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 Romania and benchmark their contributions to job and value creation with other countries.

One in six Romanian SMEs is a scaler

In Romania, about 15 900 small or medium-sized enterprises (SMEs) became scalers between 2017 and 2020, accounting for 16% of the 55 000 SMEs in the non-financial business sector. Among those, about 5 300 were scalers in employment, 14 800 were scalers in turnover, and 4 200 were 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 50% from 2013 to 2016, and continued expanding at a slower rate until 2019, reaching 18 000. The number of scalers in employment was relatively constant over the same period and peaked in 2016-17, surpassing 7 400. 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, Romania and most other OECD countries provided relief measures to support employee retention. In 2021, however, the number of scalers in turnover partially rebounded, reflecting a quick recovery for some SMEs. Conversely, the count of scalers in employment remained stable, as persistent uncertainty deterred SMEs from committing to long-term investments in expanding their workforce.

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 2020, there were 2 000 high-growth scalers in employment and 7 700 high-growth scalers in turnover. The number of high-growth scalers in employment has been constantly declining over time, starting from more than 3 000 units in 2013. High-growth scalers in turnover instead followed a similar trend to all scalers in turnover, reaching a peak of 9 500 in 2016.

Scalers in employment added 145 000 jobs over three years

In Romania, scalers in employment created 145 000 jobs over the 2017-20 period. This accounts to 8.8 additional jobs for every 100 workers in SMEs in 2017. The contribution of Romanian scalers in employment is aligned with the average of other countries for which data are available.

The contribution of scalers in turnover amounts to 22% of all SME turnover

The total turnover of Romanian scalers in turnover in 2020 was EUR 27 billion larger than in 2017. The increase corresponds to 22% of the total turnover of Romanian SMEs in 2017. This compares to 12% on average across countries with available data, indicating that the contribution of scalers in turnover to value creation is about 80% higher in Romania.

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 Romania and in other countries across different groups of SMEs.

Romanian SMEs operating in construction are more likely to scale up

Most Romanian scalers operate in non-tradable services (29%), construction (19%), other tradable services (other than advanced tradable services - 18%) and medium-low tech manufacturing and extractive industries (17%). The concentration of scalers in non-tradable services and medium-low tech manufacturing and extractive industries reflects the overall sectoral specialisation of Romanian SMEs.

However, in certain sectors scalers are overrepresented. For instance, the construction sector comprises 13% of SMEs but 20% of scalers. The overrepresentation of scalers in construction, education, social and health services, and advanced tradable services indicates a higher likelihood to scale up for SMEs in these sectors than in manufacturing or non-tradable services. About 46% of SMEs in the construction sector become scalers, compared to 24% among SMEs in medium-low tech manufacturing. Relative to other countries, Romanian SMEs have a higher likelihood to become scalers in construction and in education, social, and health services.

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 of all sizes can scale up

The likelihood to scale up is similar across SMEs of different sizes, as the size distribution of scalers closely follows the size distribution of other SMEs. More than half of Romanian 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 5% of scalers. Differences in the likelihood to scale up across size classes in Romania are aligned with the cross-country averages.

Most Romanian scalers are mature SMEs

Most Romanian scalers (52%) are mature SMEs that are more than 10 years old. 26% of scalers are less than 6 years old (i.e. young) and the rest (22%) are between 6 and 10 years old.

Young SMEs are 1.6 times as likely to scale up than mature SMEs. About 40% of young SMEs scale up, compared to 34% of SMEs aged 6 to 10, and 25% of mature SMEs. This results in scalers being overall younger than other SMEs. The share of young scalers in all scalers is equal to 27%, i.e., seven percentage points more than the share of young SMEs in all SMEs. However, six in ten SMEs are mature firms in Romania. 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 and in Romania the 15 other countries.

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

The majority of Romanian scalers are located in (large) metropolitan regions (52%). This reflects the overall geographical distribution of SMEs in the country.

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

However, the proximity of SMEs to large metropolitan regions is associated with a larger likelihood to scale up. In Romania, 32% of SMEs in large metropolitan regions scale up, compared to 26% among SMEs in remote regions.

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

About one in five scalers in employment or turnover continue on their high growth path. Between 2016 and 2019, 17% of Romanian scalers in employment continued to scale up in employment after a first scaling up in the previous three years. These 500 firms employed 37 000 more people after six years, with an increase in the workforce of 347%. Among scalers in turnover, 26% achieved two high-growth periods in a row, reaching a total turnover that was 346% higher in 2019 compared to 2013.

In addition, 35% of scalers in employment and 36% 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 in Romania was slightly above the average value across the other countries with available data.

One in five scalers 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 Romania, 39% of SMEs that scale up in employment between 2013 and 2016 reduced their workforce over the following three years. Similarly, 28% of scalers in turnover had a lower turnover three years after scaling up. Relative to other countries, the share of scalers having a reversal was above average. For scalers in employment, in particular, the share was among the highest, together with Latvia. This points to specific challenges faced by Romanian scalers in employment in sustaining an expanded workforce for a prolonged period of time.

One in ten scalers was inactive three years after scaling up

For 8% of scalers in employment and 7% 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.