market, and there are a few people with whom we talk about personal
things. In some sectors, like in the on-line advertisement sector, it is much closer. In that
sector there are very young people, and also at media and sales, they go to pubs every
week together. You can get the most valuable information through these channels. If you
just write letters and read the news, I don’t even know how somebody can decode the
message to get relevant information, they are really not up-to-date. The newsletters are
coming, full of information, and I do not understand what it is about. You have to see
behind them to understand.” (digital media manager)
366
season
“We give all our workers prior training before starting work. One kind is
continuous on-the-job training – this initial hour or half hour to tell them how
they should do things, and that first day when you’re on top of them, which is the
responsibility of an experienced person. Then, before the season starts and so,
before the worker is incorporated, we explain to him how the cooperative works,
health standards, training for the citrus fruit food handler’s licence, work risk
prevention... a load of preliminary talks that have to be given before the worker is
incorporated. And then, through intermediary authorities, there is training on
selection tasks. We run specialised courses on oranges, environmental health,
sorting, harvesting for the pickers. For members and workers, courses on
pruning, grafting... there are always courses. We have the European Social Fund
that provides free training. More than for any other reason, primarily because we
have a training capacity and because it doesn’t cost us anything. It wouldn’t be
wise not to use it. And also, because having the AENOR stamp implies that we
also have a training plan.” (manager)
Discussing the interviews’ experiences in relation to OJT, we should draw attention to
the shifting priority of different types of knowledge. We would like emphasize the increasing
role of social and cultural skills. The role of the communicational ability, appearance, or
aesthetic and emotional qualities of employees, their client-orientation, foreign language
knowledge, etc is increasing in SMEs’ everyday practice in comparison to ‘technicalprofessional’ skills. The quotations in the following box clearly illustrate the elements of
social-cultural skills discussed above:
Belgian construction firm, 100 employees
“At this moment there is training on three Fridays in a row. Six foremen (painters,
carpenters and drivers) follow a training course in motivation, communication and
leadership. This is a way of motivating people and it is also good for the company
as they need to motivate their workers.” (managing director/owner)
Belgian travel agency, 2 employees
During interviews, I really have to find out whether they have a commercial feeling
because in the end, we are a shop that has to sell. Also the appearance of the person
is important. It must be pleasant for the customer to enter the shop, to be confronted
with employees who are friendly and open-minded, who can think logically when
facing problems. You can really solve a lot, just by being friendly and by thinking
logically. Moreover, there must be an interest in tourism. Working in the tourism
industry must really be a passion. Lastly, there should be a minimum knowledge of
foreign languages and they must have travelled in the past.
367
Hungarian travel agency, 6 employees
In the travel agency office, the employees come into personal contact with the
clients; to make a successful deal, they also need what are called emotional skills
and competences (communication, empathy), which they can only master during
work, which further diminishes the training activity of the company. “At school,
one can get the essentials. Among the graduates, only those whose personal
features fit the requirements of this client-oriented job will be successful; one can
only stay permanently on the market if one can utilize the knowledge gained in
practice.” (managing director)
It is not our intention to summarise the various characteristics of skills generation and
use in the SME sector in general and in the companies investigated in the Leonardo project,
but we would like to draw attention to the following two patterns. Firstly, comparing the case
study experiences collected from companies operating in different sectors, it is interesting to
note that the companies operating in the Knowledge Economy related sectors (e.g. ICT) raised
various aspects of knowledge use and development more frequently. Surprisingly, these
firms’ representatives stressed – during the interviews – not only the need for continuous
development in the field of technical and professional skills55, but also the growing
importance of social-cultural skills. Beside the important sectoral dimension affecting the skill
needs and skill use practices, we would like to raise the important question of the use and lack
of new technologies. Evaluating the latest CVT survey results, the EU and Leonardo country
level comparison provides the following picture.
At the European level (both EU-15 and EU-25), firms employing ‘new technologies’
focus more on Continuing Vocational training than firms without ‘new technologies’. The
relation between time spent on CVT courses (per employees) and use of new technologies is
the strongest in Belgium, Spain, Hungary and Poland, followed by Germany and the UK,
while the weakest relation is in France. Evaluating this relation by size category of firms, we
may say that size matters most in the Belgian, French and Spanish cases. In Hungary, Poland
and Germany the impact of firm size on the relation between the use of new technologies and
the time spent on CVT courses prevails to a lesser extent, while in the UK there is an inverse
55
“This can be illustrated by the reference in a recent report from the Danish Ministry for Education to a German
source that claims that half of the skills a computer engineer has obtained during his training will have become
obsolete one year after the exam has been passed, while the halving period for all educated wage earners is
estimated to be eight years.” (Nielsen – Lundvall, 2003:1.)
