Significance of SMEs in the Czech Economy and Supporting SMEs as an Instrument of the Regional Development

SMEs (Small and Medium Enterprises) are important segments of the economic landscape ofthe Cuclz Republic, since halfofeconomic production is attributable to SMEs (52.85 %). The role of SMEs in tlze Czech Republic is tlze outcome of a long history of economic development and industrialization throughout tke 2(}" century. Large enterprises prefer to locate theirfactories according to e mnge of regional opportunities. Small enterprises are more dependent on business conditions in their region. Tke transaction costs are relatively high for small firms. These contmints mean that regions witkout an attractive environmentfor business need to create acceptable conditions for small businesses, ifthey are lookingfor sustainable development.


The role of SMEs
SMEs are an important element in the Czech economy.They have, however, had a varying role in the long history of the economic development of the country.In the first half of the 20 th century, small enterprises played a pioneering role both in Czech industry and in Central European industry generally.Hardworking craftsmen and professionals had a high reputation during the first wave of development of newly founded industrial enterprises.This situation continued before, during and after World War II.Small enterprises showed little change during this period, either in terms of structural characteristics Ol' in terms of productivity.This period was shaped by demand conditions.In spite of the political changes, leading to nationalization in the 1950s, the character of the market did not change.A supplier driven market dominated, notwithstanding nationalization, the planning system, and state regulation, which provided the legal framework for economic activity.Until the 1960s, economic units consisted of small working groups.To summarize, the organization of production changed only slightly during the first economic wave of the 1955-1962 period.
The political changes in the country did, however, negatively affect economic motivation and the entrepreneurial spirit.The relative increase in economic growth during the first waves of nationalization was followed by economic distress and stagnation.Economists warned about decreasing labor productivity at that time, and this led to the initiative known as the New Economic System (NES), which was set up as a way of increasing the efficiency of the economy.The implementation of the NES, however, was far from successful in accelerating further economic progress.During this period (mainly before after 1968), industry accepted orchestrated aetion with enthusiasm, and started to assimilate the flood of new investments.Development took the form of massive large-sca1e industrialization.This second wave of industrialization was connected with the centralization of industrial capacity in large-scale organizations.The monopoly of large-scale industry was established at that time, and large industries had the main responsibility for supplying goods for the whole state.At this point in time, there existed only a few hundred state enterprises in aH industrial branches.The main result ofthis policy was the disappearance ofSMEs as an economic category in the planned economy, while the development of large-scale plants and concentration on certain economic sectors dominated the growth process.This process was partially successful, in its first phase, but the resources of qualified labor were very quickly exhausted, and industry began to suffer fmm lack of motivation, which later led to the ineffectiveness of industrial activities.The amount of value added per worker was not calculated in a planned economy, but it was surely very low.Innovations in industrial management decreased to a critical point and the implementation of new products became very difficult.The management of state-owned enterprises was not interested in taking new steps toward innovative action.As a result, the planned economy faced the necessity of initiating several changes and establishing a new economic milieu.
A new wave of SME development began in 1989.The economic system changed from a planned to a pluralistic market-driven economy.This change was accompanied by the reinvention of SMEs as microeconomic entities, after the dismantling of state-owned industries.The growth of SMEs seems to be stili in progress.In 2000, the self-employed constituted the largest proponion ofSMEs, that IS 76 % of the total number of small and medium-sized firms.The share of SMEs in the CDP reached 40.2 % in 2000.The highest proportion was founci firstly in wholesale and retail trade (35.9 % of COP) and secondly in services (19.26 % of CDP).
As indicated in Table l, there are visible differences in output per employee between small (0-249 employees) and large (more than 250 employees) bllsinesses in industry, ranging between 1552.6 thousand CZK per year in large enterprises and 1186.0 chollsand CZK pel-year in small firms.This situation means chat the larger firms are 31 % more productive than the SMEs.However, the difference in labor costs per employee is not so great.The picture changes completely if we look at the need for fixed capital in order to create one job.In small enterprises, chere is a need for 92.7 thousand CZK (that is about 3.1 thousand EUR) in order to generace one job, whereas large enterprises have to invest more than twice that amount (199.3 thousand CZK, that is 6.6 thousand EUR), which amounts to a more than 2 I5 % !arger fixed capita!need than in the case of smaller.The comparison of value added per unit of output and la- bor cost per unit of output, given in Thble 2, shows that there are no significant differences between small and lalge enter- prises, but there are considerable differences in the need for investment in order to create industrial output.Small busi- nesses are less capital-intensive (0.08) than lalger ones (0.I 3).
