4. COVID-19 crisis: A fast-track path towards more innovation and entrepreneurship?

Innovation and entrepreneurship are two complementary dynamics that can lead to increased productivity and job creation, and lay the foundations of the recovery. They are also increasingly valued for their wider social benefits, as means to address pressing environmental and societal challenges. The creative destruction process that supports innovation endeavours is of particular importance in times of recession and recovery, as it allows a reallocation of assets and resources to the more productive (efficient) firms, which in turn will be able to grow and create the jobs of the recovery (Box 4.1).

Innovation results from a process of accumulation through which firms increase their stock of knowledge-based capital (OECD, 2019[1]). Firms create, acquire and recombine innovation assets, such as technology, firm-specific skills and know-how, data and brands, organisational settings and processes, and business models and networks, for innovating.

Possibly even more important in times of crisis, SMEs are primary sources of innovation and play a key role in shifting innovation models. SMEs adapt supply to different contexts or user needs, and respond to new or niche demand. Smaller firms due to higher risk acceptance, greater flexibility or more agile and adaptive organisational culture, have also a competitive edge in bringing new ideas into the market. Typically, SMEs are comparatively less at difficulty in performing specific types of non-technological innovation.

Nonetheless, SME contribution to innovation remains subdued as compared to the large population of firms they account for. SMEs struggle to combine different innovation modes that would require a larger portfolio of innovation assets (OECD, 2019[1]). Access to innovation assets is critical for firms of all sizes but the challenge is particularly acute for SMEs that confront specific barriers in finding and using the technology, data, information and networks that would enable them to participate in and benefit from innovation activities. SMEs are also more dependent on external sources of knowledge, albeit less well-integrated into knowledge networks (OECD, 2013[13]).

SMEs and entrepreneurship performance in relation to innovation is in fact defined by a complex set of business conditions (see OECD (2019[1])), as well as the quality of local entrepreneurship ecosystems (OECD, 2021[14]; 2019[15]).

SMEs adapt to market conditions through a range of strategies, with limited options to generate economies of scale due to their size but greater potential for competing through product differentiation and network and agglomeration effects (spatial concentration).

Digitalisation is a major driver of competitiveness, albeit not the only one. It enables SMEs to scale up their internal capacity and achieve economies of scale without mass. Digitalisation has helped reduce communication and transaction costs, by providing better and quicker access to information, and connecting SME staff, suppliers and networks (OECD, 2021[2]). It supports SMEs in integrating global markets, as it reduces the costs associated with transport and border operations and makes services tradeable. It facilitates access to resources, including finance (e.g. peer-to-peer lending), training and recruitment channels, as well as government services. It supports innovation and greater access to innovation assets (e.g. data or technology), as well as the potential for SMEs to generate their own data and analyse their operations in new ways (e.g. data analytics and predictive capacity). Digital platforms, such as social networks or e-commerce marketplaces, etc., have served for optimising certain operations at very low cost (e.g. business intelligence and data analytics services).

Digitalisation enables greater product differentiation and for SMEs to benefit from the rise of new business models and practices (OECD, 2019[1]). Information and communication technology (ICT) has been a major disruptor of business practices and contributed to changing consumer behaviours and expectations by enabling the rise of a more sophisticated demand and by shortening innovation cycles and time to market. In this changing landscape, SMEs have new opportunities to position and compete on niche markets, and to take advantage of the closer proximity to demand that new consumption models require.

Digitalisation, in particular online platforms, allows SMEs to capitalise on large network effects. Network effect arises as the number of users of the platforms increases, increasing the benefits for all users to operate on the same platform (OECD, 2021[2]). The larger the user base, the more likely SMEs are to find a match (e.g. with service providers, suppliers, clients), which in turn can reduce transaction costs and information asymmetry. Digital platforms have been transforming a wide range of SME business functions, from advertising and marketing (e-commerce), to service delivery, financing, HR and administration (payments), R&D and design, etc.

