A new JRC report on ‘High Growth Enterprises: demographics, finance & policy measures’ analyses the distribution of high growth enterprises (HGEs) by EU Member State, at the regional level and by industry.
It also examines the contribution of venture capital markets to financing company growth.
Finally, the report contains country-specific factsheets providing insights on the HGE-related situation, including factors that facilitate or obstruct their development, in 21 EU Member States.
By providing insights on how and why firms grow as well as their contributions to the broader entrepreneurial ecosystem, this report informs a range of EU policy domains related to SMEs, scale-ups and start-ups, and the Capital Markets Union.
What are high growth enterprises and why are they important?
HGEs are often defined as enterprises which have experienced an average employment growth rate of 10% per year over a three-year period and which had at least 10 employees at the beginning of the growth period. Their economic importance lies in their impact on job creation, industrial renewal and regional competitiveness.
HGEs are responsible for most of the employment growth in the EU – even though they only make up 11% of enterprises in the business economy. From 2015 to 2016, HGEs accounted for 53% of net employment growth (between 2014 and 2015 the figure was 90%).
These younger-than-average enterprises are also important innovators. They are present in all sectors of the business economy to varying degrees. They are not necessarily more common in high-tech sectors, but they do tend to be present more in knowledge-intensive services than in manufacturing-related industries.
Ensuring adequate financing is crucial
However, difficulties (particularly financial ones) for such firms to achieve high growth in the EU can lead to potential economic gains being unrealised or being realised elsewhere by such enterprises moving to other countries (where raising finance is easier and other framework conditions are more favourable). Such difficulties are particularly acute in equity-financing for the scale-up phase of such enterprises.
Ensuring adequate financing is especially crucial in times of crisis and the COVID-19 pandemic will almost surely create further difficulties for high growth firms to obtain finance.
While debt (loans and loan guarantees) dominates the financing of firm growth, venture capital (VC) is used, on average, more often by HGEs than other firms. Even though it is rare, VC finance is particularly suited to HGEs in high-tech sectors with high-risk and high-innovation profiles.
The United States and China are the world leaders in venture capital finance. However, most European countries continue to lag behind the rest of the world in VC activity. The EU average VC investment as a percentage of GDP (0.07%) is much smaller than in the US and China (0.32% and 0.36%, respectively).
What policy measures exist to promote HGEs?
Public policies could support and promote HGEs. National policy mixes supporting access to finance for young innovative companies with growth potential exist and are diverse. Debt-based support instruments - loans and loan guarantees - are used by all countries.
Governments are also equity (VC) investors in many EU countries, but the type and degree of their involvement varies. In some countries, governments invest directly in companies (alone or together with private investors) while, in others, they channel funds to companies indirectly as limited partners in privately managed VC funds (e.g. funds of funds).
Between 2007 and 2018, public funds accounted for 25% of VC investment in the EU, mixed public-private funds for 16% and private funds for 59%. Public VC investments in the EU more than doubled from 2017 to 2018 (from EUR 703 million to EUR 1.7 billion). In some countries (Germany, Poland, Bulgaria, Estonia, Lithuania, Latvia and Greece) direct public VC investment is bigger than that of the private sector.
- JRC report on "High Growth Enterprises: demographics, finance & policy measures"
- 2 april 2020