During the 1960s and the 1970s, economists extolled the advantages of multinational undertakings: scale economies, new production and distribution technologies, modern personnel management, production and distribution planning at European scale. Politicians offered all sorts of advantages to multinational undertakings to incite them to invest in their country or region and thus assist in its development and in the absorption of the redundant manpower of the primary sector. In fact, multinationals - practically all American - mainly exploited the over-valued dollar to buy at a good price European firms and/or eliminate from the markets that interested them the large and medium-sized national companies.
During the 1980s the rise of the multinationals had slowed. The European Commission defended more and more vigorously the tendencies of large firms to monopolise certain markets [see section 15.4] and the tendencies of national and regional authorities to give them large incentives in the form of aids [see sections 12.2.1 and 15.5]. Trade unions claimed more and more rights and social benefits for European workers. Monetary and monopolistic super-profits started diminishing for the multinationals. Thus, they stopped investing in Europe and started practising the so-called "social dumping", that is setting up plants in countries with low labour costs. Now, it is clear that, because of the technological development and the globalisation of the markets several traditional industries and "national champions" are in decline, while new industries and operators are emerging, often offering products and services with a higher value-added content. These new operators are quite often small businesses. Although it is clear that economies of scale exist and are very important in certain types of production, such as the production in very large numbers of standard products, it is also clear that the management structures of small enterprises are simpler and more flexible than those of big firms and that this, other things being equal, can be a serious advantage. Social relations are also better in smaller as compared to bigger firms. Moreover, small enterprises absorb the most vulnerable categories in the labour market, i.e., women and young persons. Last but not least, small businesses are present in new expanding markets and "market niches", less vulnerable to international competition.
As was seen above, Article 173 of the Treaty on the functioning of the EU (TFEU, ex Article 157 TEC) states, among other things, that the Union and the Member States shall encourage "an environment favourable to initiative and to the development of undertakings throughout the Union, particularly small and medium-sized undertakings". This is the base of the common enterprise policy, a policy in favour of small businesses, known in EC/EU jargon as small and medium-sized enterprises (SMEs). But what are the SMEs?
Until the mid-1990s, different definitions of SMEs were used in common policies (competition, Structural Funds, R&D, tendering for public procurement, etc.). This diversity could give rise to doubts among public authorities and even to confusion among the businessmen concerned. Therefore, the Commission adopted a recommendation concerning the definition of micro, small and medium-sized enterprises used in Community policies [Recommendation 2003/361]. An enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. Within the SME category, a small enterprise is defined as an enterprise which employs fewer than 50 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 10 million. A microenterprise is defined as an enterprise which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 2 million. However, the Commission recommends to remove from the SMEs category non-autonomous enterprises, i.e. those which have holdings entailing a controlling position (partner enterprises) or those that are linked to other enterprises.
This definition serves as a reference for Union programmes, policy and legislation concerning SMEs and thus provides an overall framework, which can increase the coherence, effectiveness and visibility of all measures to assist these enterprises. It should be noted that, out of the almost 20 million enterprises active in the non-financial business economy of the EU-27 in 2005, 99.8% were SMEs, with less than 250 persons employed. They assured 67.1% of the workforce and 57.6% of the value added of this economy.
In addition to quantitative and easily verifiable criteria, SMEs are often also identified by qualitative criteria, focusing chiefly on the ownership of their capital, their management and their methods of financing. A SME is often a family business, whose management and ownership are in the hands of the same person(s). Day-to-day running of a SME falls upon the company head, enabling flexibility and rapidity in the decision-making process and a personalised relationship with staff, suppliers and customers. Finally, a SME is heavily dependent on self-financing due to difficult access to the financial markets and it often suffers from limited availability of financial resources. These qualitative identification criteria merge with a small undertaking's main characteristics, characteristics which can occasionally prove a handicap, but which can also be to their advantage.
Of course, SMEs have their weak points, which are notably: (a) the difficulty to face the complicated administrative and legal environment created by the completion of the internal market and the globalisation of production; (b) lack in management training for many businessmen and/or lack of willingness to delegate part of the management to qualified associates; and (c) funding difficulties, despite the increase and the differentiation of sources of financing in the large market. It is clearly more difficult and relatively more costly for SMEs than for large firms to have access to world technological capital, to avail themselves of the most sophisticated management techniques and business services and to find their proper place in the global economy and even in the EU's single market.
Small and, above all, medium-sized businesses, must, first and foremost, rely on their own efforts to achieve success in the single market. In order to succeed they must make the effort to adapt to their new environment by abandoning some of their family-style management habits and/or their production and marketing methods and cooperate with each other in order to overcome some of the handicaps which are attributable to their size, in particular with regard to supply and the distribution of their products over a number of Member States. In so doing SMEs must, however, be assisted by their trade organisations, their governments and the European institutions. That is why a common enterprise policy is needed to provide a framework for and coordinate the efforts deployed by the Member States to assist their SMEs, without distorting competition by favouring certain undertakings or the production of certain goods within the meaning of Article 107 of the TFEU (ex Article 87 TEC) [see section 15.5.1].