The shift towards more incremental, non-technological and open innovation models has also brought new opportunities for smaller-scale actors and non-R&D performers (OECD, 2009[16]; 2015[17]). Business innovation is no longer confined to corporate R&D labs but increasingly results from collaborative efforts between business partners that interact, exchange knowledge and information and share standards and infrastructure. This shift towards an “open innovation” (OI) paradigm has considerably reduced the investments needed to access innovation assets, making the innovation endeavour more accessible to SMEs (OECD, 2010[11]). Business linkages act as channels for SMEs to access technology, skills or for fostering data exchange and knowledge spill-overs (OECD, 2018[18]).

Prior to the COVID-19 pandemic, OI initiatives were sprouting worldwide, cities turning into hubs for data-driven innovation and testbeds for experimentation and prototyping (OECD, 2017[19]). Large firms were taking an active part in the OI transformation by developing strategic partnerships with smaller actors, deploying specialised accelerators where start-ups and individuals could access office infrastructure and a supportive business environment, or by setting up innovation labs with a view to encouraging “out-of-the-box” thinking and new collaborations (OECD, 2019[1]). Business accelerators tend to address some of the main challenges high-growth firms can face (e.g. managerial competencies, professional networks, equity finance). Innovation labs, often installed outside the sponsors’ premises and close to high-technology clusters, provide state-of-the-art research facilities and community spaces for SMEs to test and participate in interdisciplinary teamwork.

Recovering from the shock of 2008-09, business dynamics were more supportive of innovation endeavours. Enterprise creations were back to pre-crisis levels in volume and new entries of SMEs have been an important driver of employment growth between 2010 and 2016 in most countries, especially in the services sectors (OECD, 2019[1]). Enterprise birth rates, i.e. the ratio of enterprise creations over the total stock of enterprises, were also rising in many countries. In parallel, the number of bankruptcies has retroceded in almost all countries since 2010 (Figure 4.2).1 However, trends over the decade show large cross-country differences emerging. France, Sweden and the United Kingdom (UK) are leading the start-up wave, with a population of new firms almost three times bigger in 2020 than in 2007. On the other hand, firm creation in Germany, Japan and the Russian Federation remains below 2007 levels (Figure 4.2, Panel A).

But the 2008-09 crisis has left scars, firms being born smaller and in low productive sectors. Birth rates remained below pre-crisis rates in many countries, signalling that firms were born smaller (smaller average size of entries (OECD, 2017[20])) and the potential of job creation was not fully achieved. In addition, smaller sizes constrain the capacity of these firms to innovate, digitalise and gain productivity. Size limitations have compounded in lower productivity capacity. Between 2010 and 2016, in many economies, most new firm entries took place in sectors with below-average productivity levels: for instance, accommodation and food services in Greece, Ireland and the UK; the construction sector in Italy and Norway; and wholesale and retail trade in most countries (OECD, 2019[1]). Lower-productivity jobs have resulted in lower-paid jobs, weighing down on material well-being. Lower-productivity jobs and firms have also resulted in lower business absorptive and innovative capacities.

There were also signs of market concentration, with potentially detrimental effects on the business environment of small and young firms. Market concentration and competition can actually exert important (and non-linear) effects on innovation and entrepreneurship. Past OECD empirical analysis indicates an increasing industry concentration in a number of OECD economies and in many industries since the early 2000s and the significant role of intangible investment in this increase (Bajgar, Criscuolo and Timmis, 2020[24]). Intangibles may have disproportionately benefitted large firms, which are better placed to invest in them and leverage them in greater sales. In particular but not only, in digitally dependent sectors, trends in mark-ups suggest a reallocation of business activity, assets and profits towards “superstar” firms (Autor et al., 2017[25]), contributing to reduce the fluidity and dynamism of the economy (see Furman and Orszag (2015[26]), Grullon, Larkin and Michaely (2017[27]) and OECD (2018[28]) for a more comprehensive overview). For instance, in the digital advertising markets, certain acquisitions, as well as certain forms of conduct, have led to greater market consolidation and vertical integration, the perspectives of economies of scale and scope, network effects and access to data pushing towards more consolidation (OECD, 2020[29]). By contrast, in agri-food chains, although downstream segments are typically more concentrated than farm-level production, empirical studies have not found evidence of systematic and large competition problems (Deconinck, 2021[30]). Some past country-level studies are also less conclusive on the existence of market concentration dynamics (Honjo, Doi and Kudo, 2014[31]; Valetti et al., 2017[32]).

