Luxembourg's economic fabric is essentially made up of small- and medium-sized enterprises, if we stick to the most commonly accepted definition. This is a company with fewer than 250 employees, an annual turnover not exceeding €50m and an annual balance sheet total of less than €43m. “In Luxembourg, 99.5% of businesses are SMEs, representing more than 40,000 companies," says , director of entrepreneurship at the Chamber of Commerce and head of the House of Entrepreneurship. “Almost all the structures fall into the SME category". And if you want to get a better idea of what Luxembourg businesses are like, Statec points out that of the 40,791 SMEs in the country in 2020, 87% employed fewer than 10 people. Only 2% of companies had more than 20 employees.
Key players
SMEs may be relatively small, but they are no less important to the economy. According to data from the European Commission, which focuses on companies in the non-financial business economy, SMEs employ 59.2% of the workforce in Luxembourg and generate 64.1% of the country's added value. As elsewhere in Europe, SMEs are a source of growth and job creation. In 2022, employment within SMEs was expected to grow by 1.2%, down on the previous year (2.4%).
In terms of the sectoral breakdown of the workforce, industry employs less than 8% of the workforce of SMEs in the non-financial market economy in Luxembourg (18.2% at EU27 level). Almost one person in two (48.9%) working in an SME in the grand duchy is employed in services, which is a higher proportion than at European level (42.7%). 21.4% of the workforce works in the construction sector and 20.9% in trade. The services sector generates almost half (47.9%) of the total wealth produced by SMEs in the non-financial market economy (compared with 40% at European level). Scientific and technical activities alone account for 19.5% of annual wealth (12.3% at EU-27 level).
Contrasting dynamics
The overall entrepreneurial dynamic, on a national scale, seems to have picked up again in 2023. “According to the Global Entrepreneurship Monitor, entrepreneurial activity, which essentially translates as business startups, has returned to its pre-pandemic level in Luxembourg, both in absolute terms and compared with other European countries," said Damgé. “In 2023, the proportion of residents actively involved in setting up a new business rose to 9.7%, compared with an all-time low of 7% in 2022." In other words, one person in ten is involved in an entrepreneurial dynamic. It is also interesting to note that 19% of the people questioned in this global survey say they want to start a business in the next three years. These rather positive figures should not conceal the challenges facing SMEs.
Aside from the renewed enthusiasm for entrepreneurship, the bankruptcy figures bear witness to the difficulties faced by economic players. The number of bankruptcies rose sharply in the third quarter of 2024 (273 compared with 160 in the third quarter of 2023, an increase of 71%), according to Statec. Excluding holding companies and investment funds, the increase is 60%, which shows that it is the real economy that is being affected. The construction sector, deeply affected by the rise in interest rates, is experiencing major difficulties. "We can see that young companies set up less than five years ago, during the covid period, are more affected by bankruptcies," stated Damgé. It's true that the established players are often more robust and can cope more easily with a difficult economic climate.
Weight of regulation
Between rising energy costs, inflation and its automatic repercussions on wage costs, the strengthening of the regulatory framework, particularly in terms of sustainable development, and the economic slowdown, business leaders must have had their hearts in their mouths. The latest edition of the Global Entrepreneurship Monitor highlights some major challenges and points to a worsening outlook for the future. In 2023, 38% of Luxembourg entrepreneurs reported weak growth forecasts, the highest proportion among the European countries surveyed, compared with an average of 28% for all countries.
On the other hand, while the fear of failure has increased in recent years (47% in 2023, 44% in 2022), it is broadly in line with national averages (45%). "While there has been a lot of talk about simplifying administrative procedures, what we are seeing above all is that new regulatory requirements, linked to sustainability or even increased cyber-security, are leading to additional burdens. Although SMEs want to comply, they don't always have the skills or resources to do so effectively," said Damgé. “Above all, the time and resources invested in these compliance projects prevent players from investing in innovation and in ways of improving their competitiveness. This creates barriers to business development and weighs on their profitability".
