SMEs Investing in Environmental Innovations Yield Higher Profits
Research
Investments in environmentally friendly technologies may not only benefit the environment; eventually, they can also result in cost savings and profit increases for companies. This is particularly the case for small and medium-sized enterprises (SMEs), as a study by the ZEW – Leibniz Centre for European Economic Research in Mannheim shows.
The study, which is based on data on 6,303 German companies from the Mannheim Innovation Panel (MIP, survey waves 2009 and 2015), is the first to investigate how environmental innovations are linked to SMEs’ profitability and whether there are differences to larger enterprises in this regard. Environmental innovations include all innovations within the production process that help to improve the environmental situation – regardless of whether they have been introduced for ecological or economic reasons.
While 55 per cent of SMEs in the 2009 MIP survey wave reported to be active in environment-related fields, this share decreased to 52 per cent in the 2015 survey wave. In the case of large companies, the share of environmentally innovative companies rose slightly from 71 per cent to 73 per cent over the same period.
SMEs seem to benefit more from environmental innovation
Irrespective of the size of the company, the return on sales of a company is always higher when introducing environmental innovations, with the average increase in profitability being 0.72 percentage points for the companies considered in the study. Corporate profits averaged between four and seven per cent, which means that the profits of companies who adopt environmentally friendly innovations are around ten to 20 per cent higher than those of other companies. However, this positive correlation between return on sales and environmental innovations becomes weaker with an increasing number of employees and, in particular in the 2015 MIP survey wave, SMEs seemed to benefit more from environmental innovations than large companies. This effect is particularly pronounced for innovations that increase resource efficiency and were adopted due to regulatory requirements, i.e. innovations that help companies reduce their consumption of energy, water or other materials per unit of output.
“Smaller companies often have less access to information than large corporations. Especially for SMEs, regulatory requirements can be an opportunity to learn about ways to increase resource efficiency in their production process,” explains Janna Axenbeck, ZEW researcher and author of the study. “For this reason, when designing new environmental policy measures, it is important that these measures provide small and medium-sized enterprises with comprehensive information on ways to improve resource efficiency. This would not only benefit our environment, but would also promote small and medium-sized enterprises in Germany.”