Prior to the COVID-19 crisis, small firms were still lagging in the digital transition (OECD, 2021[2]). The gap in SME diffusion rates as compared to large firms is a recurrent feature across all technologies for which data are available (Figure 4.3). Small firms remain less digitalised than medium-sized firms, and medium-sized firms less than large firms. An SME gap in adoption increases when technologies become more sophisticated or mass matters for implementation. For instance, for enterprise resource planning software that enables greater integration of corporate data flows and operations, a critical size is required to deal with the complexity and significant amount of resources needed. In addition, the SME digital gap is reflected through surveys of ICT use by businesses that do not cover micro firms, i.e. about 90% of the business population in OECD countries, which is likely to underestimate the scale of the issue.

The gap in SME connectivity, albeit a prerequisite for their digital transformation, has increased worldwide. High-speed Internet infrastructure is needed to enable digital connectivity and to facilitate data transfer. Penetration rates of high-speed broadband have been increasing in all OECD countries since 2011 but much faster in already leading countries (i.e. top five countries) and much faster among large firms (Figure 4.4). Cross-firm divides (i.e. the difference between penetration rates among small firms and penetration rates among large firms) have enlarged more in lagging countries. These gaps have left some firms – and places – with limited scope to adapt their business models and maintain operations during extended periods of social distancing, exacerbating existing inequalities.

Among those that go digital, SMEs tend to limit transformation to basic functions, primarily general administration and marketing operations. Business surveys on ICT use show that the digital gap is smaller between SMEs and large firms in their online interactions with the government, in electronic invoicing or in using social media or selling online (OECD, 2021[2]). There are however significant differences across sectors in terms of intensity and patterns of digitalisation. In knowledge-intensive sectors, such as information and communication services, adoption rates are far higher: the OECD country median share of employees having access to devices with online connection is around 90%, compared to 50% across all sectors (OECD/Eurostat, 2020[35]). In fact, the adoption of a few key technologies in each sector is critical. In the accommodation and food services sector, high-speed broadband connection, having a website and using cloud computing (CC) to store files are the main technologies associated with higher value-added and larger digital gaps. In the wholesale sector, significant gaps exist in e-sales, CC to host databases and the training of ICT specialists, while in retail trade, e-sales and CC to manage customer relationships are the key areas of the digital divide. In the construction sector, these are having a website, the training of ICT specialists and equipping employees with connected and portable devices.

SMEs also tend to rely heavily on external sources and providers of digital solutions, external systems, support and advice (OECD, 2021[2]). This is partly to compensate for weak internal capacities but also on cost grounds. Digital platforms serve for optimising certain business functions. For managing digital security risks, SMEs tend to rely on external consultants or the security-by-design features of the products and services they use. They also source artificial intelligence (AI) solutions from knowledge markets and leapfrog to new AI systems with CC-based software as a service.

The COVID-19 crisis has heightened the importance of SME digitalisation and served as an accelerator of digital innovation. Firms have moved operations on line to remain in business during lockdowns and overcome disruptions in supply chains, with online platforms playing an instrumental role in connecting users to new markets, suppliers or resources. Smart working solutions have bloomed with a view to tackling the almost total disappearance of face-to-face and onsite business activities. In professional and consulting services, where onsite visits could be an essential part of the job, the effects of social distancing have been sizeable. Early evidence from business surveys conducted worldwide in the course of 2020 point to an estimate of up to 70% of SMEs having intensified their use of digital technologies due to the COVID-19 pandemic (OECD, 2021[36]).

