Small and Medium-sized Enterprises: Falling Innovation Budgets Impede Cost Reductions

Unlike large firms, small and medium-sized enterprises (SMEs) continue to spend ever decreasing amounts on the development of new products and services, as well as on rationalisation measures. Following a rise in expenditure in 1998, levels of expenditure on innovation by SMEs in the industrial sector have again fallen. Levels of spending on innovation by SMEs in the service sector have remained steady since the mid-nineties.

In contrast to SMEs, large companies continued to increase their innovation budgets year on year until the end of the nineties. Investments made by large firms in the industrial sector continued to increase until the end of 2001. Decreasing SME expenditure on innovation has consequences; namely, that SMEs, which represent between 95 (industrial sector) and 99 per cent (distribution services) of all innovative businesses in Germany and are therefore a central part of Germany’s innovation system, are now, unlike large firms, increasingly unable to reduce their costs. As a result, they are becoming less and less competitive. This is a finding of the Innovation Survey 2002, carried out by the Centre for European Economics Research (ZEW) on behalf of the Federal Ministry for Education and Research (BMBF).

This trend does not show signs of changing. In comparison to the already very low level in 2001, SMEs in both the industrial and service sectors, expect to further reduce innovation budgets in 2003. SMEs providing services to other businesses expect that expenditure on innovation in 2003 will amount to only 10 per cent of the total expenditure in 2001. SMEs intheindustrial sectorexpectspendingon innovation to be cut by 15 per cent, SMEs providing distribution services expect cuts of 20 per cent. Large firms, however, plan to increase expenditure on innovation by 8 (industry, distribution services) or 15 per cent (business services).

The cost savings made by SMEs as a result of process innovations are clearly falling. In the last five years, the savings made by SMEs in the industrial sector as a result of operations improvements have fallen continuously. Whilst the cost savings made in 1996 totaled 4.7 per cent, savings amounted to only 2.2 per cent in 2001. Rationalisation measures have also played an increasingly insignificant role in reducing costs in businesses providing business services; cost savings made through rationalistion have fallen from 4.7 per cent in 1997 to 2.5 per cent. Reductions in costs achieved by providers of business services have stagnated, changing by only one per cent.

Levels of product innovation in SMEs in the industrial sector, however, have not fallen. With 5.7 per cent of turnover coming from the sale of new products or services, these businesses topped product-innovation rankings in 1998 and 1999. The difference between SMEs and large enterprises here is, however, considerable. In 2001, large businesses aimed to gain 10 per cent of their income from new products. The difference between SMEs and large businesses in the service sector remains unchanged. In this sector, the turnover from new products achieved by SMEs was 4 per cent, whilst this figure was 9.5 per cent for large companies. It is only small and medium-sized distribution companies which come off better than equivalent large companies in such comparison (approximately 4 per cent as opposed to 3 per cent).

Contact

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