368
size effect (i.e. as the size category of firms increases, the share of firms using new
technologies decreases). See in detail, the Table 11.6
Table 11.6 Hours in CVT courses per employee in enterprises with and without ‘new
technologies’, by size class
Country
EU-25
Total
Yes*
No**
13
10
10-49
50-249
250 or more
Yes
No
Yes
No
Yes
No
11
6
12
8
14
14
EU-15
13
10
11
6
12
9
14
14
Belgium
17
8
12
5
15
11
20
12
France
18
16
10
7
14
10
21
24
Germany
10
6
8
4
10
6
10
8
Spain
13
6
8
3
10
5
18
11
Hungary
7
3
6
2
6
2
8
5
Poland
6
3
5
2
5
2
8
5
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
n.d.
n.d.
n.d.
UK
14
12
16
17
15
14
14
9
* Enterprises introducing ‘new technologies’.
** Enterprises without ‘new technologies’.
369
12. Innovation
The key lesson to be learned from reviewing relations between the level of technology
used by the SMEs and the efforts devoted to Continuing Vocational Training Courses is that
firms using new technologies are more likely to spend more time on it. This phenomenon
draws attention to the importance of technological change and its core dimensions as an
innovation process in the SME sector. The following section gives details on various features
of innovation activities by countries and by size class of business organisations.
Reviewing the position of countries in relation to innovation activities, the following rank
order can be identified:
1. Germany (60.9%)
2. Belgium (50.1%)
3. France (40.8%)
4. UK (35.8%)
5. Spain (32.7%)
6. Hungary (23.3%)
7. Slovakia (19.5%)
8. Poland (17.3%)
This indicator of innovation activities has an aggregated nature, that is it covers the
categories of both product and process innovation. Before evaluating these two types of
innovation, it is worth noting that the rate of innovation activities is strongly related to the size
category of firms, in other words innovation activities increase with the increase in size.
These European findings are reinforced by the various surveys carried out on the direct
measure of innovative output in the USA. For instance, the US ‘Small Business
Administration’s Innovation Database’ showed that the most innovative US enterprises are
large corporations (Acs-Audretsch 1990).
Comparing the distribution of product versus process innovations, in all countries –
with the exception of Spain – product innovations represent the highest share. Looking at the
impact of the size category of firms investigated in the Leonardo project, this variable has a
visible influence in a minority of countries; France, Spain and the UK. In the remaining
370
countries no clear relationship between size and the presence of product and process
innovations was identified. In the case of Belgium, the rate of product innovation was higher
than the average in the medium-sized category of firms, similar to Hungary, Slovakia and
Germany. Looking at the distribution of process innovation, the following differences were
registered. In the Belgian case there is no visible difference according to the size category of
firms, in the German practice medium-sized firms play a dominant role, while in Hungary and
Slovakia large firms are among the leaders of process innovation.
371
Table 12.1 Innovation activities, product and process innovation of firms operating in
the Leonardo countries
UK
Slovakia
Poland
Hungary
Spain
Germany
France
Belgium
Country
Share of enterprises with…
45.0
64.2
76.5
50.1
31.4
52.3
76.0
40.8
55.0
71.6
86.4
product
innovation
only
18.6
22.0
16.5
19.1
11.4
18.8
22.9
14.4
19.1
22.3
17.7
TOTAL
60.9
19.7
11.4
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
29.5
44.6
67.5
32.6
20.9
28.0
44.4
23.3
12.9
24.6
53.4
17.3
9.5
10.6
14.2
9.8
7.5
12.8
9.7
8.5
n.d.
n.d.
n.d.
n.d.
15.1
24.4
46.8
19.5
8.8
13.9
19.4
10.7
9.4
12.9
15.1
10.0
4.2
3.5
8.1
4.2
n.d.
n.d.
n.d.
n.d.
2.1
1.6
3.1
31.6
46.7
57.1
35.8
10.8
16.2
16.8
12.2
Firm Size
(N° of employees)
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
TOTAL
10-49
50-249
250 or more
innovation
activities
TOTAL
10-49
50-249
250 or more
TOTAL
Source: Data set available on the EUROSTAT portal.
