SMEs: Hopes of a reversal in the trend for innovations

• SME innovator ratio has stabilised at a low level after falling sharply due to the financial crisis
• However, product innovations are still declining
• Positive business expectations raise hopes of an upturn in innovative activity

The innovativeness of German small and medium-sized enterprises (SMEs) has stabilised after declining sharply as a result of the financial crisis of 2008/2009, but has still not recovered on a sustained basis. This is evident from a current special survey by the KfW SME panel. The proportion of companies which have launched new products or processes is stagnating at around 30%, which is still almost a third lower than the pre-crisis level. However, there are reasons to hope that the trend will be reversed this year: one in five SMEs which have recently carried out no innovations at all are, in fact, now planning to step up their own innovation activity, once individual business conditions have improved. The anticipated economic upturn is therefore likely to provide impetus for SME innovations.

"Innovations and technical progress are the only permanent source of long-term economic growth. To ensure that German SMEs can fulfil their role in the value chain, product ranges and manufacturing facilities must be continuously updated. It is therefore essential for Germany as a business location that SMEs overcome their reluctance in relation to innovation efforts", said Dr Jörg Zeuner, Chief Economist of the KfW Group. "However, I am confident that innovation activity at SMEs will gain momentum this year as the economy picks up".

The trend in so-called imitative product innovations has remained negative recently: only half as many SMEs are currently launching imitative product innovations as was the case in the middle of the last decade. The main reason for this is likely to be the weak economic activity of recent years. It has obviously not made sense for companies to launch imitative product innovations in the market - something which generally doesn't require lengthy development periods and is demand-driven - since they have not regarded the sales potential as good enough to justify incurring the associated innovation costs.

In contrast, the proportion of so-called original product innovators has shown a positive trend at a low level for the second year in succession, and reached 6% in the period 2010/12. Since the market launch of genuinely new products is associated with a high level of innovation activity, they are not as heavily dependent on the economic trend. The growth of almost one per cent corresponds to approximately 21,000 more companies launching new products in the market than in the previous period. The proportion of process innovators (launch of new manufacturing processes) has also been positive, and has almost regained its pre-crisis level of 18%. The growth corresponds to 46,000 additional SMEs which have modernised their production processes.

However, it is not sufficient to focus solely on the economic trend to consistently utilise the innovation potential of the SMEs. Innovation activity is also being hampered by specific obstacles such as financing problems, bureaucracy or the risk of a shortage of qualified personnel. According to Jörg Zeuner: "Too low a level of innovation activity from a macroeconomic perspective also reflects a malfunctioning of the market process. Addressing this issue and creating the necessary environment for innovations can be regarded as an ongoing task of economic policy".

The full report entitled "SME panel 2013: Innovations. Are SMEs finally ready to take off?" can be downloaded at www.kfw.de/fokus . It is based on a special survey carried out by the 2013 KfW SME panel, which compiles representative data for German SMEs up to the year 2012.