ERP Digitalisation and Innovation Loan given positive evaluation

• ZEW analysis confirms the positive impact of the KfW/BMWi promotional offer
• Public funds are being used efficiently
• Constitutes an important element of the portfolio to promote innovation in Germany

Some of the key factors that limit innovation among German SMEs include high costs, economic risks and financing difficulties. That is why KfW, as a promotional bank, is active in this area and, together with the Federal Ministry for Economic Affairs and Energy (BMWi), is providing offers to help ensure innovative projects do not fail due to a lack of access to credit. Since mid-2017, the bank has been using its ERP Digitalisation and Innovation Loan to promote SMEs investing in digitalisation or in innovative products and processes, by providing low-interest loans, assuming a high proportion of risk and, since February 2020, offering promotional grants. KfW commissioned the Leibniz Centre for European Economic Research in Mannheim (ZEW) to conduct an external evaluation of the effectiveness of this promotional product, covering the period from the start of the programme to late 2019. The results are pleasing: the ERP Digitalisation and Innovation Loan is helping to translate the innovation potential of SMEs into growth. The public funds are being used efficiently.

During the period under evaluation, 1,603 loans were granted, with a committed volume of lending totalling EUR 3.58 billion. Nearly 45% of the commitments fall under the “digitalisation projects” aspect of the programme, with a further 43% being allocated to “innovative companies” and 12% to “innovation projects”. As part of the programme evaluation, ZEW surveyed the companies about the promotion they received, as well as analysing its impact using modern statistical processes (causal analysis).

Particularly gratifying are the results regarding the efficacy of the public funds deployed: in the period from 2017 to 2019, these accounted for a figure in the mid double-digit range. This enabled KfW to mobilise additional innovation expenditure of around EUR 1.2 billion and additional investment of around EUR 1.9 billion in tangible assets by German SMEs: furthermore, the promoted companies created around 14,500 additional jobs, their annual turnover increased by an additional EUR 1.9 billion and the promoted activities achieved additional cost savings of around EUR 0.35 billion. Comparison with a control group of companies that did not benefit from the promotion highlights the positive effects of the ERP Innovation and Digitalisation Loan on the companies’ economic performance: in a two-year period, SMEs benefiting from the promotional activity increased employee numbers by 8.1 percentage points more than the companies that did not benefit. During this period, turnover grew by as much as 9.7 percentage points more than would have been the case without the promotion.

“We are delighted that ZEW’s external evaluation has confirmed the significance of our ERP Digitalisation and Innovation Loan as an important element of the portfolio to promote innovation in Germany,” says Dr Ingrid Hengster, Member of the KfW Executive Board responsible for Domestic Promotion. “The public funds that we deployed are having the intended positive impact , and are ensuring that German SMEs can invest in digitalisation and innovation. It is essential for German SMEs to do this if structural change and digital transformation are to succeed, and if the German economy is to remain competitive on the international stage.”

Thomas Bareiß, Parliamentary State Secretary at the Federal Ministry for Economic Affairs and Energy and Federal Government Commissioner for Tourism and SMEs, is also very pleased with the positive results of the evaluation: “The promotion of small and mid-sized companies is a particularly important issue for me. I am pleased that through the ERP Digitalisation and Innovation Loan we have been able to have such a positive effect especially on employee numbers and innovation expenditure among the promoted SMEs. These results are a great motivation to keep ensuring that we, together with KfW, use the ERP Special Fund to offer SMEs effective support as they emerge from the economic crisis caused by the coronavirus.”

Other key results of the ZEW evaluation include:

• Of the promoted SMEs, 15% believed it was KfW support that actually made it possible for them to implement the innovation or digitalisation project. For nearly half of companies (48%), it contributed to higher technological standards or a greater degree of novelty, while in 44% of cases it enabled companies to enlarge the scope of the project. 32% were able to start sooner.
• The activities financed using the ERP Innovation and Digitalisation Loan strengthened the competitive position of the companies in terms of both products and processes. From the companies’ perspective, increased efficiency is the key outcome from the projects promoted with the help of the programme. 86% report that the efficiencies achieved are of high or medium importance to their competitiveness. At 76%, improvements in product quality come in second, closely followed by cost reduction and profit increases, with 68% each.
• More than two thirds of the promoted companies (70%) were encouraged to apply for an ERP Digitalisation and Innovation Loan by their regular bank. In one quarter of those receiving support, the idea of submitting the application came from within the company itself. The channelling of the KfW funds through the customers’ regular banks (“on-lending”) also helps to ensure that the promotion reaches the customer efficiently and without undue bureaucracy.

The full analysis is available (in German only) at www.kfw.de/KfW-Konzern/KfW-Research/Innovationen