372
process
innovation only
9.8
9.1
10.4
9.7
6.1
8.9
7.8
7.0
10.8
14.5
8.1
2.0
6.6
10.0
12.9
7.6
The relative weakness of process innovation in comparison with product innovation
draws attention to the under-rated importance of non-technical innovation. In addition, it is
worth presenting briefly the results of the latest European competitiveness report. One of the
most interesting outcomes of this report indicates that the advance of the US over Europe is
not only in the field of technological innovation but especially in the advance of non-technical
innovations. The following figures illustrate a composite indicator of non-technical
innovations. In other words, these figures demonstrate the share of SMEs introducing
‘advance management techniques’, ‘new or significantly improved organisational structure’
and significant changes in the aesthetic appearance of at least one product. See details in
Figures 12.1.
Figure 12.1 Share of enterprises with non-technical change
65
Germany
49
Belgium
46
Spain
29
Hungary
23
France
11
Slovakia
0
10
20
30
40
50
60
70
Figure 12.2 Share of enterprises implementing changed organisational structures
49
Germany
37
Belgium
UK
32
Spain
31
10
Hungary
7
France
0
10
20
373
30
40
50
Figure 12.3 Share of enterprises implementing advanced management techniques
36
Germany
31
UK
24
Spain
22
Belgium
17
France
9
Hungary
0
5
10
15
20
25
30
35
40
Figure 12.4 Share of enterprises implementing significant changes in æsthetic appearance
35
Germany
28
Spain
22
Belgium
19
Hungary
3
France
0
10
20
30
40
Source for Figures 12.1-12.4: European Innovation Scoreboard 2004:14.
374
50
Figure 12.1-12.4 shows the composite indicator of non-technical change, and the three
other sub-indicators, namely 1., the percentage implementing changed organisational
structure, 2., the percentage implementing advanced management techniques, and 3., the
percentage implementing significant changes in aesthetic appearance or design of at least one
product.56
Reviewing the composite and each of the three underlying sub-indicators, the
following pattern can be distinguished. In the case of the composite indicator of non-technical
innovation, Germany (65%) and Belgium (49%) belong to the ‘leading edge’ country group,
whilst Hungary (29%), France (23%) and especially Slovakia are among the ‘trailing edge’
countries. Looking at the countries’ position for the three other sub-indicators, we can say that
Germany has the leading position in all categories, while for other countries there is no stable
ranking position. In the ‘Implementing changed organisational structure’ category, besides
Germany (49%), Belgium (37%) and the UK (32%) have the leading position, while Hungary
(10%) and France (7%) have the lowest. In the case of ‘Implementing advanced management
techniques’, beside Germany (36%), the UK (31%) has the most favoured position, in contrast
with Hungary (9%), which has the least favoured position among the Leonardo countries.
Finally, in relation to ‘Implementing significant changes in the aesthetic appearance or design
of at least one product’, beside Germany (35%), Spain (28%) is in the leading group, while
Hungary (19%) and France (3%) have the worst position.
Recent studies emphasize the growing importance of cooperation between SMEs in
the innovation process. Cooperation and networking are replacing the well-known paradigm
of ‘economy of scale’. As a result of this paradigmatic shift in production, SMEs relying on
the extensive use of ICT may explore and exploit knowledge and information sources
56
Evaluating the comparison of various countries using these indicators – which is the only one currently
available on the subject of non-technical innovation – we have to point out that this data can only be interpreted
with caution. “For some countries the results for organisational change are very high and, for most countries, the
occurrence of organisational change seems to be significantly higher than the implementation rate of advanced
management methods. This raises doubts about the common understanding of the underlying concepts and
indicates that the results must be interpreted cautiously.” (European Innovation Scoreboard 2004:16.) In
addition, we have to note that some of the countries involved in the Leonardo project are missing from the
dataset. For example, in the case of the composite indicator of non-technical change, UK and Polish data are
missing. In the case of implementing changed organisation structures and of implementing advanced
management techniques, data for Poland and Slovakia are missing, and finally, for implementing significant
change in aesthetic appearance, British and Slovakian data are missing.
375
generated by the firms participating in the network. The following table indicates the
importance of cooperation in innovation activity among the New Member States.
