Micro businesses rather than SMEs are the real backbone of Central Europe’s economies

There are a million clichés about the importance of small and medium-sized enterprises (SMEs) to national economies. “SMEs are the backbone of the economy” is probably the most common one. You hear it almost every day.

It’s primarily popular because it’s true. Across the EU, there are more than 23 million businesses. Officially, a “medium-sized company” is any business employing fewer than 250 people. Based on that definition, only 0.2% of businesses across the EU are not SMEs.

There are two categories underneath “medium-sized company”: “small company”, a business which employs fewer than 50 people, and “micro company”, a business which employs fewer than 10 people. It is the “micro companies” that really dominate, at least in terms of the total number of registered businesses. Across the EU, for example, 93.2% of all SMEs are “micro” rather than “small” or “medium-sized”.

The V4 region is a real ‘cluster’ in this area: Slovakia and the Czech Republic are the two member states with the highest proportion of micro businesses amongst SMEs; Poland and Hungary are 6th and 7th on the list:

Cultural factors must play a part in this. For example, some countries have much higher rates of self-employed people than others, and you would expect there to be a link between that and the number of micro businesses – which is exactly what you do see:

(N.B. Although they aren’t highlighted in the map above, Greece, Italy and Spain are all above the EU average in terms of the proportion of micro businesses as well.)

But given the number of micro companies in the V4, why isn’t there even more political focus in the region on the very smallest companies?

One reason is productivity. Across Europe as a whole, “apparent labour productivity” (i.e. the Gross value added per person employed) is about a third lower in micro businesses than the average level for companies of all sizes. In the V4, with the exception of the Czech Republic, productivity rates are even lower than that amongst the smallest companies:

This, then, is the challenge for the V4 countries: how to increase the productivity of the smallest businesses – perhaps, for example, through digitalisation, using the EU funds allocated for this purpose through the Recovery and Resilience Facility.

But if solutions can be found, then the economic impact will be huge given the number of micro enterprises in these countries.