The crisis has accelerated SME digital uptake, especially among medium-sized firms. According to the new data of the Facebook/OECD/World Bank survey, 64% of medium-sized firms (50-250 employees) that were interviewed at the end of 2020 on their use of digital technologies or platforms reported having increased use since the beginning of the pandemic (Facebook/OECD/World Bank, 2020[3]). This value is higher than the shares for the self-employed (38%), micro firms (41%) or small firms (51%). Of particular concern, it appears that 53% of the self-employed and 48% of small firms did not take the digital wave at all, despite having already a digital presence. The same survey also confirms the importance of e-commerce during the crisis: SMEs making more than 75% of their sales on line were 15 percentage point more likely to maintain their income than SMEs making less than 25% of their sales online (Facebook/OECD/World Bank, 2020[37]) (Chapter 1).

The share of SMEs increasing their use of digital technologies was greater in countries with more stringent containment and social distancing measures. The stronger the measures, the stronger the pressure on SMEs to adopt new means of doing business (Figure 4.6). Chile and Columbia, which experienced very stringent lockdowns, saw around 60% of their SMEs increasing digital uptake in the period, significantly more than in countries with comparably softer lockdowns, such as Norway or the Slovak Republic, where only 32% and 25% of SMEs increased digitalisation respectively.

Examples of SMEs going digital to deliver in the turmoil or adapting business models and work practices with new software, applications or cloud usage, are spread across countries and sectors including e-commerce, the leisure and entertainment industry, e-banking and mobile payment, e-learning and manufacturing, etc. (OECD, 2020[39]; 2021[2]). The OECD SME databank that gathers business cases of SME digital transformation provides examples of the resilience of digital and non-digital SMEs during the COVID-19 crisis (OECD, 2020[39]) (Box 4.2).

Costs have been the major impediment to digital uptake by SMEs during the crisis. The analysis of the Facebook/OECD/World Bank survey shows that all SMEs, irrespective of their size, name costs as the most important barrier to digitalisation (Facebook/OECD/World Bank, 2020[3]). Costs are especially an issue for the self-employed (61% see them as a barrier) and micro firms (59%) but less so for small enterprises (44%). Costs become an important barrier again for a majority of medium-sized firms (59%), possibly signalling a non-linear increase in the costs related to integration and organisational changes beyond a certain firm size.

Other barriers to digitalisation include a skills and awareness gap or integration challenges. For the self-employed and micro firms, all of these barriers, i.e. lack of awareness of tools, the difficulty of integration, and lack of skills, are similarly important and named by 20% to 30% of firms. For SMEs, the difficulty of integration is the second most important barrier after costs (named by 41% and 43% of respondents respectively). While the lack of awareness plays only a minor role for medium-sized firms (13%), it remains constraining for small firms (32%).

Accessing government and multiple forms of support has been associated with greater digital uptake during the crisis. SMEs that received government support are, on average, eight percentage points more likely to increase their levels of digitalisation than SMEs that did not receive support. The effect was 3 times as large for SMEs that received multiple types of support (18 percentage points more likely to increase digitalisation) as SMEs receiving financial support alone (6 percentage points more likely to increase digitalisation).2 Despite the importance of cost barriers, results, therefore, highlight the relevance of combining financial and non-financial support (e.g. training) for overcoming barriers to adoption and suggest that policy mixes for digital uptake by SMEs requires a holistic and polymorph approach.

The crisis has further widened the digital gap between SMEs across sectors. SMEs in sectors where digitalisation was already well advanced before the crisis, as measured by the share of SMEs in the sector with a high-speed broadband connection in 2019,3 show a substantially higher share of SMEs that report having increased their use of digital tools during the COVID-19 pandemic (Figure 4.7, Panel A).4 This is the case in the ICT sector. Conversely, SMEs in low-digital sectors, such as construction or transportation services, have experienced a lower degree of transformation during the crisis.

