Introduce mid caps as a company category complementary to SMEs
Facilitate targeted policy
June 27, 2023
Introduction
Germany is home – with regional differences in density, breadth and depth – to an entrepreneurial Mittelstand sector that is particularly pronounced in many respects, with many family businesses. These also create versatile products and suitable services away from the conurbations and often in partly cross-border value-added networks of small, medium-sized and large companies as well as together with science. Some of these solutions are in demand worldwide.
As a general rule, differentiated sector and company structures are a guarantee for the dynamic competitive advantages of German industry. Entrepreneurial ecosystems, clusters and network structures that can withstand constant scrutiny and dynamic change are particularly important in order to be able to develop competence bundles and synergies – and thus competitive advantages
If policymakers in Brussels and Berlin want to stand up for the EU's global competitiveness and strategic resilience as well as for local investment, jobs and growth, practical and future-oriented categories of companies offer a wide range of opportunities. Adequately defined, national and European Mittelstand policy is given clear guidance to develop strategic concepts and concrete measures accurately. In the case of companies, overarching objectives (innovation; climate protection; ...) can be stimulated or size-related disadvantages or vulnerabilities can be compensated for as needed, for example by means of financial support and regulatory relief.
For a targeted Mittelstand policy that is also felt across the board, decision-makers in Brussels and Berlin should not only introduce mid caps as a category, but also review the financial thresholds of the SME definition. The European SME definition has been in place since 2005, has long been in need of reform and does not do justice to current and foreseeable developments. This is because sometimes dramatic price developments, for example for energy, raw materials, materials and labor, result in leaps in sales that do not reflect the actual development of value creation. The BDI already presented reform proposals for the European SME definition in April 2018 (BDI: Making the European SME definition fit for the future)
Mid Caps: a survey
A study conducted by the Austrian Institute of Technology (AIT) on behalf of the EU Commission in 2022 shows a multitude of definitions of mid caps at the European and national level, which makes it difficult for policymakers to handle them consistently (AIT: study to map, measure and portray the EU mid-cap landscape, pp. 8-12).
While the AIT defines mid caps for its study purposes as companies with at least 250 but less than 1,500 employees, it remains to be noted that different sizes of mid caps are politically discussed or already operationalized. These range from small-mid caps with up to 500 employees to large-mid caps with up to 3,000 employees. All sizes appear to be politically expedient, but must be viewed in a differentiated manner because each has its own advantages and disadvantages for specific policies.
In its own study design (at least 250 / less than 1,500 employees), the AIT notes on the quantity of mid caps in the EU: " We estimate that they account for more than 13% of overall employment in the European business sector, and around 20% of all employees in the Nordic countries, Luxembourg, Germany, and Austria, while their share on employment is 10% or less in Spain, Portugal, France, Poland, or Greece." (AIT p. 3).
German statistics do not (so far) evaluate in the direction of mid caps. Based on a special analysis of figures from the Federal Statistical Office, it can be assumed that comparatively few companies in Germany fall into this category. Along the AIT cut, there would be around 15,000 companies (out of a total stock of around 3.5 million).
The AIT considers the entrepreneurial and thus economic policy quality of mid caps in the EU to be remarkable. This is because " their share is particularly high in industrial ecosystems that are key to the European Union’s competitiveness: Electronics, Aerospace & Defence, Energy, Energy-intensive Industries and Health" (AIT p. 3). They " grow faster than the average enterprise in most EU member states. Their innovation performance is above that of SMEs and slightly below that of large companies. Most of them are also active on markets outside the EU (AIT p. 3)."
The AIT has also studied the ownership structure of mid caps in the EU. These are often family-owned, but a considerable number of them are also subsidiaries of multinational companies (AIT p. 3). In any case, the category mid cap has long been established in the financial sector and refers to companies with medium-sized market capitalization on the stock exchange. It is important to broaden the perspective here and to consider companies far from the stock exchange, such as family businesses.
As a result, it is clear that targeted consideration of mid caps is oriented less toward quantity than quality. Companies that play a special role as agile drivers for innovation, scaling, transformation, growth and internationalization – in other words, for the objectives of a modern Mittelstand policy at national and European level – would be accessible.
Mid Caps: the political momentum
Knowing the special quality of mid caps, their importance has been confirmed from different perspectives for years.
One example is Brussels:
▪ The EU Commission's Communication "For a European Industrial Renaissance" of January 2014 (COM 2014/14) acknowledges the importance of SMEs for successful industrial policy. At the same time, sustainable clustering and entrepreneurial scale are seen as critical drivers for success in achieving industrial policy goals across Europe.
▪ The EU Parliament resolution on family businesses in Europe of September 2015 (2014/2210 INI) establishes a close link between family businesses and SMEs for good reasons (recital E and point 5). Specifically, the EU Commission is invited to "consider including family businesses of medium market capitalization among the beneficiaries of all existing instruments for SMEs and/or entrepreneurs (...)" (point 10).
