Incentives for SMEs to Invest in Skills

1. Investment in Skills in SMEs

SMEs constitute a large part of the economy and play a key role in ensuring that our economies and societies can adapt to today’s major transformations – globalisation, technological progress, demographic change and environmental change. In order to remain competitive and in the face of these challenges, SMEs need to secure access to skills and talent by attracting and retaining skilled workers, as well as up-skilling or reskilling their workforce.

Skilled workers are a key component of firms’ competiveness in a knowledge‑based economy, but SMEs are often less successful in hiring and retaining skilled workers than larger firms, especially workers with management, communication or problem-solving skills, which are crucial for innovation. Their employees are also less likely on average to participate in formal and non-formal job-related learning. (OECD, 2019[1]; OECD, 2019[2]). For instance, almost all (91%) large firms in the EU27+United Kingdom provided at least one continuing vocational training (CVT) course to their workers in 2015, as opposed to 77% of medium and 57% of small firms (Figure 1.1, Panel A). These shares differ across countries, with particularly low shares of firms engaging in training in Greece, Hungary, Latvia and Poland, but in all countries there is a considerable gap between larger and smaller companies. Even where smaller companies do offer training, the number of hours of training per worker is generally smaller than in larger firms offering training. Notable exceptions are Ireland and the United Kingdom, where small firms invest longer hours per worker in CVT courses than medium-sized and large firms, a fact that deserves further consideration in the future.1 The same gap between smaller and large companies also exists for other types of learning activities beside CVT courses such as guided on-the‑job training, rotation schemes, conferences and workshops, learning and quality circles.

Indeed SMEs face a number of challenges when it comes to investment in training and skill development of their staff: on average, they have less time and resources to devote to training, they have less understanding of what training systems can do to address their workplace needs, and they have more limited access to credit (OECD, 2017[3]; OECD, 2019[2]). SMEs tend to lack information on training opportunities or support mechanisms that are available to them, as well as on the benefits of investing in training relative to the perceived risks. Generally, smaller companies tend to be more reluctant to invest in human capital they could lose (e.g. because of poaching) and face higher opportunity costs of training, especially one that happens during working hours but outside the firm’s boundaries. The direct cost of training an employee may also be higher, if the firm cannot benefit of economies of scale, or if the initial cost of searching suitable opportunities can only be split over a limited number of training participants. Lastly, SMEs’ are less able to identify their skills needs and attract the right talent than in larger companies (Stone, 2012[4]). They usually have less developed human resource management systems, while owners and managers do not always have the capability to identify skill requirements in relation to training needs and talent acquisition, or to design an effective strategy for skill acquisition and development.

Figure 1.1. Continuing vocational training (CVT), by firm size

Note: The survey covers only firms with ten persons employed or more.

Source: European Continuing Vocational Training Survey (CVTS), 2015.

These challenges are further amplified in the context of technological transitions, as small businesses on average adopt new technologies at a slower pace than larger companies (OECD, 2018[5]; OECD, 2020[6]). Beyond basic levels of digitalisation, the emergence of new technologies, such as the Internet of Things, cyber security and big data creates further skills gaps, shortages and mismatches, especially for SMEs, who cannot compete with larger companies in attracting digital talent (European Commission, 2020[7]; OECD, 2021[8]). Skills shortages are registered at every level in the hierarchy of SMEs, from e‑Leadership skills to ICT-professionals to users’ digital skills, with SMEs running the risk of remaining excluded from significant market potential. Furthermore, surveys from multiple OECD countries, show that up to 70% of SMEs have increased the use of digital technologies during in 2020 (OECD, 2021[8]), which could worsen skill shortages.

The tendency for SMEs to underinvest in skills derives from a number of market failures, which are especially consequential for smaller firms (Stone, 2012[4]; OECD, 2020[6]). In this context, well-designed interventions by governments can engage employers in adult learning provision in a variety of ways and help address the misalignment between the supply and demand of skills. The purpose of this report, therefore, is to identify a range of public policies that can be effective in supporting and promoting investment in competences in micro, small and medium-sized enterprises. It presents a critical overview of instruments used across Europe, and highlights their implementation features, governance structure and success factors. In particular, the report focuses on measures that provide good examples in incentivising SMEs to invest in training their workforce, hiring skilled employees or assessing their needs.

Overall, the landscape of public policies for investments in skills is varied, with a constellation of measures at the national and regional levels, which affect both supply of, and demand for, skills and training. This report will focus on measures that target investment in skills in SMEs specifically or that benefit SMEs in particular, such as simplified procedures or greater support. It does not provide, therefore, a full review of the effectiveness of the overall adult learning system as in e.g. OECD (2019[2]; 2020[9]), despite the fact that this certainly has some bearing on SMEs’ ability to find suitable human capital. Similarly, the report is not concerned with measures that target the supply of skills with the aim of making it more responsive to the needs of SMEs, such as apprenticeship systems (OECD/ILO, 2017[10]), individual learning accounts (OECD, 2019[11]), or career guidance services (OECD, 2021[12]).

