Cyprus urged to push business mergers to fix ‘structural weakness’

Cyprus should actively encourage mergers and acquisitions to help overcome the structural weakness of its business landscape and lift the country’s competitiveness, the Cyprus Economy and Competitiveness Council said on Monday.

In its statement, the council said the very small size of most Cypriot firms remains a key constraint on growth, noting that around 90 per cent of businesses employ fewer than 10 people.

That fragmentation, it argued, limits productivity, access to finance, innovation capacity and the ability of companies to compete internationally.

Larger firms, it said, typically benefit from economies of scale, stronger bargaining power with suppliers and customers, easier and cheaper access to funding, greater scope for research and development and improved resilience through diversification.

Scale also allows businesses to expand abroad, whether through exports, foreign subsidiaries or strategic cross-border mergers.

At the same time, the council cautioned that size alone is no guarantee of success.

It warned that large organisations can suffer from bureaucracy, slower decision-making, reduced flexibility and a growing distance from customers, particularly in fast-changing and highly competitive markets.

Against that backdrop, the council said it was returning to the issue of business growth because policies and practices in Cyprus often work at cross purposes, discouraging companies from scaling up rather than supporting a clear competitiveness strategy.

The comments come as Cyprus slipped one place to 44th out of 69 economies in the 2025 IMD global competitiveness ranking.

The council attributed the decline mainly to weaker economic performance linked to international investment trends, alongside mounting shortcomings in infrastructure, especially basic infrastructure.

It noted that a new reform push is under way, covering areas such as taxation, the justice system and the labour market, which could support competitiveness.

Relevant guidance, it added, is also contained in Mario Draghi’s report on the future of European competitiveness, while the finance ministry has already prepared an action plan to promote mergers and acquisitions, including specific measures and timelines.

Before any measures are rolled out, however, the council said clear strategic objectives must be defined and wider spillover effects carefully assessed.

These include impacts on other sectors, society, the environment and natural resources, as well as on Cyprus’ relations with strategic partners, particularly the EU.

It also stressed the need to distinguish between sectors where scale genuinely improves competitiveness and those where it does not, so that policies are properly targeted.

Start-ups, it added, should not be crowded out. Young innovative companies play a crucial role in competitiveness and innovation and require tailored policies alongside any push for consolidation.

At EU level, the council noted, the European Commission has announced plans to encourage mergers and acquisitions through regulatory simplification, financial support and diplomatic initiatives, while at the same time strengthening the position of small and medium-sized enterprises through a more supportive legislative framework.

The council said policy design should be grounded in data, identifying sectors that benefit most from economies of scale, those exposed to intense international competition and the prospects of both traditional and emerging industries.

“It is considered unreasonable to encourage a business to remain small, possibly because it will lose a subsidy or face higher compliance costs, at a time when its competitors outside Cyprus benefit from economies of scale,” it said.

It also called for lessons to be drawn from international experience, citing countries such as Singapore, Ireland, Brazil and India.

Potential side effects must not be overlooked, the council also warned. The profile of larger firms, including those from other EU states or third countries, will affect labour markets, housing, infrastructure, energy and water demand, environmental pressures and income distribution, while reactions from other EU member states should also be factored in.

Turning to practical steps, the council said it fully endorses the main recommendations of the Draghi report and called for the development of an enabling ecosystem for mergers and acquisitions.

This should include a strong start-up environment, supported by accelerators and incubators that increase acquisition opportunities, alongside public backing for early-stage funding and mentorship.

It also proposed public matchmaking platforms to connect potential buyers with local firms seeking growth or exit options, as well as a stronger push to promote Cyprus as a regional hub, leveraging its access to the EU, the Middle East and North Africa.

Strengthening bilateral investment agreements, it said, could further support capital inflows and help Cypriot firms expand abroad.

Other recommendations include investment in digital infrastructure to facilitate remote due diligence and transactions, specialised training for legal and financial professionals in cross-border deals, and a review of how de minimis rules are applied so that firms are not discouraged from growing or merging for fear of losing subsidies.

The council also urged the simplification of merger procedures, a sharp reduction, or abolition, of related fees and tax burdens, and the creation of specialised public-sector units, including within the judiciary, to handle large-company and merger and acquisition cases more efficiently.

Further proposals include stronger protection for minority shareholders, better corporate governance, support for listings on the Cyprus Stock Exchange (CSE) or other regulated markets, and broader financing options beyond bank lending.

These range from revitalising the domestic capital market and encouraging institutional investors such as pension funds, to expanding the corporate bond market and attracting foreign capital.

The council also emphasised financing as one of the most serious obstacles to mergers and acquisitions. The limited role of the domestic capital market and the absence of national development-focused financial institutions, it said, constrain access to funding.

The council called for renewed consideration of establishing such an institution or alternative flexible financing mechanisms, as well as closer cooperation with European bodies such as the European Investment Bank (EIB), with the aim of widening financing options and lowering funding costs.