The crisis has however contributed to narrow the SME digital divide across countries. Digital uptake by SMEs has been higher in some countries with initially lower broadband penetration rates (Figure 4.7, Panel B). Colombia, Ireland or Italy entered the crisis with a lower share of SMEs connected to high-speed broadband and showed a very fast SME digital uptake during the crisis. Conversely, in countries starting at similar levels of broadband penetration rates such as the Czech Republic, Hungary, the Slovak Republic or Turkey, fewer SMEs have undergone a digital transformation. Likewise, several countries with higher initial levels of connectivity – such as Portugal, Spain or Switzerland – have also experienced a faster digital transition among SMEs.

Public interventions have been determinant in speeding up SME transformation and narrowing the digital gap. Overall, those countries where SMEs managed to narrow the initial digital gap with their peers in other countries have provided a higher amount of fiscal support (in proportion to gross domestic product [GDP]) in emergency response measures as they were going through stricter containment conditions.

During lockdowns, businesses and people increasingly turned to online platforms to pursue economic activities. Based on a dataset of about 1 400 online platforms active in OECD and G20 countries, a recent OECD study shows that the use of online platforms increased by about 20% in the first half of 2020 in areas requiring little or no physical proximity for product and service delivery (OECD, 2021[40]). This is the case in mobile payments, marketplaces to consumers, professional services and restaurant delivery. On the contrary, in areas requiring physical proximity (such as accommodation, restaurant bookings and transport), platform activity declined markedly, by around 90%.

SMEs increased their use of platforms during the crisis, especially for selling and notably if they were already active on platforms before. The Facebook/OECD/World Bank survey shows that 39% of firms that used platforms before the crisis increased use during the crisis, as compared to only 5% that reported having started during the crisis (Facebook/OECD/World Bank, 2020[37]). Primary purposes of use include communication (67%), advertising (61%) and sales (48%). However, SMEs selling on platforms have a higher probability of increased platform use during the pandemic and are more likely to report a positive impact not only on sales but also on costs.

The smallest SMEs, however, face barriers on platforms. Platforms help smaller firms unlock the benefits of network effects, e.g. by leveraging a large user base to increase outreach and reduce transaction costs and information asymmetry, or by accessing the digital services proposed by the platform at very low costs (OECD, 2021[2]). However, the fees charged by the platform still seem to be a binding constraint to further adoption, especially for smaller firms. About 30% of the self-employed and micro firms report fees as a challenge to expanding platform use, as compared to 26% of small and 23% of medium-sized firms.

Levels of telework have skyrocketed during the pandemic (Figure 4.8) (OECD, 2021[2]). Survey data from the European Foundation for the Improvement of Living and Working Conditions show a striking increase in the share of respondents who started working from home because of the pandemic. In addition, the intensity of teleworking adoption varies significantly across people, places and industries. The lower-educated, the oldest rural areas and small towns, frontline sectors such as health, transport and agriculture, and sectors with a large share of place-dependent employment such as commerce and hospitality were less likely to work from home (Eurofound, 2020[41]).

A collective impulse has been given to SMEs to go digital faster. Initiatives in support of SME digitalisation have sprung up worldwide and across all sectors, starting with the private sector, SMEs and start-up themselves, as well as business associations (OECD, 2020[39]). Players in the digital industry have also deployed services, support schemes and assistance for SMEs to remain in business (Box 4.3). Some of them have focused on providing free access to “learning platforms” for SMEs willing to expand their online presence, transition towards remote working or enhance digital security. These “learning platforms” include blogs, videos, fora as well as specific training (usually tailored to the level of experience and understanding of the entrepreneur). Most of these services only require the SME to register, although they also involve using the proprietary technology and commercial tools of the industry actor that is offering its support.

The crisis also brought examples of entrepreneurship and small business creativity in coping with the crisis, often as a direct response to urgent societal needs, e.g. medical devices, disinfectants, liquidity solutions (OECD, 2020[39]; 2020[43]) (Box 4.4).

