SMEs’ declining innovative capacity also weakens their digitalisation

• Digitalisation and innovation in enterprises are interrelated
• Enterprises that go digital and innovate have more sweeping and broader digitalisation projects than others
• They also grow faster

Years of weakening innovative capacity in Germany's SME sector have also hampered their digitalisation progress. A study conducted by the Leibniz Centre for European Economic Research (ZEW) on behalf of KfW Research has revealed the correlation between innovation activities and digitalisation. According to the study, businesses that carry out both digitalisation and innovation projects achieve higher growth in turnover and employment than enterprises that conduct digitalisation without innovation. It highlights that digitalisation and innovation go hand-in-hand. The more an enterprise innovates, the more in-depth and comprehensive its digitalisation measures. At the same time, new digital technologies and digital data represent an important basis on which a business can carry out innovation activities. In this way, digitalisation helps enterprises to innovate. By contrast, enterprises that carry out digitalisation measures without innovating are smaller and grow more slowly. Besides, they often restrict their digitalisation activities to individual, less sophisticated processes.

Dr Fritzi Köhler-Geib, Chief Economist of KfW, commented: “For growth and employment, innovation and digitalisation are two sides of the same coin. Digital technologies often form the basis for innovation. On the other hand, it is particularly the innovative enterprises that drive digitalisation forward. The fact that ever fewer SMEs are innovating is therefore cause for concern, since progress in the digitalisation of SMEs will also slow down without a broad basis of small and medium-sized innovators.

The share of innovators among SMEs has been falling for around one and a half decades now. The KfW SME Innovation Report illustrates that the share of SME innovators dropped by nearly half (-49%) up to 2017–2019 since peaking during the 2004–2006 period.

More information is available at www.kfw.de/focus.