A summary of the address delivered by Dr Michael Fuchs, Member Federal Parliament & Chairman of the Parliamentary Group of Medium-sized Business at the Seminar on “Small and Medium Enterprises: Engines for Growth and Employment” held on 5th April 2007 at Chennai.

Less than four weeks ago the International Tourism Exchange (ITB) drew to a close in the German Capital, Berlin, having achieved a new visitor record. Every year this event, the world’s largest tourism fair, focuses on one particular country. This year it was India. “Incredible India” is the motto adopted by your country to advertise its charms and attract visitors from around the world. I am delighted to be with you today and to be able to discuss with you, at the invitation of the Konrad Adenauer Foundation, what I consider to be a particularly important part of every developed and developing economy and society: small and medium-sized enterprises and the population group behind them.
“Incredible” is a word which describes not only the cultural wealth and scenic beauty of India and the successful path your country has taken into the modern age to become the world’s largest democracy, equally noteworthy is the country’s successful economic transformation over the past decade. Since the start of the economic reform process almost 15 years ago, annual growth rates in India have hovered between six and eight per cent. If this rate continues, your country will within the next generation, become the world’s third largest economy after the USA and China. For Foreign investors India is a rising international economic factor and interesting growth market, which geopolitically, too, is becoming increasingly significant.
The Social Market Economy in Germany
The western part of Germany experienced a similar rapid economic and social transformation in the two decades following the collapse after the Second World War. Today we refer to this period in the 1950s and 60s as the time of the German “economic miracle”. This miracle laid the foundations for Germany’s success as Europe’s largest and most important economy.
Two factors, among others, were particularly important in this context: firstly, the decision to opt for a market economy system; secondly, the flourishing economic development of small and medium-sized businesses within this system. This paved the way for the creation and/or resurgence of a large middle class sector which led to widespread prosperity and participation, as well as social stability and security. Both are different sides of the same coin: the policymakers firstly must create the conditions which secondly enable the private sector to create growth and employment – ideally in such a way as to enable the whole of society, that is to say, broad sections of the population, to share in the resulting prosperity.
We refer to our system in Germany as a Social Market Economy. Two names are synonymous with its establishment in West Germany: the first Federal Chancellor of the Federal Republic of Germany, Konrad Adenauer, who gave his name to the Foundation, and his first minister of economics, Ludwig Erhard. As the founding fathers conceived it, a social market economy does not signify that a liberal economy is unsocial and that the state therefore has to correct its outcomes per se through interventionist policies such as the active redistribution of the gross domestic product. On the contrary, a functioning social market economy means that the policymakers simply set and monitor the framework conditions and rules in such a way that the market itself generates solutions which are not only efficient but also social. The role of politics and the state in the social market economy is above all to arbitrate and set the framework. We call this economic governance.
The most important principles of economic governance relating to the German style social market economy are:

a free market where supply and demand determine prices, where there are no barriers     blocking market access to new companies and no obstacles for pioneers, start-ups and     innovative new products
intensive competition, that is to say with as many market participants as possible, fair    competition, no monopolies, and strict conditions to regulate market-dominant companies, to    block cartels and to govern mergers.
Consumers sovereignty and mature consumers
Protection of private property and freedom of contract (private autonomy
 A reliable public administration (rule of law), as well as democratic political institutions and    decision-making processes
 A stable economy- the euro is a notable success story in this regard.
Autonomy of employers and trades unions in collective bargaining – the state has no role to     play in wage determination
Properly functioning infrastructure from transport and energy supply through to the education    system. The state has a primary responsibility here.

If this framework is guaranteed by policymakers and state institutions, the economy can flourish and SMEs can develop. Conversely, some of the greatest dangers for the SME sector can also be derived from these priciples:
Protectionism, state control of prices or profits
Cartels, monopolies, unfair competition and oppressive economic activity on the part of the     state, which often creeps in under the cover of subsidies. We Germans had a vivid example of     this in East Germany (the GDR).
Bureaucracy, corruption, legal uncertainty
Clandestine employment and the black economy
Socialization of losses, state influence on the appropriation of profits.
And last but not least, an unhealthy dominance of the welfare state. A well-developed welfare    state may seem appealing at first sight to both politicians and the general public, particularly at    election times. Where it is excessive, however, it risks hindering personal responsibility,    motivation and structural change.
Importance of the SME sector today
Germany has not always been and is not always a model pupil in all these points. All in all, however, we have so far been successful in maintaining this model of the social market economy.
60 years after the invention of the social market economy, a few key statistics highlight the successful interplay between the social market economy, economic governance and small and medium-sized enterprises:
Of the around 3.4 million businesses in Germany, 99.7% are SMEs. They employ 70.8% of all workers and provide 82.9% of all training places. They account for 39.8% of the turnover of the German economy and generate 46.7% of gross valued added in Germany. In short, Germany is much more a country of SMEs than an industrialized nation dominated by big business.