Social economy, social enterprises and social innovation initiatives have blossomed. Social enterprises prioritise their social impact over profit and contribute to improving the welfare and well-being of individuals and communities. They are major actors behind social innovation, albeit not the only ones (Box 4.5). According to the Social Enterprise: Market Trends Report (2017), nearly 9% of the UK small business population are social enterprises (SEUK, 2020[44]). There are an estimated 471 000 UK social enterprises overall, made up of 99 000 social enterprises with employees and 371 000 social enterprises with no employees. Social enterprises employ roughly 1.44 million people, the majority of these are employees, the remainder are working owners and partners. Twenty-two percent of the UK small business population (or 1.21 million enterprises) are identified as socially-oriented SMEs, i.e. SMEs that have social and environmental goals but do not use surplus/profit chiefly to further these goals.

Social economy organisations and social enterprises have turned into important actors in mitigating the effects of the pandemic. They have not only supported governments by addressing sanitary issues but have provided innovative solutions to complement government action. They are also serving as a trusted partner for a better allocation of resources in the provision of the goods and services needed (Box 4.6) (ILO, 2020[53]; OECD, 2020[4]).

If the COVID-19 shock has accelerated the development and uptake of digital solutions and platforms, it has also raised concerns about market concentration and the risks of abuse of market power. Amidst the crisis, GAFAM recorded exceptional results for 2020. Google consolidates its global leadership on online advertising, increasing profits by 50% over the second half of the year. Despite a drop in tourism advertising revenues, the company grew its revenues from CC services and its YouTube platform (La Tribune, 2021[54]). Apple has passed the threshold of USD 2 000 billion of market capitalisation, the results of the company benefitting from the uptake of teleworking during the pandemic, which largely compensated the losses due to the closure of its shops (Reuters, 2021[55]). Amazon has doubled its profits over the last trimester of 2020 only, as “brick and mortar” shops were closed or circumvented by customers. In addition to the boom in e-sales, Amazon owes its historical performance to a fast increase in the uptake of Amazon Web services (Amazon, 2021[56]). Microsoft saw a big surge in the use of Microsoft Teams at the beginning of the pandemic, which has maintained over the following months (The Verge, 2021[57]). In October 2020, Microsoft reported 115 million daily users, i.e. a more than 50% increase as compared to 6 months before.

More broadly, multinationals with a strong digital presence saw their stock market returns surge during the turmoil (OECD, forthcoming[5]). As an example, the big commercial brands of the retail trade have been able to shift part of their sales and turnover towards their own website as their physical stores closed (La Tribune, 2021[58]).

Some changes of the digital transformation are poised to last given the irreversible investments made and demonstrated gains. Among those that have increased use of digital technologies and platforms during the pandemic, the self-employed (63%), micro firms (64%) and small firms (69%) alike declared these changes to be permanent (Figure 4.5). Seventy-eight percent of medium-sized firms (up to 100 employees) also anticipate the transformation to be permanent. Similarly, 78% of employees interviewed in July 2020 indicate an inclination for working from home at least occasionally if there were no COVID-19 restrictions, with a preference for a frequency of several times a week (Eurofound, 2020[41]). As e-commerce (e.g. social media, e-sales) is an entry point for firms to step in the digital journey (OECD, 2021[2]), the crisis may have helped millions of SMEs gain years in the transformation process.

However, this accelerated digitalisation has also revealed risks and vulnerabilities for the SME and entrepreneur population. In particular, the COVID-19 crisis has been an opportunity for malicious actors to intensify cyberattacks, taking advantage of a greater reliance on digital technology and communication infrastructure and SME vulnerabilities. Operators of telecommunications and broadband services have experienced as much as a 60% increase in Internet traffic compared to before the COVID-19 crisis (OECD, 2020[60]). SMEs were not well prepared to face sophisticated attacks, with poorer digital security risk management practices and a lack of awareness of the risks and losses incurred (OECD, 2021[2]).

