Making Better Use of the Innovation Potentials of Small and Medium-sized Enterprises

Small and medium-sized enterprises (SMEs) are the backbone of innovative activities in Germany. For this reason it is disquieting that in the period from the end of the 1990s until the year 2003 the number of SMEs that successfully engaged in innovative activities fell by roughly 10,000 to 83,000 enterprises.

A current study conducted by the Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung - ZEW) and KfW Bankengruppe (KfW banking group) on behalf of the German Federal Ministry of Education and Research shows what economic policy measures would be suitable to improve the overall framework for innovation activities of SMEs. The study takes account of the huge heterogeneities and, thus, the very diverse needs of enterprises in the SME sector by breaking down the SMEs of the manufacturing sector and the knowledge-intensive service industries into five large groups which are given very specific economic-policy recommendations for action.

High-tech start-ups are young enterprises (which, depending on the industry, are not older than five to ten years) with a very high R&D (research and development) ratio (at least 10 percent of turnover, 40 percent on average). In the year 2003 there were about 5,000 such high-tech start-ups in Germany. The biggest challenge in the area of innovation is to ensure adequate access to financing and to open up sales markets for the products which often represent radical innovations. A functioning venture-capital market and support in the financing of research expenses are of central importance for such enterprises.

R&D service providers are older enterprises (which are at least five years, but usually more than ten years old) with a very high R&D ratio of 25 percent (more than 50 percent on average). In the year 2003 this applied to roughly 2,000 enterprises in Germany. These enterprises depend on the demand for R&D services from industry and, thus, depend strongly on the R&D cycles in the industries of their customers. A problem for R&D service providers could be the stronger support for R&D cooperation between industry and science if such support is geared towards applied R&D because in such an event the universities and other research institutions would increasingly appear in the market for R&D services as (subsidised) competitors.

SMEs that do R&D on a regular basis represent the core of technology-oriented SMEs in Germany at around 29,000 enterprises in 2003. Their total R&D expenditure amounts to more than EUR 3 billion annually, thus accounting for more than 50 percent of total R&D expenditure in the entire SME sector in Germany. They are the main recipients under most of the innovation programmes of the German government, the German federal states and the EU targeted at SMEs. Additional measures aimed at improving the use of innovation potentials in this SME group should in particular be targeted at those SMEs active in research that are on the fringes of the group, i.e. they are on the verge of abondoning their R&D activities because they think that continuing the R&D activities will produce lower returns in the future. Indirect R&D support might produce independent incentives for such enterprises to pursue ongoing R&D activities on a longer-term basis.

In 2003 there were more than 50,000 successfully innovating SMEs not engaged in regular R&D activities. This is more than half of all SMEs engaged in innovative activities. Their typical innovative activity is "imitating" ideas presented by other enterprises with regard to products and processes and - having adapted them to the specific needs of their customers - spreading them in market. Stimulating the innovation potentials of this SME group must be geared towards achieving several objectives: First of all, it is important to create incentives for a continuous R&D activity. This might be achieved, for instance, through indirect promotional instruments aimed at a broad-based impact and through a specific R&D entry support (for instance by financing part of the personnel costs or granting subordinate loans). A second important objective is to create incentives for innovating SMEs not to abandon innovation activities. The decisive aspects here, besides positive sales prospects for the enterprises concerned, are the availability and the price of factors that are critical for innovation activities, especially qualified staff and debt capital.

In terms of numbers, SMEs not engaged in successful innovation activities currently represent the largest group of SMEs at almost 55,000 enterprises. On average they are smaller (around 60 employees) than the enterprises in the other groups and their profitability is lower. The major share of this group (85 percent) did not engage in any product of process innovation activities during the last three years. Positive sales prospects, growing returns and the availability of favourable debt financing are the central factors for these SMEs when it comes to decide about taking up innovation activities.

Contact

Dr. Christian Rammer, Phone: +49 (0)621 1235-184, E-mail: rammer@zew.de