KfW Innovation Report: Coronavirus crisis is slowing down innovation

• Three in ten SMEs scaled back their innovation activity in 2020
• Access to finance and skills shortages are still the main barriers
• Share of innovators in the SME sector grows to 22% as a result of new OECD definition

Innovation activity has been on the decline throughout the German economy for around one and a half decades, while innovation efforts are concentrated in ever fewer and mainly large enterprises. This trend continued in the coronavirus year 2020. The current KfW Innovation Report shows that innovation activity among SMEs continued to slip after surging briefly at the start of the crisis. Three in ten small and medium-sized enterprises (27%) reduced their innovation efforts from 2019, while only 12% of SMEs innovated more.

Last year as well, it was primarily small businesses with fewer than five employees that stopped innovating (balance between companies with increased and decreased innovation activity: -17 points vs. -1 point in enterprises with more than 50 employees). The main causes are the difficult financial situation and the uncertain prospects which the pandemic has created for many businesses. Irrespective of the size of their workforce, companies are more likely to stop innovating when the crisis threatens their survival and when they have suffered distinct liquidity shortages (balance: -34 points compared with -8 points in enterprises with sufficient liquidity). The same applies to those that expect the crisis to continue for a long time (balance: -31 points vs. +6 points for those that have already recovered from the crisis).

Dr Fritzi Köhler-Geib, Chief Economist of KfW, commented on the findings of the KfW Innovation Report as follows: “Difficulty in accessing finance is likely to continue gaining importance as a barrier to innovation especially after the acute crisis phase has been overcome. Given the tense liquidity situation and higher debt levels of companies, the trade-off between the desire for stronger resilience and the need for more investment in future competitiveness is becoming more difficult to manage. Innovation policy will therefore have to provide more financial incentives in order for businesses to innovate more than before the crisis. Besides, the skills shortage is currently slowing down innovation activity throughout the SME sector. Promotional measures aimed at building these companies’ innovation capacity must therefore be expanded. Innovations are crucial to addressing social challenges such as climate change, healthcare and demographic change. At the same time, they are the key to securing Germany’s good position in international competition – and thus to growth and prosperity. We can’t afford to respond slowly”, said Dr Fritzi Köhler-Geib.

In the current KfW Innovation Report, KfW Research looks at the developments in the coronavirus year and analyses innovation activity in the SME sector in the 2017/2019 period. A new OECD definition of what constitutes innovation, which was also used in KfW’s analyses, has led to an increase in the share of innovators in all enterprise size classes. Of a total of 3.79 million small and medium-sized enterprises, 22% (840,000) introduced product or process innovations, three percentage points more than in the previous period of 2016/2018. At the same time, 16% (13%) of SMEs brought new products to market, while another 16% (13%) implemented process innovations. Design changes are now counted as product innovations as well. Marketing and organisational innovations now fall into the category of process innovations. In 2019 the sum of SMEs’ innovation expenditure dropped on the previous year to EUR 32 billion (2018: EUR 34 billion).

The current KfW Innovation Report can be downloaded from:

www.kfw.de/KfW-Konzern/KfW-Research/Innovationen

The dataset:

The KfW Innovation Report is partly based on data obtained from the main survey of the KfW SME Panel in 2020, which is representative of small and medium-sized enterprises in Germany with annual turnover of up to EUR 500 million. In addition, KfW Research conducted several additional surveys on the effect of the coronavirus crisis – most recently between 3 and 14 May 2021 – which were linked to the main survey and evaluated for the report.