What do all these figurcs mean?Frrstly, large businesses are more productive; have higher value added per employee, and also higher wage levels.The difference in productivity is higher than the difference in wages, which identifies a possi- ble profitability gap benveen large and small firms.Similarly, there are massive differences in investment on equipment per employee.A large enterprise provides more than 2.1 times more investment assets than a small one.These figures indicate that the advantage of large firms, in terms of productiviry is the result of the use of more advanced equipment in the work place.Thble 2 shows that rhe economic outpurs per unit are relatively well balanced and there is no subsrantial diflbrence between small and large enterprises.Nevertheless, small enterprises also have other assets and advantages, such as flexibiliry the ability to adapt to volatility in rhe marker, etc. Table 3 A category of enterprises that is very important in the Czech Republic is the self-employed.There are 16 Vo of pri'vate entrepreneurs in business as per the trades licensing act of the Czech population.
The high number of self-employed can be explained by the possibility of working for oneself while still being employed in a company or in public service.Statistics relating to this type ofwork are not available, but estimations indicate that half of the self-employed are also employees.The statis- tics do not disringuish active entrepreneurs.
The development of SMEs still seems to be in progress.
Thble 3 shows the strucrure of registered SMEs in 2000, with the self-employed creating a broad base.
Thble 4 shows the number of registered SMEs according to size. 2 Sectoral distribution of SMEs and development in the Czech Republic There are considerable differences between economic sec- tors, in terms of the share ofvalue added in total production.
Table 5 shows the differences in terms of the share of value added in the total value added generated by SMEs among the main sectors of the economy (Rathouska, 2002).More importantly, the shares of SMEs in different economic seclOrs also display considerable variation (Table 6).
The largest share ofSMEs in lOtal production is in ilie Restaurants and Trade sector, and the lowest the lndustry.Besides, the difference between the share ofSMEs in total production and value added is quite considerable in different seclOrs.For   Large enterprises prefer to locate their factories according to a range of regional opportunities.Small enterprises are more dependenr on business conditions in their region.The transaction cosrs are relatively high for small firms.These constraints mean that regions without an attractive environ- ment for business need to create acceptable conditions for small businesses, if they are looking for sustainable developrnent.
In the near future, due to their proximity to the developed countries of the European Union, the Czech regions are expected to get an influx of capital and know-how, which will aim to utilize the available qualified labor force, Also, after accession to the European Union, new opportunities in the unified market may have a positive impact on several regions, and the financial support provided by European  Qyality pays up to 50 % of the cost of approved proposals to a maximum of200 000 CZK on projects (7 000 EUR).
There are 29 Regional Advisory and lnformation Centres (RPICs) and 5 Business lnnovation Centres (BICs) in the Czech Republic, aimed at supporting the innovative capacities of firms.RPICs mostly provide advisory services for emrepreneurs, such as help in establishing new companies, assistance in making business plans, mediating bank credits, creating new jobs, providing information about support programmes available in their region, organizing educational seminars for entrepreneurs, etc. Business lnnovation Centers (BICs) focus on supporting innovative businesses, transfer of technologies from abroad, the implementation of R & D olitcomes, and making use of the opportunities provided by the European network of business and innovation centers, in addition to basic advisory services.Their special task is to provide support for companies located in so-called business incubators.The standard services provided by RPICs and BICs are intro-ductory consultation, business advisory services, subsidies for innovative firms in incubalor centl'es, as well as the training of entrepreneurs.The amoum alJocated from the state budget to support SMEs is quite low; approximately 1 milJion EUR, and obviously such a low level of financial help cannot do much to promote SMEs.At the regional leve!, municipal authorities are not able to devote any resources to promote SMEs in their region.
The support system designed for SMEs in the Czech Republic seems \Vell defined, \Vell advised and well coordinated.Low financial resources, however, are the main obstacles to the realization of its intended purpose.Obviously, regional developmem has to be seen as a result of increasing market relations and not necessarily as a result of state economic policy.ln regional development, SMEs play an imponam role in balancing the market consisting of large emerprises, especially in the service seetors and in innovative production activities.Nevertheless, SMEs have to act very carefully.One large mistake Ol' wrong decision can be a serious threat to their existence.Therefore, the management ofsmall enterprises has to behave more carefully than that of large emerprises.
Therefore it is oecessary to develop more effective methods of hel ping small businesses.A small enterprise is innuenced not only by the loeal eeonomic eonditions, but also by external forces.The impact of national maero-economie conditions is usually unavoidable.