▪ The EU Commission's Communication "Investing in a smart, innovative and sustainable industry" from September 2017 (COM 2017/479) revisits core industrial policy ideas from 2014. Thus, relevant actors at European, national and regional level would have “to remain mobilised to address changing value chains, sustainability challenges, shifts in global demand as well as remaining structural weaknesses in our business environment. SMEs remain particularly vulnerable"" (p. 3).
▪ In turn, the EU Parliament resolution on a new strategy for European SMEs from December 2020 (2020/2131 INI) sees and specifies the need for action "whereas mid caps contribute significantly to employment and growth, especially in some Member States; whereas the Commission should, as part of the REFIT initiative, assess the need for a separate mid-cap definition in order to enable targeted measures, while ensuring that this does not broaden the existing SME definition nor compromise SME support in any way" (point O)
▪ The EU Commission's "working paper" on the evaluation of the SME definition (SWD (2021) 280 final) from September 2021 states: " There is a distinct call for a tailor-made definition fitting companies that have outgrown the SME definition ceilings. It could be useful to look into the challenges that companies meet once they have ‘outgrown’ the SME-phase and analyse whether any policy gaps could be addressed" (p. 3).
A study commissioned by the EU Commission (implemented by the Austrian Institute of Technology (AIT)) outlines the European mid cap landscape and recommends: "policy should monitor and evaluate how existing initiatives benefit mid-cap firms and adapt these initiatives if necessary (AIT p. 3)".
In Berlin, in turn, the German federal government formulates (BReg: Comments as part of the public consultation concerning the review of SMEs (May 2018)):
“In the interest of allowing for larger medium-sized companies to be addressed under certain policies, any new Recommendation ought to introduce an additional category of “small mid caps” (250-500 staff). In light of the major importance of research and innovation for the competitiveness of the EU, it ought to be possible to address as many Mittelstand as possible" (BReg, p. 2). The SME definition should be supplemented with such a size segment, as a “new category would correspond to a new module in the overall toolbox” (BReg, p. 3). For then, a “uniform European definition of what constitutes a “small mid cap” would allow this do be done in a more targeted manner” (BReg, p. 3)
As a result, it is clear that in the political momentum in Brussels and Berlin, the special quality and high importance of mid caps have been strategically recognized, but concrete and consistent implementation is still pending. It remains important to understand conceivable measures not as a zero-sum game, but as a win-win situation that closes financial or regulatory funding gaps and thus opens up new perspectives.
Mid Caps: the political operationalization
Beyond strategic perspectives, parts of EU regulation already take into account that targeted financial support, as well as bureaucratic relief for companies, have a positive effect on investment, growth and employment in the EU and beyond, even beyond the SME category.
Examples include:
▪ Regulation EU 2015/1017 on the "European Fund for Strategic Investments" (EFSI) identifies in Art. 2 a broader spectrum of eligible companies. Considered are micro, small and mediumsized enterprises (SME as officially defined), small mid cap companies’ (having up to 499 employees) and mid-cap companies’ (having up to 3 000 employees)
▪ Directive EU 2014/95 on CSR reporting had exempted companies with fewer than 500 employees.
▪ Directive EU 2022/2464 regarding corporate sustainability reporting (CSRD) staggers the – in all cases very complicated – reporting obligation, at least in terms of time, along the size of companies.
Mid Caps: Conclusions and need for action
Mid Caps are qualitatively important players for the local economy and society, for cross-border activities in Europe, and for the global competitiveness and strategic resilience of the EU as a whole. From this perspective, there are good reasons to establish mid caps as a separate category of companies.
For initial steps, it would seem helpful to distinguish between "small companies with up to 499 employees" (small-mid caps) and "companies with up to 3,000 employees" (large-mid caps) along the lines of the EFSI Regulation. Policymakers should establish mid caps as a category and evaluate the effects of targeted categorization through robust data collection at national and European level in order to be able to take targeted action and, if necessary, follow up.
Introducing small-mid caps very quickly as a first step would have the advantage of being able to take this category of company into account on a case-by-case basis and in a comprehensible manner in the upcoming design of the Multiannual Financial Framework (MFF) for 2028 onwards and the EU funding programs or for regulatory relief. This would provide experience and resilient indications.
In order to introduce mid caps to selected EU funding programs in a controlled manner, funds could be allocated on a degressive basis or capped. Pilot projects, for example in the fields of climate, environment, research & development or internationalization, would show whether funding is targeted and to what extent European goals are achieved. In any case, the new MFF should provide more resources for strengthening competitiveness and resilience.
In terms of regulatory relief, it would be possible for the European legislator to reach beyond SMEs to companies where disproportionate burdens from regulatory requirements are still to be expected due to their size. Viewed positively, specific chapters in future foreign trade agreements, for example, could reach a target group that is demonstrably internationally active.
Imprint
Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin, Germany
www.bdi.eu
T: +49 30 2028-0
Lobby registration number: R000534
Editorial
Fabian Wehnert
Head of Department German Mittelstand and Family Businesses
T: +49 30 2028-1470
f.wehnert@bdi.eu
BDI document number: D1800