Table 12.2 Enterprises with cooperation arrangements on innovation activities, as a percentage of all
innovation active enterprises, by sector and size class
NACE
Sizeclass
Total
Industry
Services
EU-15 Czech
Estonia Latvia Lithuania Hungary Poland Slovenia Slovakia Romania
Republic
Small
14
20
31
45
49
48
26
36
12
17
Medium
24
26
39
49
44
56
36
49
31
22
Large
57
40
67
68
60
73
49
55
46
39
All
19
24
35
49
48
52
32
46
24
22
Small
11
22
27
31
38
52
19
36
17
12
Medium
22
23
28
48
38
58
27
47
29
18
Large
61
40
68
66
59
71
48
55
45
38
All
17
25
34
41
41
55
28
47
28
19
Small
18
18
35
65
56
40
33
37
8
27
Medium
29
36
41
52
58
43
61
62
37
36
Large
47
39
67
74
67
86
52
54
58
47
All
22
22
37
62
57
42
40
43
16
31
Note: Data for Hungary do not include Mining and Quarrying
Note: Data for Malta and Cyprus are missing as well as that for the ‘Old Member States’
Source: Crowley 2004:4. edited version
Table 12.2 shows an interesting picture of the degree of cooperation in innovation
activities of the New Member States in comparison with the EU-15 countries. Surprisingly
enough, in all New Member States the share of cooperation arrangements on innovation
activities, as a percentage of all innovation active firms, is significantly higher than the EU-15
average. More than every second Hungarian firm (52%) reported that they have some form of
cooperation with other partners in their innovation activities, followed by Latvia (49%),
Lithuania (48%), Slovenia (46%), Estonia (35%), Poland (32%), Slovakia and the Czech
Republic (24%).
Comparing the intensity of cooperation in innovation by sectors (industry versus services),
a fairly balanced situation was found. In one group of countries (the Czech Republic,
Hungary, Slovenia, Slovakia) cooperation is more developed in the industrial sector, whilst in
the other group of countries (Estonia, Latvia, Lithuania and Poland) cooperation in innovation
is more concentrated in the service sector. As far as the size category effect is concerned, we
376
can say that, with the clear exception of Hungary, intensity of cooperation is increasing with
the growing size of firms (the larger the firm the higher is the intensity of cooperation).
377
ANNEX VI.1 Some basic data for measuring training and innovation
activities of firms in Europe
Table 12.3 Training of Employees in the NMS and ACC, 2001
Indicators of Training
Countries
Bulgaria
Employees who received
training over the past 12
months (%)
12
Romania
17
3.7
Lithuania
24
5.4
Hungary
25
6.8
Cyprus
25
7.9
Latvia
26
4.3
Poland
24
2.8
Malta
29
9.2
Estonia
34
4.5
Slovenia
26
4.7
Slovakia
40
2.6
Czech Republic
51
3.5
ACC – 12
27
3.7
Source: Working Conditions … 2003:41
378
Average length of training
(number of days)
2.0
Table 12.4 Hours in CVT courses per 1000 hours worked by size class
Total
10-19
10-49
50-249
250 or more
8
10
8
8
9
EU-15
9
10
8
8
9
Belgium
10
10
10
9
11
France
11
9
7
7
14
Germany
6
6
5
6
6
Spain
11
13
12
9
11
Hungary
6
9
8
5
5
Poland
5
10
6
4
5
n.d.
n.d.
n.d.
n.d.
n.d.
8
13
9
8
7
Country
EU-25
Slovakia
UK
* Only in enterprises with CVT courses.
** All enterprises.
Table 12.5 Percentage of Internal CVT courses, by size class
Country
EU-25
Total
58
10-19
10-49
50-249
250 or more
38
41
45
64
EU-15
58
38
42
46
64
Belgium
51
27
35
42
60
France
51
27
29
30
58
Germany
63
29
33
48
74
Spain
48
15
25
33
59
Hungary
35
30
29
32
38
Poland
45
15
31
53
47
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
63
52
57
55
65
379
Table 12.6 Percentage of the total hours in External CVT courses, by training
provider* and size class
Country
EU-25
Total
8
10-19
10-49
50-249
250 or more
12
9
11
6
EU-15
8
12
9
11
6
Belgium
7
9
6
7
7
France
5
9
6
7
4
Germany
3
1
3
3
4
Spain
1
5
3
1
1
Hungary
14
6
14
6
18
Poland
1
0
0
0
2
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
15
36
27
33
9
*Provider: Public schools and colleges
Table 12.7 Percentage of the total hours in External CVT courses, by training
provider* and size class (continued)
Country
EU-25
Total
4
10-19
10-49
50-249
250 or more
3
3
2
4
EU-15
4
4
3
2
4
Belgium
5
7
8
6
3
France
2
2
1
2
3
Germany
1
1
1
1
1
Spain
3
4
4
2
3
Hungary
19
17
15
20
19
Poland
6
0
2
5
8
n.d.
n.d.
n.d.
n.d.
n.d.
