Scalers and the economy

A small group of SMEs that grow fast over a short period of time, i.e. “scalers”, provide a large part of the growth in jobs and economic value in OECD countries. This section contains an overview of the recent trends in the number of scalers in Estonia and benchmark their contributions to job and value creation with other countries.

Around 22% of Estonian SMEs are scalers

About 1 560 small or medium-sized enterprises (SMEs) became scalers between 2018 and 2021, accounting for 22% of the 7 100 SMEs in the non-financial business sector. Among those, about 550 were scalers in employment, 1 450 scalers in turnover, and 400 scalers in both employment and turnover.

Scalers in year 2020 are defined as enterprises with 10 to 249 employees (SMEs) that increased employment or turnover by at least 10% per year, on average, over the three previous years (2017-20). This means they grow by at least 33% over the three-year period.

The number of scalers in turnover grew by 53% from 2015 to 2019. The number of scalers in employment modestly grew by 13% over the same period. The number of turnover scalers declined sharply in 2020 as the COVID-19 pandemic spread. The number of scalers in employment fell as well, but less so. The reason is that SMEs that grew in 2018 and 2019 and were on track to become scalers by 2020 were unable to continue growing and might even had to reduce output or employment. The impact on turnover was more severe than on employment as generally firms tend to try to retain staff even through a crisis and particularly during the COVID-19 pandemic, Estonia and most other OECD countries provided relief measures to support employee retention.

High-growth scalers, defined as SMEs with annual growth rates exceeding 20% over three consecutive years, may exhibit distinct trends through economic cycles. Compared to other scalers, high-growth scalers may be faster to react to economic shifts and new market opportunities, but they may also be more constrained by lack of financial resources or tight labour markets. About one in three scalers grows by more than 20% per year on average over three consecutive years, qualifying as “high-growth” scalers. In 2021, there were 190 high-growth scalers in employment and 650 high-growth scalers in turnover. The number of high-growth scalers in employment reached its peak in 2016, hitting 260, but has since then been on a downward trend. High-growth scalers in turnover showed an upward trend after 2015, reaching its peak of 760 in 2019 before the COVID-19 crisis.

Scalers in employment created 11 000 additional jobs over three years

In Estonia, scalers in employment created 11 000 jobs over the 2017-20 period, which accounts to 5.9 jobs for every 100 workers in SMEs in 2017. Estonia belongs to the group of countries in which scalers in employment made a particularly small contribution to job creation by SMEs. The group also includes Slovak Republic and Austria.

The contribution of scalers in turnover amounts to 14% of all SME turnover

The total turnover of Estonian scalers in turnover in 2020 was EUR 4 billion larger than in 2017. The increase corresponds to 14.2% of the total turnover of Estonian SMEs in 2017. This compares to 12% on average across countries with available data.

Scalers’ characteristics

All types of SMEs can scale up. This section describes the characteristics of scalers in terms of sector of activity, size, age, and geographical distribution. It also compares the likelihood of SMEs to scale up in Estonia and in other countries across different groups of SMEs.

Estonian SMEs operating in construction and advanced services are more likely to scale up

Most Estonian scalers operate in medium-low tech manufacturing, non-tradable services, construction, and other tradable services (22%, 21%, 18%, and 17%, respectively). The distribution of scalers across economic activities mirrors largely the distribution of SMEs across these activities.

However, in certain sectors scalers are overrepresented, particularly in advanced tradable services, which comprise 12% of scalers but 8% of all SMEs. This reflects the higher probability of SMEs to scale up in these sectors. About 43% and 39% of SMEs in the education, social or health services sector and the advanced tradable services sector become scalers, compared to 18% in the other tradable services sector. Relative to other countries, Estonian SMEs have a lower likelihood to become scalers in the construction sector.

Sector groups include the following two-digit NACE sectors:

• Low and medium-low technology manufacturing and extractive industries: food, textile, paper, wood, refined petroleum, rubber, plastic, basic metal products, mining.

• Medium-high and high technology manufacturing: chemical products, pharmaceuticals, computer, electronic/electrical equipment, machinery, transport equipment.

• Advanced tradable services: software, telecommunications, consultancy, legal services, accounting services, architectural activities, scientific research.

• Other tradable services: travel agency, services to buildings/landscape, employment activities, veterinary, accommodation/food services, services for transportation.

• Other non-tradable services: electricity, gas and water supply, waste management, wholesale and retail trade, repair of motor vehicles/household goods, real estate activities.

• Education, social care and health services: Education, human health activities, residential care, social work.

• Construction: construction of buildings, civil engineering, specialised construction activities.

Source: Manufacturing sectors are aggregated using Eurostat’s high-technology classification of manufacturing industries. The classification of tradable and non-tradable services is based on Piton, S. (2021). Economic integration and unit labour costs. European Economic Review, 136, 103746.

SMEs across all size classes scale up

60% of Estonian scalers have between 10 and 19 employees at the beginning of the growth period, and almost one third have between 20 and 49 employees. In contrast, SMEs with 100 to 249 employees represent only 3% of scalers. The similar distribution of scalers and SMEs across size classes implies that the likelihood to scale up is not very different between smaller and larger SMEs. About 26% of SMEs in the 10-19 size class become scalers, compared to 15% of SMEs in the 100-249. Differences in the likelihood to scale up across size classes in Estonia are aligned with the cross-country averages.