In addition, former barriers to SME digitalisation remain, in terms of awareness, the skills needed (for both managers and workers), solutions to bridge the investment gap, legal uncertainty, technological lock-ins, weak data culture and data management practices, reputational risks in case of dispute, etc. (OECD, 2021[2]). For instance, the increased reliance on ICT infrastructure has stressed the need to bridge the digital connectivity gap faster and extend high-speed and quality broadband to all places, firms and people. Looking forward, abyssal inequalities may arise between those that have a digital profile and those that have not, undermining the prospects of a fair and sustainable recovery.

It is too early to say if these innovation activities may lead to higher productivity, business growth and job creation. It is also too early to say whether the change in business practices will be sustained over time and what their impacts in terms of economic and societal benefits will be. It is also too early to assess the negative impact of the crisis on innovation investments. For instance, Lithuania has initiated research on how the COVID-19 crisis would affect corporate investments in research and development (R&D) and innovation (EU/OECD, 2021[61]). Forty percent of companies are planning to reduce their investment in research, development and innovation (RDI) and 56% to maintain them at the same levels. Only 3% of respondents are planning an increase, which reflects a negative tendency as compared to 2019 when 17% had increased them. However, it is very likely that the very specificities of the crisis may have favoured some forms of innovation more than others. Backing on this momentum will be important for the recovery phase, as well as shifting creativity away from immediate crisis solutions towards more future-oriented problem-solving.

Governments have been proactive in helping their SMEs transition towards the digital space, either expanding or accelerating the implementation of existing programmes or implementing new ones (OECD, 2021[2]). From e-government services to incentives for digital uptake, reskilling, reinforcing the digital security and infrastructure, better connecting SMEs with innovation networks and digital solutions providers, governments have put in place a large range of action, also targeting the entry points to the SME digitalisation, i.e. e-commerce, use of social media and interaction with the government. The following country examples are drawn from OECD (2021[62]), (2021[2]), (2021[63]) and (2020[64]) in their respective fields, or otherwise stated.

E-government services have been strengthened to improve and speed public services delivery. Digital instruments, such as government portals, have been used to improve transparency, provide information and access, and ease the interaction with SMEs (OECD, 2021[2]). Innovation in public services, fostered by the crisis, represents an important opportunity to build stronger regional resilience, as the digital transformation of public administration encourages the transformation of SMEs and these innovations enhance a region’s ICT and technological environment (OECD, 2020[65]).

Several countries have introduced broad measures to support SMEs in moving operations online. Policy makers have offered SME-targeted financial support and technical assistance in conducting technology and problem-solving diagnosis or implementing e-business solutions, often in the form of small-scale and place-based initiatives (OECD, 2021[2]). In some cases, financial and technical support is supplemented with training and guidance on the skillset and organisational changes that are required to support technological change. In some cases, initiatives are implemented in co-operation with the business sector. In some cases, policy action is designed at the sectoral level (Box 4.7).

A special focus has been given to promoting e-commerce and helping SMEs sell on line (Box 4.8).

Special policy attention has aimed to enable teleworking. Typically, national governments took framework measures to enable work from home (OECD, 2020[6]). Options ranged from introducing brand new or adapting pre-existing regulations, to issuing guidelines or other quasi-legal tools. Several national governments set up online platforms to make digital services offered by large IT providers accessible to all. Regional and local governments, in turn, focused on building the capacities to increase teleworking uptake. Several of them prioritised offering information and training services. Others started drawing long-term plans for a broader diffusion of teleworking on a permanent basis. Lastly, various governments, mostly regional, designed financial support schemes to foster uptake by SMEs, typically by subsidising investments in digital tools and skills (Box 4.9).

Massive reskilling is needed. Existing measures for the training and skills development of SMEs have been expanded or new ones have been launched. Measures to retain employees and competencies, or rehire them, have been deployed as well (Box 4.10).

Initiatives have aimed to reinforce digital security in SMEs and improve the digital infrastructure (Box 4.11).

