KfW Innovation Report: Fewer SMEs are introducing innovations

• Innovator rate drops by 4 percentage points to 23%
• SME innovation expenditure drops further to EUR 30.7 billion
• Process innovations are bucking the trend, most likely driven by digitalisation

The proportion of innovative SMEs in Germany has dropped again. According to the current KfW Innovation Report, the innovator rate for the years 2015/2017 was 23%, 4% lower than in the previous survey period of 2014/2016. In other words, only around 850,000 small and medium-sized enterprises in Germany invested recently in innovative products or processes – 150,000 fewer than in 2014/2016. After a brief interim high, innovation activity in the SME sector has thus resumed its long-term downward trajectory. The rate of innovators among SMEs is down by nearly half from its peak of 43% in the years 2004/2006. The amount which SMEs spend on innovation has also been decreasing since 2014 and dropped again in 2017 to now EUR 30.7 billion (2016: EUR 32.2 billion).

The current decline is exclusively driven by the trend in product innovators. The share of enterprises that brought new or improved products to market dropped by four percentage points on the previous period. At 15%, it has now fallen to the lowest level since 2002, when it was first included in the KfW SME Panel. By contrast, the process innovator rate has increased for the second time in a row to 17%, surpassing the product innovator rate for the first time. One likely reason for this is the growth of digitalisation in the SME sector, which drives the modernisation of production processes and administrative workflows.

Innovation activity by enterprise size was down -3 to -6 percentage points from the previous period in all size classes. But a long-term comparison shows 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 dropped by well over half within a period of 11 years. Among large SMEs with more than 50 employees, the share of innovators also dropped significantly over the same period, but only by a good one fourth. The decline since the mid-2000s is probably due to a combination of factors. Among them are growing skills shortages, the ageing of the workforce as a result of demographic change, growing access barriers to innovation finance, and the absence of a new technological wave.

In addition, enterprises in which research and development (R&D) is firmly embedded in the business model play a special role: They form a relatively small group of currently 8% of SMEs, but one that continually introduces innovations with a high degree of novelty. Nine in ten enterprises that conduct R&D complete at least one innovation project within a three-year period.

“The decline in innovation activity in the SME sector is continuing”, said Dr Volker Zimmermann, innovation expert at KfW Research. “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. In order to counteract the decline in the innovator rate, innovation activities should be strengthened broadly across predominantly imitative SMEs, for example by providing organisational and human resources support. These innovators are important because they ensure that new technologies are diffused across the economy. Innovations will not have economic benefits such as additional economic growth and the hoped-for renewed increase in productivity until technological progress is realised across the economy as a whole”, said Zimmerman. “What is also needed are policies that further reinforce the development of new technologies and support for pioneer enterprises. German industry must maintain its technological edge and occupy new fields of technology. Given the ambitious innovation strategies being pursued by other countries, that will require greater innovation efforts at home. It is particularly urgent in the face of the current business cycle phase which is threatening to exert a dampening effect on innovation activity. Policymakers’ commitment to the target of allocating 3.5% of GDP to R&D expenditure by the year 2025 is an important signal. Providing initiatives and promotional measures with sufficient financial resources will play a crucial role in whether this goal will actually be achieved.”

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

Details about the database:
The KfW Innovation Report is based on the SME Panel (KfW-Mittelstandspanel), which has been conducted since 2003 as a recurring postal survey of small and medium-sized enterprises in Germany with annual turnover of up to EUR 500 million. It regularly surveys small and medium-sized enterprises on their innovation activity. With a database of up to 15,000 companies a year, the KfW SME Panel is the only representative survey of the German SME sector, making it the most important source of data on issues relevant to the SME sector. As it is representative of all SMEs of all sizes and across all branches in Germany, the KfW SME Panel offers projections for even the smallest companies with fewer than five employee. A total of 9,666 SMEs took part in the current wave.