Most of Estonian scalers are mature SMEs

Most Estonian scalers (56%) are mature SMEs that are more than 10 years old. 22% of scalers are less than 6 years old and another 22% are between 6 and 10 years old.

Young SMEs are 1.7 times as likely to scale up as mature SMEs. About 37% of young SMEs scale up, compared to 28% of SMEs aged 6 to 10, and 20% of mature SMEs. This results in scalers being overall younger than other SMEs. The share of young scalers in all scalers is equal to 22%, i.e., eight percentage points more than the share of young SMEs in all SMEs. However, six out of ten SMEs are mature firms in Estonia. It follows that most scalers are mature SMEs, as the lower likelihood to scale up is counterbalanced by a larger base. Similar to size, differences in the likelihood of scaling up across age classes are similar in Estonia and in the 15 other countries.

SMEs in remote areas are as likely to scale up as SMEs in metropolitan areas

The majority of Estonian scalers are located in metropolitan regions (67%). The distribution of scalers across typologies of regions mirrors the distribution of all SMEs. Therefore, SMEs can scale up in all types of regions in Estonia, including regions with only small cities or remote regions.

The OECD metropolitan/non-metropolitan typology for small regions (TL3) helps assess differences in socio-economic trends in regions by controlling for the presence/absence of metropolitan areas and the extent to which the latter is accessible by the population living in each region. TL3 regions are classified as “metropolitan” if more than half of their population lives in a functional urban area (FUA) of at least 250 000 inhabitants and as “non-metropolitan” otherwise. A “metropolitan region” becomes a “large metropolitan region” if the FUA accounting for more than half of the regional population has over 1.5 million inhabitants. The typology further classifies “non-metropolitan” regions based on the size of the FUA that is most accessible to the regional population. More specifically, “non-metropolitan” TL3 regions are subclassified into three possible types: i) with access to a metropolitan area, if at least half of the regional population can reach an FUA of at least 250 000 inhabitants within a 60-minute car ride; ii) With access to a small/medium city, if at least half of the regional population can reach an FUA of between 50 000 and 250 000 inhabitants within a 60-minute car ride; iii) remote, if reaching the closest FUA by car takes more than 60 minutes for more than half of the regional population.

Source: Fadic, M., et al. (2019), ‘Classifying small (TL3) regions based on metropolitan population, low density and remoteness’, OECD Regional Development Working Papers, No. 2019/06, OECD Publishing, Paris, https://doi.org/10.1787/b902cc00-en

At 24%, the likelihood for Estonian SMEs to scale up in metropolitan regions is only marginally higher than in remote regions (21%), and lower than in regions with or near a small-medium city (26%). This indicates that SME proximity to metropolitan regions is not a strong predictor of their scaling up.

Growth trajectories

While many SMEs consolidate at their new size after scaling up, rapid growth also brings new challenges, with some scalers failing to adapt. This section illustrates the growth trajectories of scalers in the three years following their (first) expansion phase.

The majority of scalers maintained their new size or even continued to grow

Between 2016 and 2019, 17% of Estonian scalers in employment continued to scale up in employment after a first scaling up in the previous three years. These 60 firms employed 2 000 more people after six years. Among scalers in turnover, 32% achieved two high-growth periods in a row, reaching a total turnover that was 555% higher in 2019 compared to 2013.

In addition, 37% of scalers in employment and 38% of scalers in turnover maintained their size or grew moderately in the following three years. The share of scalers that consolidated at the new size or continued growing was 7 percentage points lower for scalers in employment and 2 percentage points lower for scalers in turnover than the cross-country average.

One in three scalers in employment contracted after scaling up

Scaling up also brings challenges for SMEs. Firms may need to comply with stricter regulations, improve their managerial practices, or adopt a different financial model. Some scalers may struggle to adapt and experience a contraction after growing. In Estonia, 32% of SMEs that scale up in employment between 2013 and 2016 reduced their workforce over the following three years. Similarly, 21% of scalers in turnover had a lower turnover three years after scaling up, underscoring the challenges inherent in maintaining an expanded scale. Relative to other countries, the share of scalers having a reversal was 5 percentage points higher for scalers in employment and 3 percentage points higher for scalers in turnover than the cross-country average.

One in ten scalers was inactive three years after scaling up

For 14% of scalers in employment and 9% of scalers in turnover, there was no information available on their employment or turnover levels in 2019. This lack of information is open to different interpretations. First, the firm may be closed or about to close, which in most cases indicates that the business has not been successful. Second, the company may have been acquired by another entity, which often indicates success rather than failure. Third, the lack of information may simply be a “nuisance” in the data, e.g. due to reporting errors. It is not possible to know the exact incidence of each of the three alternatives. However, it is known that acquisitions are rare events even for growth-oriented businesses. Conversely, around 8-10% of businesses close each year. Therefore, it is likely that most former scalers with missing information have ceased operations.