Ohstacles to further development of SMEs in the Czech Republic
An improving, but sti II imperfect, legal framewol-k, cootinuing privatization, and insufficient adaptability to world market conditions characterize the eeonomic environmem in the Czech Republic.In recent years, the national economy has suffered from laek of domestic capital, low levels ofinvestmem in industry and a generaJ decrease in the fixed capita] investment rate.In general, the economic potemial is relatively limited.The low level of competitiveness is the result of outdated technology and a low level of innovation.A substantial number of industrial and agricultural enterprises (mainly SMEs) are in a difficult economic situation, due to under-capitalization, latem Ol' real inso]vency and increasing debts.They suffer from unfavorable technical conditions and a decrease in the number of qualified workers.In-firm research activities are limited.Similar conditions exist in agriculture, as is apparent [rom the !ow levels of agricultural production, Jow levels of competitiveness in the rural economy and the insufficient facilities of smaller municipalities.
The proportion of CDP devoted to education is below the EU average.The consequence of this situation is a low percentage of university-educated people, permanent under-education, poorly equipped schools and a decrease in the number of qualified teaehers.The education system is not sufficiently connected to the labour markets.The same kind of disadvantages appeal' in utility services.Road networks are insufficiemly connected to the greater European network, the highway networks are unevenly distributed, and highway connections in some regions (southern Bohemia, northern Moravia) are lacking.Peripheral regions face increasing deficiencies in their transportation infrastructure.
supply and distribution are still monopolistic.The pricing model used in energy disrribution and waier supply is distorted, which leads to high warer losses and high'failure rates in obsolete networks.The natural environmJnt in the Czech Republic also reveals many problems.These problems include high levels industrial air foilution in North-wesrern Bohemia, the Ostrava region and prague, and increasing concentrations of transport emissions in most of the bi[ towns.Emissions, raw material exploitation and unsuitabll forrns of tourism are doing damage to several environmen_ tally sensitive locations.Waste disposai is not controlled, wastes are not re-used or prevented at source.Excessive utili_ zation of non-renewable sources is still continuing, and there is a preference for "pipe-end" technologies, etc., as a conse_ quence of a lack of, or low efficiency of, suitable economic and normative tools.
^ In summary the free market economy has been running for only 12 years in the Czech Republic, and the new legal system has not been able to remove the habits of the past.Some entrepreneurs do not respect business standards.The enforcement of laws is poor and this situation facilitates dis_ honest practices.SMEs, which are especially vulnerable to these conditions, have only a limited iUitity io sustain their own viability.Beside, loss of conrinuiry and lack of experi- ences play its important role.

Conclusions
The role of SMEs in the Czech Republic is rhe outcome of a long history ofeconomic development and indusrialization throughout the 20"' cenrury.The industrial basis has pas- sed through several stages.The change from disaggregated small-scale manufacturing to relatively concentrated industry on a private basis, which was the experience of the first half of the 20'h century was followed by the concentration of state-owned enterprises in the planned economy.The de- regulation and privatization of the last decade led to the revitalization of entrepreneurship and the creation of many small or middle-sized enterprises.The market driven econ- omy promptly highlighted the weak and srrong points of enterprises, and the regional context of entrepreneurship became an important factor in economic perfiormance.
SMEs are important segments of the economic landscape of the Czech Republic, since half of economic production is attributable to SMEs (52.85Vo).The main concenrrarion areas of SMEs are Agril:ulture, Forestry and Fishing, Restaurank arul, Tiai"e, Market Seruices, and Cowtru,ction, in which sectors the share of small and medium-sized firms in total production is higher than 80 Vo.On t!i'e other hand, the share of SMEs in total manufacturing producrion is only 35.25 70, according ro 2000 figures.This outcome, and several of the problems in manufacturing, is the result of the policies followed in the phnned econlm).The main problems are low economic effi- ciency, suppression of interest in innovation and technical progr.ess,low productivity, high percenrage of labor costs in the production.value,etc.
Currently, the incentives to growth are oriented not only to large-scale industry services and other segments of the economy, but also to small and medium-sized enterprises.The support provided for rhe factors promoting develop- ment has led to the rediscovery of SMEs as an impor- tant instrument of economic progress.The abiliry of SMEs to operate within the new global economy is moie limited, since globally operating enrerprises have a greater ability to succeed in the global market and to deal with economic problems.Howeveq there is a need to balance business op_ portunities between lnrge and, sma,ll or medium-sizcd enter- prises, in order to initiate and sustain regional development.
It should-not be forgotten that SMEs are imporant not only for their role in economic growth, but alio for their contribution to the strengthening of social cohesion.
In spite of the lower value added per worker created by SMEs, the welfare attributes of small enrrepreneurship make SMEs importanr for local and regional development.From the economic point ofview, larye public..rt..p.ir., may have an advantage compared with small enterprises, since they can support the_unemployed and the socially handicapped, but SMEs are able to substitute for several public social iervices in the regions.SME support schemes are cheaper than direct payments of social services and unemployment benefits by governments.SMEs are crucial in the development of the regions.The investmenr requirements of SMEi are only half as demanding as the investment requirements of large-scale enterprises.In addition to this aspect of SMEs, they are more flexible and have the abiliry to creare changes and innova- tions.That is why SMEs are the subject of attention, not only in the Czech Republic, but also in the European Union.
Fig. I presents rhe index of GDp per capita during the 1995-2001 period and predictions for the 2002-2004 period.This figure shows rhe recession rharoccurred between 1996-1998, which was due ro the fast growth of domestic consumption, a high import deficit, and relatively low productivity growth in the industry and services sectors.This pattern of growth in GDP is reflected in the growth ofthe sectors described in Thble 7 and Thble 8flexible in their production organiza- tion, they are confined to certain localities, due to the immobility of their main resources.Individuals linked to SMEs are connected to their place of residence, housing, etc.