5
4
3
2
6
Slovakia
UK
*Provider: Universities and other higher education establishments
380
Table 12.8 Percentage of the total hours in External CVT courses by training provider*
and size class (continued)
Country
Total
10-19
10-49
50-249
250 or more
EU-25
12
12
12
11
12
EU-15
11
11
11
10
12
Belgium
20
21
17
20
21
France
5
13
10
5
4
Germany
4
3
3
8
2
Spain
6
8
8
9
2
Hungary
17
39
27
20
12
Poland
32
13
29
39
29
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
11
5
5
3
14
*Provider: Specialised training institutions
Table 12.9 Percentage of the total hours in External CVT courses by training provider*
and size class (continued)
Country
EU-25
Total
48
10-19
10-49
50-249
250 or more
28
34
45
54
EU-15
48
27
34
45
54
Belgium
38
31
30
41
40
France
65
30
49
57
72
Germany
36
17
19
29
47
Spain
58
29
33
54
74
Hungary
31
13
19
29
35
Poland
49
72
53
31
56
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
48
28
36
43
51
*Provider: Private training organisation
381
Table 12.10 Percentage of the total hours in External CVT courses by training
Country
EU-25
Total
9
10-19
10-49
50-249
250 or more
15
15
10
8
EU-15
10
16
15
10
8
Belgium
10
13
17
7
8
France
7
22
15
12
3
Germany
16
26
29
17
10
Spain
7
12
9
7
6
Hungary
10
11
10
14
9
Poland
3
2
4
7
1
n.d.
n.d.
n.d.
n.d.
n.d.
9
11
11
9
9
Slovakia
UK
*Provider: Equipment suppliers
Country
EU-25
Total
5
10-19
10-49
50-249
250 or more
6
5
4
6
EU-15
6
6
6
4
6
Belgium
9
7
11
7
10
France
6
14
9
3
7
Germany
4
1
2
5
5
Spain
8
10
11
6
7
Hungary
2
5
3
1
2
Poland
3
5
4
8
1
n.d.
n.d.
n.d.
n.d.
n.d.
4
2
2
1
4
Slovakia
UK
*Provider: Parent/associate companies
382
Country
EU-25
Total
1
10-19
10-49
50-249
250 or more
1
2
1
1
EU-15
1
1
2
1
1
Belgium
1
2
1
1
1
France
0
0
0
0
0
Germany
2
0
1
2
2
Spain
3
3
7
3
1
Hungary
0
0
0
0
0
Poland
1
0
1
0
1
n.d.
n.d.
n.d.
n.d.
n.d.
1
0
0
0
1
Slovakia
UK
*Provider: Unions
Country
EU-25
Total
7
10-19
10-49
50-249
250 or more
12
12
9
5
EU-15
7
13
13
9
5
Belgium
9
6
9
10
8
France
6
4
5
9
5
Germany
21
39
34
23
14
Spain
7
10
12
9
3
Hungary
2
5
3
4
1
Poland
1
1
3
2
1
n.d.
n.d.
n.d.
n.d.
n.d.
4
6
10
3
3
Slovakia
UK
*Provider: Chambers of commerce, sector bodies, employers’ organisations
383
Table 12.14 Percentage of employees (only in enterprises with CVT courses)
participating in CVT courses by sex and size class
Country
EU-25
Total
47
10-19
10-49
50-249
250 or more
46
43
42
49
EU-15
47
46
43
42
49
Belgium
54
45
44
46
62
France
51
35
34
41
59
Germany
36
41
39
33
37
Spain
44
40
40
39
47
Hungary
26
40
32
22
26
Poland
33
34
31
28
37
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
51
50
47
50
52
participating in CVT courses by sex and size class (Males)
Country
EU-25
Total
48
10-19
10-49
50-249
250 or more
45
41
41
52
EU-15
48
45
41
41
52
Belgium
n.d.
n.d.
n.d.
n.d.
n.d.