Given this approach and scope, the present report is the first systematic review of international reskilling successful practices for SMEs since Stone (2012[4]), on which it expands with more recent policy examples, a broader typology of instruments, and greater focus on the design of each policy. Other recent OECD analyses have also reviewed successful reskilling practices but with a selected focus on some regions (OECD, 2013[13]), financial instruments (OECD, 2017[3]), university-industry linkages (OECD, 2018[14]) or workplace innovation practices (OECD, 2020[15]).

1.1. The structure of the report

Drawing on a range of national examples, the present report identifies policies and programmes that have proved successful in supporting SMEs’ investment in skills. These initiatives are classified according to the barrier the SME faces in investing in skills: (i) cost, i.e. the direct costs of training or hiring and retaining workers with the required skills, as well as the opportunity cost of such activities; (ii) informational barriers, including the limited skills of managers and entrepreneurs; and (iii) co‑ordination failures between a firm and its skills and training ecosystem (other firms, universities, the public sector). However, as firms may face several co‑existing barriers, so some of the reviewed policy actions can tackle more than one barrier at the same time. Another distinction can be made between initiatives that require a change in regulation or legislation (but no financial commitment), and the majority of initiatives that imply spending or direct provision of services by the public administration. Among the latter, only a fraction provides direct financial support to firms for their reskilling activity.

Chapter 2 presents measures that aim to lower cost barriers and risks that SMEs encounter when investing in human capital. The chapter focuses mainly on financial incentives, which are broadly used to support SMEs accessing training and new talent, as well as investing in digital transformation and innovation. Among financial incentives available to governments, subsidies are the most used and suitable to target SMEs. Voucher schemes are especially frequent and, when used to acquire consulting services, have proven to be a scalable and transferrable funding scheme that allows SMEs to innovate. Also covered are tax incentives, payback clauses (which mitigate the risk of poaching) and measures that promote the recovery of costs linked to informal training, a form of learning that is often used in SMEs.

Chapter 3 focuses on measures that aim to build the capacity of SMEs to invest in human capital, supporting them in developing and accessing competences, services and structures that are instrumental to this type of investment. The chapter includes measures that support SMEs assess and anticipate their skills needs, develop the right competences and structures – such as HR functions – to offer relevant and quality training, and become innovative and attractive workplaces, where skills are used effectively. As the success of this type of measures is often linked to management and leadership skills within the company, the chapter also presents measures that focus on strengthening the learning and innovation culture, through mentoring or leadership- and management-development programmes.

Chapter 4 presents measures that promote co‑operation among firms and between firms and other institutions. It highlights the importance of including SMEs within learning networks, or in digital and innovation ecosystems, as this can reduce the costs of, or foster economies of scale in, firms’ investment in skills. This can happen through pooling of resources among companies or in the form of knowledge transfers.

In each chapter, a number of good practices from different European countries are presented, with a focus on practices that have proven successful in advancing SMEs investment in skills. The analysis discusses implementation details and strengths and weaknesses of the measures, and takes into consideration their potential for scalability (to other companies) and transferability (to other contexts). It also highlights how many successful cases combine financial support with the provision of direct expertise or other non-financial tools, which raise the return on the investment made.

The assessment of the success of the presented policies mainly relies on the relevant literature, discussions with institutional and non-institutional stakeholders, and the analysis of the policy design itself, and considers the potential of each measure to affect the outcome of interest (investment in skills by SMEs). In most cases, indeed, the monitoring, evaluation or review of users’ opinions on these measures do not exist. For the same reason, the report does not in general look at policies from the perspective of the optimal allocation of public resources, as very little evidence exists on the counterfactual outcomes in absence of these policies in order to carry out a full cost-benefit analysis of these policies.

The good practices identified in the report are mostly, albeit not solely, taken from countries that present a high participation of SME employees in training such as Denmark, Finland, the Netherlands, Norway, United Kingdom, Sweden, Ireland, and/or are front-runners in developing SME innovation and smart growth policies, such as Germany. The focus is limited to European countries, as the report was funded by the European Commission Structural Reform Support Programme.

As each policy is embedded in its country’s regulatory and policy system, effectiveness can vary across countries for the same policy, depending for instance on framework conditions and skills ecosystems that characterise the national context. Furthermore, there can be complementary policies that influence the effectiveness of the measure of interest, including policies that target the supply of training, which are not discussed in detail in this report. To the extent possible, the report tries to account for these elements while describing the good practices.

In addition, the analysis acknowledges and factors in the large diversity among SMEs, in particular in the context of the digital and green transformations. SMEs include both innovative and fast-growing companies that provide or use digital solutions, and companies that face significant challenges in acquiring the skills to benefit from these technologies. The target group is thus diverse, with different stages of corporate maturity and business goals. However, it has been noted that innovation and digital strategies may have greater impact on competitiveness and productivity when focusing on SMEs that have the propensity and capacity to lead, grow, digitise and internationalise their business (European Commission, 2020[7]). These SMEs have in fact the potential to act as intermediaries between leading companies and non-tech SMEs, thus fostering the diffusion and adoption of new technologies. This report describes measures that can best support the investment in skills for these high-potential SMEs.

Note

← 1.  For instance, the same ranking can be retrieved in the United Kingdom across all three waves of the Continuing Vocational Training Survey (2005, 2010, 2015), but only in the 2015 wave for Ireland.