KfW Research: German SMEs are demonstrating slightly more innovation activity again

• In the previous three-year period, 41 per cent of businesses brought forth at least one innovation
• Even after accounting for inflation, innovation expenditure is up
• Innovation activity is strongly limited to few, mainly large businesses

SMEs in Germany are demonstrating somewhat more innovation activity again. In the survey period of 2022 to 2024, 1.6 million businesses – 41 per cent of all SMEs – generated at least one innovation during the three preceding years. That was two percentage points more than between 2021 and 2023. Businesses spent EUR 35.4 billion on innovation in 2024 – EUR 1.8 billion more than the year before. Even after adjusting for price increases, the rise was nearly three per cent.

But this moderately positive development cannot mask the fact that innovation activity in German SMEs has decreased significantly since the mid-2000s. Furthermore, it is concentrated in ever fewer, mostly larger businesses. Of the large enterprises with more than 50 employees, 73 per cent have recently introduced an innovation. Among small businesses with fewer than five employees, it was only 37 per cent. Large enterprises also account for the bulk of innovation expenditure.

In simple terms, innovation activity is defined as measures which businesses take to create new or improve their existing products, organisational procedures or processes as well as marketing methods. The innovation must be clearly distinct from the company’s previous practice or offerings.

“It is encouraging to see that slightly more businesses are innovating again. It is also noteworthy given that the economic environment remains difficult,”

said Dr Dirk Schumacher, Chief Economist of KfW.

“In light of the importance of SMEs to the German economy, however, we cannot be content with businesses’ innovation activity. Businesses used to innovate much more. Germany’s productivity growth and transformative capacity will be weakened in the long term if an increasingly larger proportion of enterprises fails to periodically upgrade their production processes and product offerings.”

In the SME sector, innovation is usually not generated by research and development departments but from day-to-day operation. Between 2022 and 2024, a mere three per cent of SMEs continuously undertook own research and development, and a further six per cent did so occasionally.

“It is important that economic-policy measures such as promotional programmes be designed in such a way that they also benefit small businesses without own research and development. Besides, eliminating bureaucratic hurdles and easing skills shortages are of key importance for small and medium-sized enterprises,”

said Dr Dirk Schumacher.

The study can be found at KfW SME Innovation Report | KfW.

KfW supports SMEs with a number of promotional programmes on behalf of the Federal Government. More information is available at We are strengthening the SME sector (German page).