France
52
32
33
43
61
Germany
38
41
39
34
40
Spain
44
38
39
38
48
Hungary
27
41
32
22
28
Poland
33
33
28
28
38
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
53
45
42
44
56
384
participating in CVT courses by sex and size class (Females)
Country
EU-25
Total
44
10-19
10-49
50-249
250 or more
49
46
43
44
EU-15
45
49
46
44
44
Belgium
n.d.
n.d.
n.d.
n.d.
n.d.
France
48
43
38
39
55
Germany
33
42
39
31
32
Spain
44
45
43
40
45
Hungary
25
38
32
23
24
Poland
33
36
37
28
35
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
48
58
59
62
46
Table 12.17 Cost of CVT courses per participant (only in enterprises with CVT courses)
in Purchasing Power Standard (PPS) by size class
Country
EU-25
Total
1487
10-19
10-49
50-249
250 or more
1692
1499
1938
1379
EU-15
1524
1736
1533
2016
1410
Belgium
1644
1672
1651
1765
1592
France
1625
1147
1238
1373
1751
Germany
1593
1023
1003
1548
1736
Spain
1514
1333
1352
1380
1590
Hungary
1166
1094
1390
1317
1057
Poland
598
767
735
494
609
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
1286
2351
1768
2971
991
385
Table 12.18 Cost of CVT courses as % of total labour cost (all enterprises) by size class
Country
EU-25
Total
2.3
10-19
10-49
50-249
250 or more
1.5
1.5
2.4
2.5
EU-15
2.3
1.5
1.5
2.4
2.5
Belgium
1.6
1.0
1.0
1.6
1.9
France
2.4
0.7
1.0
1.8
3.0
Germany
1.5
1.0
0.9
1.4
1.7
Spain
1.5
0.5
0.7
1.1
2.1
Hungary
1.2
0.9
1.1
1.0
1.3
Poland
0.8
0.4
0.6
0.6
1.2
Slovakia
n.d.
n.d.
n.d.
n.d.
n.d.
UK
3.6
4.8
3.6
5.9
3.1
Table 12.19 Percentage of enterprises evaluating the effect of CVT by type of
evaluation and size class
Type of evaluation: Measuring satisfaction level of participants
Country
EU-25
Total
71
10-49
50-249
250 or more
67
75
84
EU-15
72
68
76
85
Belgium
69
57
84
91
France
84
81
86
87
Germany
65
61
67
84
Spain
64
60
69
81
Hungary
57
54
57
74
Poland
29
28
27
41
Slovakia
n.d.
n.d.
n.d.
n.d.
UK
88
87
90
89
386
evaluation and size class (continued)
Type of evaluation: Measuring if new skills are applied at work
Country
EU-25
Total
60
10-49
50-249
250 or more
60
62
53
EU-15
60
60
62
54
Belgium
54
61
46
37
France
57
59
57
48
Germany
58
56
63
53
Spain
50
51
48
45
Hungary
66
67
69
59
Poland
67
70
61
68
Slovakia
n.d.
n.d.
n.d.
n.d.
UK
72
71
79
64
Type of evaluation: Formal validation or certification of skills acquired
Country
EU-25
Total
40
10-49
50-249
250 or more
38
43
45
EU-15
40
38
43
45
Belgium
20
16
21
36
France
30
32
27
33
Germany
27
25
30
32
Spain
45
40
56
57
Hungary
26
22
26
50
Poland
68
62
70
90
Slovakia
n.d.
n.d.
n.d.
n.d.
UK
61
60
63
61
387
Type of evaluation: Carrying out tests to verify new skills
Country
EU-25
Total
30
10-49
50-249
250 or more
28
31
37
EU-15
31
30
31
38
Belgium
23
22
19
44
France
48
55
43
37
Germany
21
20
24
26
Spain
12
9
16
25
Hungary
24
25
21
24
Poland
18
10
27
37
Slovakia
n.d.
n.d.
n.d.
n.d.
UK
51
54
45
51
Type of evaluation: Using indicators of any improvements in production
Country
EU-25
Total
6
10-49
50-249
250 or more
6
5
8
EU-15
6
6
5
9
Belgium
8
11
4
5
France
12
10
12
16
Germany
6
7
4
7
Spain
4
3
5
6
Hungary
4
3
5
4
Poland
0
0
0
1
n.d.
n.d.
n.d.
n.d.
4
4
4
8
Slovakia
UK
388
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LEONARDO Community Vocational Training Action Programme

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