SMEs in Germany: Innovation is concentrated in increasingly fewer enterprises

• Share of innovative enterprises has almost halved since 2004
• Share of product imitators has dropped by six percentage points
• Rate of product and process innovators has fallen to a historic low
• But SMEs’ innovation expenditure remain stable

The proportion of innovative SMEs in Germany has fallen significantly in the past few years. According to the new KfW Innovation Report for the 2013/2015 period, the share of innovators fell by nearly 7 percentage points on the period of 2012/2014 to now 22%. The number of innovative SMEs dropped to 803,000 businesses, a decline by 237,000 against the previous period. The long-term trend towards fewer innovators thus continues, having reached the lowest level since surveys began in 2002/2004. At the time, the share of innovators was still 42%. The KfW Innovation Report draws on the representative data of the KfW SME Panel to survey the innovation activities of German SMEs – businesses with an annual turnover of not more than EUR 500 million.

The share of innovative enterprises has fallen across all sectors and size classes. The decline is particularly pronounced among small businesses with fewer than ten employees and in construction firms and service providers. The rate has fallen less sharply in research and development-intensive manufacturing (e.g. engineering, electronics and chemistry).

Total innovation expenditure in the SME sector has remained constant in the past three years, however, and even increased by EUR 3 billion to EUR 20 billion among large SMEs with more than 50 employees. In contrast, investment expenditure by smaller businesses has fallen from EUR 20 billion to just under EUR 17 billion. Investment in innovation is thus concentrated in increasingly fewer enterprises.

KfW Research has identified predominantly negative business expectations and high uncertainty with regard to economic and political conditions as the direct causes of the decline in innovative businesses during the period under review. In a long-term analysis across the past 10 to 12 years, difficulties in obtaining funding, demographic trends and the growing challenge of finding skilled workers are the main reasons for declining innovator shares.

Dr Jörg Zeuner, the Chief Economist of KfW, said: “in order to revive innovation activity, which has been declining across the entire SME sector for years, the innovation system as a whole needs to be reinforced. Germany should set itself ambitious goals and not rest on its achievements. This is true for investment in research and development in the public and private sector, for example. We have nearly achieved the EU's target set forth in the Lisbon process of 3% of GDP. However, other countries are pursuing even more ambitious goals. We therefore need bolder business founders, more skilled workers and strong, trusted financing partners who are able to carry substantial innovation risks. We also need a scientific community that is willing to allow businesses to use its findings, and we need a social climate that welcomes innovation and change.”

The KfW Innovation Report is available online at: www.kfw.de/innovationsbericht-mittelstand