KfW Research: Fewer SMEs in Germany are innovating

• Economic situation and aftermath of COVID-19 pandemic have put the brakes on innovation
• Large enterprises are much more active than small businesses

Innovation activity is increasingly diverging within the German SME sector. In the past three years, 76% of SMEs with 50 or more employees brought a product innovation to market. Among small businesses with fewer than five employees, on the other hand, it was only 35% between 2021 and 2023.

Thus, the share of innovators among larger businesses rose by 5 percentage points compared with the 2020-2022 period, returning exactly to the level from before the COVID-19 crisis. Among small businesses, in turn, the share fell by one percentage point compared with the 2020-2022 period and even by 4 percentage points compared with the 2018-2020 period.

These are the findings of a recent special analysis conducted by the KfW SME Panel. It was conducted between mid-February and mid-June 2024. Responses were received from 9,556 SMEs from all economic sectors.

The rate of innovators stood at 39% among all small and medium-sized enterprises between 2021 and 2023. In other words, nearly 1.5 million SMEs produced an innovation during this three-year period. SMEs’ innovation expenditure remained almost on the same level as in the previous years, at just under EUR 34 billion in nominal terms, although slipping slightly on a price-adjusted basis.

A consistently high level of innovation expenditure in a smaller number of innovative enterprises points to increasing concentration in few businesses. Today, 2% of the largest medium-sized enterprises already account for 56% of innovation expenditure in the SME sector.

“The current development marks a continuation of a trend that can be observed since the middle of the previous decade. In particular, small businesses and companies without any research and development of their own are increasingly less likely to innovate”,

said Dr Volker Zimmermann, innovation and digitalisation expert at KfW Research.

“When more and more businesses fail to periodically renew their production processes and update their range of offerings, there is a risk that Germany’s productivity growth and transformative capacity will be weakened in the long term.”

It appears that many enterprises are no longer innovating because of the difficult economic situation. It is known that businesses are most likely to be inventive when they have positive economic expectations. In addition, the impact of the pandemic continues and may endure into the future, putting the brakes on innovative capacity.

“In order for businesses to innovate more again, the impediments to innovative activity must be removed. These include skilled labour shortages, but also funding problems”,

said Dr Volker Zimmermann.

“The vast majority of innovations in the German SME sector emerge from normal day-to-day business – not in research and development departments. In addition to supporting businesses that conduct research and development, which often spearhead innovation, economic policymakers also need to pay more attention to the needs of enterprises that are not engaged in research and development”.

The findings of the special analysis of the KfW SME Panel can be retrieved from KfW SME Innovation Report

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