KfW Innovation Report: Number of innovative SMEs in Germany is up, but no trend reversal

• Rate of innovators gains five percentage points to 27% – still far below peak level
• Total investments by innovative SMEs have dropped slightly to EUR 32.2 billion
• Innovation decline is adversely affecting turnover with new products
• Main reasons for not innovating are lack of necessity and ideas

The share of innovative SMEs in Germany has risen again after dropping continuously for a good ten years. The current KfW Innovation Report shows that the rate of innovators in the years 2014/2016 was 27%. That means around one million small and medium-sized enterprises in Germany recently invested in innovative products or processes – 200,000 more than in the previous survey period of 2013/2015. But it is more than doubtful whether this welcome recovery already signals a reversal of the long-term downward trend. The rate of innovators among SMEs is still far below its peak of 42% in the years 2004/2006. At the same time, the amount which SMEs spend on innovation has stagnated already since the mid-1990s and dropped again in 2016 to now EUR 32.2 billion (2015: EUR 36.7 billion).

Even if the rate of innovators has recently picked up in firms of all size classes, a long-term comparison illustrates that small businesses with fewer than five employees in particular are increasingly abandoning innovation. Around 80% of all SMEs fall into this size class, and the share of innovators here decreased by a good two fifths within a period of ten years. The proportion of innovative firms in large SMEs with more than 50 employees also dropped significantly in the same period but by just under one fifth. A comparison across sectors shows the highest loss of innovators over a ten-year period in services (-17 percentage points to 27%) and construction (-14 percentage points to 15%).

The steadily decreasing presence of innovation in the SME sector is also reflected in the decline in turnover generated through innovation. Whereas 43% of SMEs generated more than half their turnover with their innovations in 2004/2006, that rate is now down to just 25%. In return, the share of SMEs that generate only up to one tenth of their turnover from innovations surged from 30% to 59% in the past decade.

Overall, the decline in the rate of innovators in SMEs is driven less by highly innovative pioneer enterprises but by the bulk of firms that imitate product or process innovations and diffuse them across the economy (-16 percentage points to 15% within ten years). The share of enterprises that conduct their own research and development (R&D), however, is also below its peak of 16% in the years 2004/2006 but has been hovering around the 10% mark now since 2010.

For the new Innovation Report, KfW Research has asked the non-innovators for the first time why they have decided not to innovate products or processes. The bulk of SMEs, 54%, reported that they currently did not consider it necessary or beneficial for their business to innovate. Analyses in fact show that returns on innovation have been on the decline since the turn of the millennium. There are many reasons for this. Tighter competition is increasing pressure on prices and costs, growing technological complexity makes imitations more difficult and, not least, network effects favour pioneer enterprises in digital technologies. One in five enterprises (20%) also mentioned lack of ideas as a reason for not innovating. Why these ideas are lacking is unclear. One reason could be lack of specialist knowledge and skills in the workforce for harnessing existing innovation opportunities and developing innovation ideas. The robust state of the economy with high returns and capacity utilisation levels is also likely to be a factor that makes innovation a less pressing issue. New innovation opportunities have not thrust themselves upon the wider SME sector in the past years either. Since the internet boom there has not yet been a new technological wave.

“Despite the recent welcome recovery of the innovator rate, the fact remains that SMEs continue to scale back their innovation activities. That is not good news for the German economy and its international competitiveness. After all, innovation plays a major role for employment, returns, turnover and productivity”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “Economic policy therefore must urgently strengthen the development of new technologies and their diffusion across the economy. For one thing, it is important to safeguard Germany’s technological leadership and occupy new fields of technology. For another, innovation activities need to be reinforced across the SME sector. That will contribute to the diffusion of new technologies and secure the competitiveness of the German economy as a whole. Learning and innovation processes also need to be improved, particularly in firms that conduct no R&D of their own. Helpful measures include training, developing appropriate innovation management, teamwork and improving access to new knowledge. The ability to implement them is also determined by enterprises’ financial and human resources”, said Zeuner.

The KfW Innovation Report can be downloaded from (available only in German): www.kfw.de/innovationsbericht

Details about the database:
The current KfW Innovation Report is based on the KfW SME Panel 2017. The KfW SME Panel is the only representative survey of the German SME sector (enterprises with turnover of up to EUR 500 million), making it the most important source of data on issues relevant to the SME sector. It enables projections to be made for all SME size classes and sectors. A total of 11,043 SMEs took part in the current wave of the survey.