KfW Innovation Report: Number of innovative SMEs in Germany drops to record low

• 725,000 small and medium-sized enterprises provide innovative products or processes
• Innovator rate drops to 19%
• Innovation expenditure has risen to EUR 34 billion but is concentrated on increasingly fewer firms

The proportion of innovative SMEs in Germany has dropped to a new low. Only around 725,000 of the country’s approx. 3.81 million small and medium-sized enterprises have recently introduced innovative products or processes. The current KfW Innovation Report shows that the rate of innovators in the years 2016/2018 was only 19%. That means the share of innovative enterprises in the SME sector is down by more than half from its record level of 42% in the years 2004/2006. At the same time, the sum which SMEs spend on innovation increased again in 2018 for the first time since 2014 to now EUR 34 billion (2017: EUR 31 billion). Innovation expenditure in Germany is thus concentrated in increasingly fewer enterprises.

The current drop in the innovator rate can be attributed to a decline in both product and process innovation activity. The share of enterprises that brought new or improved products to market dropped by 2 percentage points on the previous period and, at 13%, is now the lowest since KfW began surveys in the years 2002/2004. The process innovator rate has also fallen to 13% (-4 percentage points).

Innovation activity was down from the previous period in all enterprise size classes. The current decline is slightly less pronounced in larger SMEs with more than ten employees than in small businesses (-2 to -3 percentage points compared with -6 to -7 percentage points). The smaller the enterprises are, the greater the loss of innovators is in a long-term comparison as well.

At the same time, both the current development and the long-term trend show that Germany is experiencing a decline above all in what are referred to as ‘imitative innovations’ – those which a company takes over from a competitor, possibly with certain modifications. The main reason for the current decrease is probably the weaker economic environment, as this type of innovation is very closely tied to the business cycle. Imitative innovations constitute the bulk of innovation activity in the SME sector and are important for the economy as a whole. They promote the dissemination of novelties and more efficient use of resources, and they strengthen the overall competitiveness of the economy. The share of SMEs with product imitations decreased by one percentage point to 11% in the period under review, falling by nearly two thirds from its peak of the years 2004/2006. By contrast, the proportion of enterprises with new-to-market innovations has remained steady at 3%, after several declines.

“SMEs are increasingly withdrawing from innovation activity”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “That is a dangerous development for the sustainability and international competitiveness of the German economy. After all, innovation plays a major role for employment, growth and productivity. The decline in imitative innovations is also a problem. Innovations will not have economic impacts until technological progress is realised across the economy as a whole. We also need to further reinforce the development of new-to-market innovations and new technologies. Given the ambitious innovation strategies being pursued by other countries, Germany will have to step up its research efforts. German business cannot afford to rest on the laurels of being on the cutting edge of technology but must secure its pioneer role and develop technologies for the future”, concluded Dr Fritzi Köhler-Geib.

The current KfW Innovation Report can be downloaded from: www.kfw.de/KfW-Konzern/Service/Download-Center/Konzernthemen/Research/KfW-Innovationsbericht