KfW Research: SMEs delay innovation during the coronavirus crisis, digitalisation shows a mixed trend

• Coronavirus restrictions have driven a short-term push for digitalisation and innovation
• Financial constraints force many firms to defer or spread strategic long-term projects over time
• Small businesses in particular are more hesitant

The lockdown and contact restrictions prompted by the coronavirus pandemic have driven a short-term digitalisation and innovation push in the SME sector. But as the crisis continued to evolve, the tense financial situation has made businesses more reluctant to innovate. These are the findings of a special survey conducted as part of the KfW SME Panel in September 2020. It revealed that 25% of SMEs have scaled back their innovation activities in response to the coronavirus crisis while only 10% have expanded such efforts. The impetus for digitalisation remains positive for now. While 23% of businesses reported having expanded their activities, 14% reduced their efforts in this field.

The analysis also revealed that large businesses and those that undertake own research and development continued to implement or even intensified their digitalisation and innovation strategies even in the crisis, while small businesses were more likely to scale back their efforts. These have probably limited themselves to immediate measures that enabled them to continue trading. Companies that suffered sharp declines in turnover in particular lacked financial resources for longer-term and strategically oriented innovation and digitalisation activities. This gives reason to fear that the longer the crisis drags on, the more enterprises will curtail these activities.

Dr Fritzi Köhler-Geib, Chief Economist of KfW, commented: “The coronavirus crisis initially triggered a wave of innovation and digitalisation in many businesses, such as the expansion of home working capacities or changes to sales methods. But this push is superficial. After all, we see that the coronavirus pandemic is impacting on future investment in the SME sector overall. This applies to the immediate period during the acute crisis, and a downturn in future investment must be feared after the crisis as well, because businesses will then invest more in crisis resilience. These financial resources will then be unavailable for investment in greater competitiveness. Economic incentives can help reconcile these conflicting goals.”

Further information on the special coronavirus survey on innovation and digitalisation in the KfW SME Panel can be found at:
www.kfw.de/fokus