To understand these figures it is first necessary to define what constitutes a small or medium-sized enterprise. In Germany it is usual to base the definition on the number of employees and annual turnover. We designate as “small” a business with up to nine employees and an annual turnover of below one million euro. “Medium-sized” denotes enterprises with 10 to 499 employees and an annual turnover of one to 50 million euro. This is slightly at variance with the standard definition applied in the European Union.
Such purely quantitative parameters may be helpful in conveying an appreciation of the economic significance of the Mittelstant or SME sector in Germany, but they are not enough to gain a real understanding of what the German Mittelstant means.
The concept has a qualitative dimension too, founded on the idea of an independent owner-entrepreneur who takes responsibility for himself and his future, has a commitment as a private individual to society, and in the way he manages his business, thinks in the long term in generations rather than in quarter reports. Both employers and employees see themselves as being achievers where the business is concerned while at the same time being responsible and self-determined citizens in society. Day-to-day working life in an SME is characterized by partnership, not a “class war” between capitalist and unions. One outcome of this partnership style, in addition to the fact that the sector is a very willing training provider, is the high level of innovation in SMEs. Even in businesses without a research department, many application-ready patents come direct from the workbench.
Germany’s economy is highly export-oriented, at least as far as the trade and industry sector is concerned. Many SMEs operate successfully in international markets, too. Around 98% of all German exporters operate SMEs with an annual turnover of less than 50 million euro and account for 21% of Germany’s total direct exports. The real percentage is probably considerably higher since many SMEs are domestic suppliers to large German export industries such as the car industry or plant engineering and construction. Germany also has around 450 so-called hidden champions, that is to say SMEs which are undisputed world leaders in their very specific product segment. These companies in particular are experiencing increasing problems with product piracy and patent infringements, particularly in Asia. Worldwide protection of intellectual property is therefore one of the central themes of Germany’s Presidency of the G8.
German-Indian economic relations
Bilateral economic relations between Germany and India, by the way, are developing extremely promisingly. The volume of trade in 2006 again reached a record level of 10.5 billion euro, a rise of 38.7% over the previous year. Thus the target set by both governments in 2004 of doubling the trade volume from the then level of five billions euro by 2010 has therefore been achieved far ahead of this time. In 2006 German exports to India rose by 51.8% over the previous year to 6.3 billion euro, while imports from India were up by 22.5% at 4.2 billion euro. I would like to see the SME sector on both sides benefiting from this cooperation as well.
SMEs and Globalization
Globalization confronts SMEs with greater challenges than large internationally operating businesses. For smaller enterprises access to foreign markets is often more difficult. They lack country-specific knowledge particularly where distant markets are concerned. Hence in terms of foreign business, German SMEs still focus primarily on their European neighbors, particularly since transport distances are shorter, the EU internal market has dismantled many tariff and trade barriers and the euro as a single currency enables business contacts to be established without currency risks. A breakthrough in the deadlocked WTO negotiations would be of very great benefit in creating access to distant markets to exporting SMEs too. Should multilateral negotiations stall again, however, I increasingly believe that alternative bilateral solutions will have to be found.
According to recent surveys, some 100,000 German SMEs have direct foreign investments, that is to say maintain their own marketing or service centers, holdings, joint ventures or production facilities. These direct investments mostly serve to secure existing export markets and/or open up new market segments. Joint partners on the spot such as bilateral chambers of commerce are a great help in this respect.
In terms of the increasing globalization of the global economy, a further feature which marks out the German Mittelstand is that these enterprises are very loyal to their location. Even if they operate globally and establish not only marketing centres but also production facilities abroad, entrepreneurs in the SME sector very rarely relocate their head quarters or their whole company to a low-wage or low-tax country. Most of their vertical range of manufacture, particularly research and development activities and hence important value added, continues for the most part to be retained in Germany. In terms of politics, therefore, the Mittelstand provides a reliable bedrock for the economy and jobs market, particularly in times of globalization. Because of Germany’s decentralized structure, this is one of the factors that keeps living conditions on a par with each other in the different regions of our country. While Germany’s big companies have steadily cut jobs at home in recent years, the Mittelstand has created new jobs.
Globalization creates new challenges not just for the economy but for politics. Is it possible to conceive a global economic order along the lines of the social market economy? Could there, for example, be an international cartel authority overseeing fair competition? That is a subject to which one would have to devote an entire conference.
Current challenges facing German SMEs
Let us return to SMEs in Germany. Where there is light, there is also, of course, always shade. What are the greatest challenges currently facing German SMEs and how are the policymakers reacting to them?
Firstly the German economy, particularly since last year, is experiencing a very welcome and stable upturn after several years of stagnation. Last year GDP grew by 2.5% . For this year growth rates of over 2% are expected. This revival is having an impact on the jobs market. Since the new Federal Government took office, registered unemployment has fallen from almost 4.5 to 4.1 million. In the last 12 months alone around 450,000 new jobs subject to social security have been created. And, it is the Mittlestand above all which has created these new jobs.