Getting back on track
The profitability of players is deteriorating and that company directors are not very confident about the future. “According to the latest Baromètre de l'Économie, business activity over the last six months has been less favourable than expected in the first half of the year, and this applies to all sectors apart from the financial sector," comments Damgé. “While 23% of companies had forecast a fall in activity in the first half of the year, 32% actually recorded a decline. Inflation, although it has slowed, and interest rates, although they have started to fall, are still weighing heavily on economic performance.”
Which sectors have been hardest hit? Manufacturing (45% have suffered a downturn, compared with 19% who had anticipated one six months earlier), construction (43%) and retail (40%), compared with just 7% for the financial services sector. "Rising prices and wages have had a significant impact on margins. Competitiveness is also suffering. Many businesses, particularly the smallest, do not have the financial flexibility to absorb all these increases", says Damgé, who advocates in particular an adjustment to the indexation system to ease the burdon on the smallest businesses.
Added to this are the other major challenges faced by SMEs, the two main ones being recruiting staff and accessing finance, as shown by the results of the Global Entrepreneurship Monitor. Against this backdrop, firms need to find their feet again so that they can explore new avenues for growth. "It is now important to give players back the means to develop, by easing constraints so that they can go out and find customers and differentiate themselves from the competition, whether local or international", she commented.
At a time when the European economy is falling behind the rest of the world, there is an urgent need to ensure that SMEs can get out of the rut they are in. Rather than regulating, leaders should be doing more to encourage economic players to invest in digital technology, in particular through aid and tax measures. “Using technology to automate, offer new services and provide new experiences is one of the main growth drivers for businesses today.”
While there is a great deal of assistance available to support digitisation, it is not always clear enough, or tailored to the real needs of the players involved. “It's important to support everyone's digital transformation, by correctly identifying opportunities at the outset, then deploying technologies, but also managing change and building skills." Skills development is another major challenge, to meet the dual challenge of digitalisation and sustainable development. But attracting, recruiting and training people is proving more difficult than ever. The housing crisis and the rising cost of labour in Luxembourg are not making life any easier for businesses.
Consolidating the foundations
In an uncertain and much more volatile world, developing a business must be part of a sustainable approach, which means being able to demonstrate a great capacity for adaptation and resilience. Throughout the life cycle of a business, from its creation to its transfer to the next generation, managers face a number of challenges. Running a business requires dexterity, but above all the ability to prevent setbacks, anticipate the next bends in the road and get a better grasp of the risks.
"To grow well, there are three main pillars to consider: solid capital, well-defined roles and processes, and well-structured governance", says Damgé. “Governance, in particular, must enable the company to adapt effectively to its environment and anticipate eventualities. For management teams, meeting all these challenges means providing inspiring leadership and nurturing a positive corporate culture, with strong values around sustainability in particular, that is understood by everyone, employees and customers alike".
Luxembourg entrepreneurs also report a strong commitment to social and environmental sustainability. In 2023, 54% of entrepreneurs said they were actively committed to maximising social impact. 66% said they were actively committed to minimising environmental impact. Between 2014 and 2021, the percentage of companies declaring sustainable development practices rose from 14.7% to 21.4%. In a context where sustainability criteria are becoming increasingly important in customer choices, these commitments should bear fruit. At least we can hope so. While continuing in this direction, Luxembourg companies, with the support of the government, must above all find their way back to competitiveness.
2,500 companies to be taken over
When talking about entrepreneurship, we mainly look at the figures for business startups. Another major challenge lies in the takeover of existing businesses. Over the next ten years, Luxembourg will have around 250 businesses to take over each year, or 2,500 businesses by 2035, employing a total of up to 10,000 people. Supporting these transfers is therefore a huge challenge. For those who want to start their own business, there are plenty of opportunities here too. The approach is obviously very different from that of setting up a business. However, there may be an interest in taking over a profitable business with the ambition of developing it and taking it further. The businesstransfer.lu platform was set up by the Chamber of Commerce, the Chamber of Trades and the Ministry of the Economy to make it easier for sellers and potential buyers to meet.
Entrepreneurs can post anonymous advertisements on the platform to sell their businesses. Behind this, the Chambers offer support services to facilitate the transfer process, which requires good preparation on the part of both the seller and the buyer.
This article was written for the small- and medium-sized business supplement published with the released on 11 December 2024. .
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