Necessity is the mother of invention: German SMEs respond to coronavirus crisis by stepping up innovation

• The higher the loss in turnover, the greater the innovation effort
• Small businesses innovate the most during the crisis
• However, coronavirus-induced innovation is rarely based on research and development activities
• Coronavirus crisis is likely to hamper the development of fundamental innovations

Small and medium-sized enterprises are responding to the coronavirus crisis with more innovation. According to a current supplementary survey conducted on the basis of the KfW SME Panel, 43% of all businesses have already upgraded their products, processes or business models or are planning relevant measures to manage the pandemic. Given that the crisis broke out just a short time ago, this is a remarkably high proportion. By comparison, only 19% of SMEs introduced product or process innovations during the period of 2016-2018.

Enterprises that suffered heavy losses in turnover are also proving to be particularly innovative (41%). Moreover, enterprises that have already innovated in the past are innovating more than average (42% compared with 30% of enterprises that did not innovate in the past years). This demonstrates that innovative enterprises are capable of responding to crises at short notice. That makes them more crisis-resilient than others.

However, coronavirus-induced innovations are less likely to be based on research and development activities and are implemented in the company almost without any lead time. This allows the conclusion that they are not the result of more long-term development processes but often represent measures that can be adopted on an ad hoc basis. Rather, the companies’ tight financial situation is likely to actually cause more fundamental innovation projects to be spread over a longer period, reduced in scope or abandoned altogether. So there is reason to fear that the coronavirus crisis will adversely impact the development of fundamental innovations in the SME sector.

The Chief Economist of KfW, Dr Fritzi Köhler-Geib, commented on the results as follows: “Small and medium-sized enterprises in Germany are digging in to fight the crisis. Many of them have very quickly adapted their processes and business models to the more challenging conditions. That’s positive, but it is also important that enterprises maintain their research and development activities and retain their capacity to develop genuine new-to-market innovations.”

The study shows that the focus of innovation activity is on business processes, which have been improved or upgraded by 21% of all SMEs. Fourteen per cent of enterprises have updated or improved their business model. The same proportion of SMEs has brought new or improved products and services to market. This lower proportion compared with process innovations is consistent with the notion that product innovations are more often brought to market in upswing phases.

The Focus on Economics No. 295 “Innovation during the coronavirus crisis: necessity is the mother of invention” is available for download at www.kfw.de/fokus