The labour market, it must be pointed out, is one of the fields which experts believe is in need of considerable reform in Germany. In the light of modern career biographies and the accelerating pace of structural change, the German labour market is too rigid and immobile. The greatest problem groups are the long-term unemployed and the low-skilled. A high level of basic security for the unemployed decreases the pressure to seek work. But I do not, I am afraid, anticipate any courageous moves to introduce reforms in this area since the Social Democrats within the governing coalition are very much dragging their feet on this.
Further areas which the Federal Government is seeking to reform are:
Social Security Systems
In Germany these are traditionally financed on a pay-as-you-go basis rather than being fully funded. Demographic trends mean that this system is reaching its funding limits. High social insurance contributions, which for the most part are financed in equal parts by employers and employees, are a burden on labour as a factor of production. As a first step the Federal Government has raised the statutory pension age to 67. In the medium term more far-reaching solutions are needed, such as decoupling the funding side from labour as a production factor and making the insured take more responsibility for themselves. Non-wage labour costs are an important competition factor for employment-intensive SMEs in particular.
The tax burden for corporations is too high in Germany by international and European comparison. This is why in parliament we are currently deliberating a reform which would cut the rate of corporation tax to just under 30%. SMEs, too, will benefit from this reform since retained profits will be treated more favourably in terms of tax.
A traditional problem of the German Mittelstand is its high level of outside financing the correspondingly low equity capital ratios. Special programmes offered by the public promotional and guarantee banks, such as low-interest loans and better access to capital markets, are also designed to improve financing in the SME sector.
By international comparison Germany has a very efficient and reliably administration. Over recent decades, however, bureaucracy for companies has mushroomed. Estimates indicate that red tape imposed by the state (in the form, for example, of obligations to provide information and statistics, applications licensing and tax assessment procedures) costs the German economy up to 40 billion euro each year. SMEs, of course, are particularly hard hit by these costs and the expenditure on personnel to cope with the bureaucracy.
Cutting red tape is therefore on of the Federal Government’s central economic policy aims. A few months ago we set up the Regulatory Impact Unit, an independent body which examines all existing legislation and every new law before it is adopted to assess the impact of the resulting bureaucracy on businesses. The unit scrutinizes every bill tabled by the Federal Government and, prior to its deliberation in parliament, provides parliament with an independent costing. The political target is to cut the cost of red tape by at least 25% by 2011. One problem is that much of the red tape comes from the European Union. During its Presidency of the EU, Germany is therefore seeking to introduce a similar regulatory impact body to measure the cost of red tape in the European Union too. Another of our aims in Germany is to further cut the time it takes to set up a new business by systematically introducing a one-stop-shop system. We also want to shorten licensing procedures for plant and infrastructure projects which, because of complex environmental requirements for example, can take a very long time in Germany.
Finally, the Federal Government is currently seeking to encourage and promote innovation in SMEs in particular, mobilizing research and development activities. Special promotional programmes are being developed for the purpose. There is a particular focus on stepping up cooperation between SMEs and scientific research establishments since we have become aware that university research, in particular, too seldom culminates in marketable products. The Federal Government has created a new and innovative instrument here in the form of a “research bonus”. In future universities which carry out application-oriented research contracts for SMEs will receive additional funding from the state.
What is SME policy?
This last example, the research bonus, is a very good way of explaining Germany’s SME policy. The main intension of the social market economy, as explained at the beginning, is to create the framework for the private sector and to avoid interventionist policy as far as possible.
In reality, however, SMEs, because of their size and diversity, are confronted with problems which big business does not have:
SMEs find it more difficult to get the ear of politicians. Their efforts to represent their own interests are often fragmented and their lobbying weak.
Because they lack scale of economies, small businesses are at a commercial disadvantage in terms of procurement, production, distribution, access to capital or indeed research resources.
For SMEs access to foreign and/or international markets is considerably more complex than for big businesses. While there may not be particular legal obstacles, there are indeed actual barriers blocking access to markets.
The particular job of SME policy is therefore:
To ensure that institutionally the interests of SMEs are represented in political and     parliamentary decision-making processes and that SMEs have a voice
out size-related disadvantages, for example by facilitating cooperation agreements under    anti-  trust law of promoting access to the capital market and to foreign markets (financial    support to enable SMEs to attend foreign trade fairs) or by creating To even incentives for    inter-company research collaboration
To subject every law to an “SME test” and then, if necessary,
To mitigate disproportionate burdens on SMEs through statutory provisions. Regulations on    protection against dismissal in Germany, for example, only apply to businesses with 10 or    more employees. We want to introduce more such exemptions with respect to statutory    obligations.
Conclusion
SME policy in this sense is about evening out disadvantages to create a level playing field without at the same time establishing unwarranted privileges or creating a policy catering to a specific clientele.
The working group on medium and small business of the CDU/CSU parliamentary group in the Bundestag, which I chair and which, with 133 members, is the largest group within the German Bundestag, has committed itself to this very goal.
“Think small first” is therefore the motto. Because SMEs are indeed the sustainable Engines for Growth and Employment.
“Incredible SMEs’ so to speak!n