SMEs adaptive behavior in the modest growth environment of : Implications for innovative SME 1 VUZF University October 1, 2013 Sofia, Bulgaria Giuseppe Gramigna Chief Economist U.S. Small Business Administration

2 Summary 1.Hypothesis: SME’s have adapted to the modest growth environment of the period, by conservatively increasing their use of labor, capital, and credit, all the while increasing their profits. 2.This adaptive behavior, while positive in the long-run, has had dramatic impact on net firm formation, and may be indicative of a performance bifurcation even among SMEs, where the strong get stronger and the other exit the market. 3.A comparative analysis of the US and the EU experience.

The Current Policy Question 1.In this environment the critical policy question is which SME exited the market? Were they (1) the less efficient, or were they (2) the risk takers? 2.Answer 1: The most efficient firms survived and the less efficient exited the market. Thus, policy makers and financial institutions should work with existing firms and new entrants. -- Growth along existing economic activities (paths) and with existing firms! 3.Answer 2: Conservative firms survived and the risk takers exited the market. Thus, policy makers will need to re-grow innovative SMEs with high risk preferences, and financial institutions would also need to find additional risk takers, as their portfolio may be “risk deficient” given a predetermined risk preference -- Growth via new markets and with new firms.

4 The Cause: Real GDP: Actual vs. Potential Growth Rates (RGDP): Post Recession 2.1% vs. Historical 3.5% Actual/Potential Ratio: 94% vs. 99%

5 Adaptive Behavior : A Similar Gap Exists in the Labor Market.

6 Low Labor Turnover: (Layoffs at historical lows, but hiring not returned to pre crisis level) indicative of adaptive behavior.

7 The Number of Firms Declined During The Great Recession.

8 Adaptive Behavior (2): Corporate Profits Historical Highs Levels (Top Graph) and Margins (Bottom Graph).

9 Profit Margins have rebounded at Large and Small Firms.

10 Manufacturing Sector’s Profit Margins Rebounded for All Size Classes.

11 The Impact on SMEs: The Credit Markets

12 SBA Loan Guarantees: (a)Dollar Value Guarantees Have Surpassed Pre-Recession Levels; (b)Number of Guarantees Are Still Lagging.

13 The US: 1.federal government undertook fiscal expansion programs, partly counteracted by balance budget constraints in some states; 2.Regional shift in production and labor in the period; 3.Experienced greater reduction in employment and number of firms; 4.And higher profits (levels and margins). The EU: 1.National governments undertook fiscal contractions and structural reforms of various degrees; 2.Regional shift in production and labor from Southern Mediterranean countries and toward Northern Europe; 3.Experienced lower reduction in employment and number of firms; 4.And lower profits (levels and margins). 5.Significant difference among member countries. The US and EU SME Environment and Adaptation

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15 Significant Regional Difference in Real GDP Performance.

16 Employment Reductions in the US were Higher than the EU.

17 Firms Reductions in the US were Higher than the EU.

18 Significant Regional Difference in Employment and Firm- Formation Trends.

19 Profit Comparison: EU Declining; US Rising; EU Still Higher than US.

20 Significant Regional Difference in profit Performance.

21 Questions?