Give start-ups a leg-on

Start-ups are key drivers of economic growth and job creation. They are often a catalyst for radical innovation, contributing significantly to aggregate productivity growth, accounting for as much as half of it in some countries. Over the years, young firms have accounted for about one-fifth of employment but almost half of new jobs across OECD countries. 

During the COVID-19 crisis, start-ups have continued to play a critical role for economies. Surprisingly, some innovative young firms have reacted fast and flexibly to the pandemic. Many have been critical in helping countries shift towards fully digital work, education, and health services, and have provided innovations in medical goods and services. In fact, though the number of new business registrations generally drops during recessions, many successful innovative start-ups or businesses have emerged from periods of crisis. International examples include Uber, Airbnb, WhatsApp, and Pinterest, which were all founded during or just after the global financial crisis, and Alibaba’s Taobao that was founded during the SARS outbreak in China in 2003.  In Malta, the COVID pandemic has ushered in such businesses as Bolt and Wolt Food, while online shopping has boomed.

This confirms that periods of crisis are not only a challenge, but also provide new opportunities for entrepreneurs, as start-ups can help address the constraints created by difficult health or economic conditions, and respond to changing preferences and needs.

On the other hand, the crisis has curtailed the creation of start-ups, challenging their survival and limiting their growth. A missing generation of new firms has significant implications for economic outcomes.

Most existing start-ups have faced significant challenges during the economic contraction, being more vulnerable than older incumbents to the shock brought by the pandemic. This was to be expected, given that they tend to engage in high-risk activities compared with other small and medium-sized firms (SMEs). Additionally, they face constraints in accessing traditional funding, while their linkages with suppliers and customers are still relatively weak. They are also highly vulnerable to labour supply shocks.

Periods of crisis usually correspond to drops in business registrations.  Figures released recently by the National Statistics Office confirm that firm creation in Malta dropped by 7% in 2020.  This was somewhat lower than the 9% drop registered in the EU. But, when one considers that it followed a decline of 12% in 2019, it becomes rather worrying.

The difficulties faced by business units also depend on their ownership structure. When businesses are controlled by sole owners, their resources are necessarily limited and are particularly open to shocks. This is a problem in Malta, considering that over half of the businesses in the country are sole ownership ones. The share of such businesses has increased by almost two percentage points in three years.

Over half Malta’s business units are concentrated in just three categories (retail & wholesale trade, financial services, and professional & administrative), while the other half are split in 12 other categories. This heavy dependence on three economic sectors is one of the banes of the economy. And it does not look like it will change any time soon. In fact, new registrations in 2020 were also highly concentrated, with just three sectors (wholesale U& retail, transportation, professional and administrative) accounting for 47% of them.

Another characteristic of business units in Malta is that the absolute majority of them are micro-businesses employing less than nine persons each on average. Just over 1% employ between 10-50 persons. Those employing more than 50 persons are a tiny minority of 0.5%.

With so many micro-enterprises and SMEs, government action to shield them from the effects of the crisis was paramount. The Government’s response, targeting the firms’ financial fragilities, was thankfully tempestuous and massive. The measures administered by the Ministry of Finance and Malta Enterprise effectively sustained short-term liquidity needs with wage supplements, loan guarantees, direct lending, grants or subsidies.

Malta Enterprise has also recognised the specific needs of start-ups, through its Start-up Finance 2020 scheme, under which start-ups can obtain support linked to private equity, wage costs, procurement of assets, and working capital. Though the incentives are officially available until the end of 2022, one would hope that the scheme or a similar version of it will still be available after that.

It is imperative that our policy-makers continue to foster the ability of start-ups to grasp new business opportunities, reduce barriers to entrepreneurship, provide the right incentives, and boost entrepreneurial potential. In the current times of heightened restructuring, the country must seize the opportunity to build a stronger and more resilient economy.

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