KfW Innovation Report KfW Research: Innovator rate in the SME sector drops to 40%

• EUR 33.9 billion was spent on innovation in 2021, almost unchanged from the previous year
• Proportion of innovative enterprises grows with company size
• Easing the skilled labour shortage is key to more innovation

According to the new Innovation Report released by KfW Research, the share of innovative German SMEs currently sits at 40%. That means a total of 1.5 million SMEs brought forth at least one innovation in the 2019-2021 period. In the previous 2018-2020 period, the share of innovators was 42%. This shows that after a brief boom at the start of the pandemic, innovative activity dropped again in the second pandemic year. Besides the difficult economic environment, a likely major reason was that the longer the crisis dragged on, the more difficult it was for many businesses to allocate funds to innovation activities.

Innovation expenditure in the SME sector amounted to EUR 33.9 billion in 2021, remaining steady on the previous year (2020: EUR 33.7 billion). At the same time, a concentration process that has been ongoing for years is continuing. Increasingly fewer companies are investing in innovative products or processes, and those that do tend to be larger. The group of large SMEs with more than 50 employees, which account for 2% of the 3.8 million SMEs operating across Germany, spent EUR 18.5 billion, more than half the innovation expenditure in the SME sector.

A look at the different types of innovators shows that the share of process innovators remained steady at 34%, while that of product innovators fell by 4 percentage points to 28%. Most of the product innovations consist in enhancements or imitative innovations. Only one in fourteen SME product innovators introduced a new-to-market innovation. Most of the innovative activities of SMEs consist in disseminating and adapting new technologies and methods to customer preferences or specific fields of application, for example. Small and medium-sized enterprises only rarely carry out own research and development activities (8%, or 300,000 enterprises).

Compared with the previous year, the share of innovative enterprises has decreased at least moderately in all enterprise size classes. The proportion of innovative enterprises grows with the size of the company. At 72%, the share of innovators in the group of companies with more than 50 employees is today significantly higher than among small businesses with fewer than five employees (37%). Small businesses have fewer resources and supply smaller markets. That makes it harder for them to innovate and reduces the profits they could generate from innovating.

“From a macroeconomic perspective, innovation is a crucial driver of economic growth and productivity growth. Germany in particular, a country devoid of any major deposits of natural resources, must maintain and expand its technological leadership in order to secure its competitiveness and prosperity in the future as well”

, said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“Besides the renewed drop in the share of innovators, the finding that the impact of innovation barriers has also increased in almost all segments of the SME sector in the past 15 years underscores the urgency of addressing structural challenges now. Capacity and financing-related constraints top the list of innovation barriers. The shortage of skilled labour and the high costs of innovating are the most frequent obstacles. Easing the shortage of skilled workers is key to innovation growth in the SME sector. All actions that improve the supply of skilled workers in the German labour market indirectly also constitute innovation support measures. These can range from measures in school education through vocational and academic training and education to actions aimed at mobilising the domestic labour supply and migration policy”

, said Köhler-Geib.

“Expanding financial support is particularly promising for the target group of innovation-oriented small and medium-sized enterprises without their own research and development. Recently, these companies in particular have been increasingly confronted with constraints to innovation. At the same time, their share in innovation promotion has dropped at a disproportionately high rate, so that they are now clearly underrepresented compared with their contribution to the SME innovation system. It would also be advisable to strengthen the innovative capacity of small and medium-sized enterprises by improving their strategic skills. Many small businesses with well-established but not very innovative business models give little attention to the aspect of strategic business development because their day-to-day business is the main priority. Creating awareness of this aspect is a key starting point.”

The current KfW Innovation Report can be downloaded from

www.kfw.de/innovationreport

The dataset:

The KfW Innovation Report is based on the data of the main survey of the KfW SME Panel on innovation activity, which was conducted from 10 February to 17 June 2022. The data is representative of small and medium-sized enterprises in Germany with annual turnover of up to EUR 500 million. The OECD changed the definition of innovation in 2018. Besides technical innovations, new organisational and marketing methods are now also regarded as product or process innovations. The KfW SME Panel took this definition into account for the first time in the 2021 survey, so that the current KfW Innovation Report provides comparable data on the basis of the new OECD definition for the 2018-2020 and 2019-2021 periods.