Fig
Fig. l: Real growth of GDP in the transition period of CR

Table l :
srructure and Economic power ofBusinesses in Industry (1g99)

Table 2 :
A comparison of small and large enterprises according to performance indicators Source: Czech Statistical Office 2001.

Table 5 :
Comparison of sectarsSMEs in (year 2000)SMEs tota! production SMEs tota! value added Share ofVA value added wiiliin production was created in ilie Restaurants and Trade sector, and ilie second highest was in Market Services.The lowest ratio is in the Constmetion seclOr.

Table 6 :
The shares of SMEs in tatal production and value added •'VA.value added example, in the Transport, Stomge and Communications sector there is a gap between the share of production (46.2 %) and value added (23.9 %).This means that this sector is not able to create sufficient value added and is not competitive enough.According to the numbers given in Table6, it can be seen that SMEs in construction are the most competitive.If we compare the value added for produetion in particular sectors, over a six-year time period, a declining trend can be observed in aH sectors (Table7).The reason for this situa-

Table 8 :
Acta Polytechnica Vol.43 No. 2l?00g Value added share in invesrment (%) lgg5_2000 Source: Czech Statistical Office 2001 tion is that the value added growth index for the 1995/2000 period was 1.38, while the intermediate consumption growth index reached 1.72 in the same period.Further information is given in Table8.It is necessary to pay more attention to the indicator "Share of value added in investment", since investment has a multiplier eflect on pro_ duction.One unit of investment creates more than seven units of value added in the construction sector.The main reason is that Construdian has a high share of value added in produc- tion and ar the same time it has the highest increase in the price index for the 1995-2000 perio=d (about l0 Zo).Other sectors have lower price index growth and need higher investmenr input.The general trend in the Czech Republic's economic development explains the changes in the share of value added in invesrment during the 1995-2000 period, which are given in Thble 8.
Union programmes may accelerate the restructuring process in industry and agriculture.A prerequisite for these growth scenarios is the incorporation of SMEs imo Lhe restrueturing process, as one of the major sources of innovation, although many of the changes so far have been focused on large-scale industry.There are several points that the new policies need (no more than 25 % of the capital may owned by a company which is not an SME).There are also programmes financed by the state budget; and assistance is provided in certain fields, such as facilitating access to funding (programmes: Guarantee, Credit, Market, etc.), employment support (Special programme), reinforcing their position in the market and their improving competitive advantage (programmes: Cooperation, Design, Consultancy, etc.), regional programmes (Region, Regeneration, Vúlage, Mobile Salesroom, etc.), and so on.There are also banking and financial schemes in suppon of SMEs.The Small Loan Programme provides subsidies for financing development projects.The range ofthis loan is from 0.3-1 mill ion CZK, for a period of 4 years, and the interest rate is the prime rate plus I %.The industry programme that has been announced by the Ministry of Industry supports subprogrammes called Transfer and Qyality.The aim of this programme is to introduce new technologies and products, which will initiate R&D activities, in collaboration with domestic universities, Ol' using external suppliers.The Transfer programme covers up to 50 % of the cost of the accepted proposals to a maximum of 3.5 million CZK on projects (about 100000 EUR).The aim of Quality is to support projects specializing in information technology (IT) development and information control systems, test systems, methodology and diagnostics.