Governments serve as facilitators in connecting SMEs with innovation and knowledge networks and digital solutions providers, sometimes with a sectoral approach. SMEs tend to rely on external systems and external sources of digital solutions, support and advice for digitalising their operations, and compensate for weak internal capacities but also on cost grounds (OECD, 2021[2]). However, a key challenge for many of them is to identify and connect to appropriate knowledge partners and networks at the local, national and global levels. Barriers include problems inherent to the interactions between SMEs and the actors of the digital industry, lack of networking facilities, asymmetric information (e.g. when potential users may not be aware of the digital technologies and innovations available, or the benefits they could bring them), etc. Governments intervene to address these system failures (Box 4.12).

Support to start-ups and scale-ups has been extended, essentially to help start-ups overcome their liquidity constraints but also to access innovation and growth capital (Box 4.13).

The COVID-19 crisis is an opportunity to transition towards a greener and circular economy. Governments have deployed massive plans for the greening of SME activities, sometimes twinned with the digital agenda. From June onwards, recovery packages increasingly aimed to support sustainable recovery and build back better (OECD, 2021[66]). Although they vary by country in size and content, in many cases, they include a strong investment focus on sustainability (Box 4.14).

Going forward, national SME and entrepreneurship recovery packages need to integrate an explicit territorial dimension, with effective governance mechanisms. Subnational governments need to be involved in the design and implementation of such strategies early on. Multi-level co-ordination bodies, ones that bring together national and subnational government representatives, can help co-ordinate policy responses in order to avoid overlaps and misplaced incentives in public action. In Italy, for example, simplification measures were introduced by 14 regions to streamline administrative and regulatory procedures for SMEs. These include deferring application deadlines for public funding programmes, reporting on investment plans subject to public incentives and simplifying public procurement (OECD, 2020[70]). Co-operation among levels of government and across municipalities helps generate agreement on joint solutions and enhances the acceptance of measures at all levels. It also helps minimise fragmented or disjointed recovery responses and competition for resources (OECD, 2020[70]). Procurement practices are an area where cross-jurisdiction co-operation is especially relevant. Subnational governments account for almost 50% of public procurement in the OECD, 62% in federal countries and 38% in unitary countries (OECD, 2018[71]). Inter-regional or inter-municipal collaboration in procurement, especially in emergency situations, will be important to harmonise and accelerate procurement practices at the subnational level and support SME recovery.

The territorial impact of the pandemic can also give SMEs and entrepreneurs the opportunity to contribute to a stronger regional innovation environment. The COVID-19 crisis might reinforce existing SME and entrepreneurship vulnerabilities (e.g. liquidity shortages or lack of labour supply) that affect regional economies and innovation capacity, particularly where SMEs and entrepreneurs form a significant percentage of the enterprise fabric. At the same time, the crisis offers opportunities for regions to accelerate innovation in the private and public sectors. For example, it can represent an important opportunity to embrace digitalisation and enhance the ICT and technology environments, particularly among regions in industrial transition (OECD, 2019). In addition, innovation in public services fostered by the crisis, including those supporting the transition toward a greener and circular economy, represents another important and symbiotic link between subnational government action and the SME environment. Improved accessibility to services, in physical and digital terms, for instance, can contribute to the resilience of a region’s firms and citizen well-being while also offering business development opportunities. Piedmont, Italy, is an example of a region that is currently redesigning its innovation support to cushion the challenges and advance the opportunities arising from the COVID-19 crisis.


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← 1. Declines in bankruptcy numbers may not necessarily be a signal that business dynamics are improving if they reflect the survival of low-efficient incumbent firms (“zombie” firms). Similarly, increases in firm creation may not be a signal of improving entrepreneurship performance if incentives are push factors such as fiscal tightening and lower levels of social security payments, rather than pull factors, e.g. business opportunities.

← 2. This is based on an econometric specification controlling, in addition to the different types of government support, for firm age, firm size, sector and country.

← 3. High-speed broadband connections have a download speed of at least 100 Mbit/s.

← 4. If former digitalisation has been an enabling factor at the sector level, it is worth noting that the analysis is conducted on a sample for firms that had already adopted some basic forms of digitalisation prior to the crisis (firms with a Facebook page). Sectoral rates of adoption during the crisis for the entire firm population could be therefore lower.

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