The Federal State of Baden-Wuerttemberg is among the regions in Europe with the highest research spending per GDP. Among the many factors contributing to this performance, small and medium-sized enterprises (SMEs) are regularly regarded as a particularly important source. Some authors propose that the network of innovative SMEs is the key feature of the innovation system in this region and distinguishes from most other regions in Europe.This project investigates whether SMEs in Baden-Wuerttemberg are indeed more successful in innovation and analyses the determinants of likely differences in innovation success compared to other regions in Germany. Five potential groups of determinants are considered in particular:

• Market positioning with respect to niche strategies;
• degree of technological novelty of innovations;
• orientation on research-intensive customer sectors;
• type of innovation financing, in particular the role of internal financing;
• co-operation with public science organisations from the region.

The analyses will be performed for a representative sample of SMEs from Baden-Wuerttemberg, covering all sectors that are particularly relevant to innovation (manufacturing, knowledge-intensive business services, logistics, financial intermediation, media, energy sector). In order to compare innovation success (and its determinants) of SMEs from Baden-Wuerttemberg with SMEs from other regions, a control group is built, containing SMEs in the same sectors from a number of other German regions. This allows us to identify the specific role of location factors in Baden-Wuerttemberg relevant for it's SMEs' innovation success. Innovation success is measured through a set of indicators covering both product and process innovations and considering also success on export markets and in terms of firm profitability.

Empirical base of analyses is the Mannheim Innovation Panel (MIP) of ZEW. Data from the MIP are merged with other data sources, such as Mannheim Enterprise Panel and patent data, in order to construct variables on firm ownership (including the role of family enterprises), credit ratings, firm age the production of new technological knowledge by field of technology.

By the means of econometric analyses we investigate two interrelated research questions:

• First, we test whether innovation success of SMEs from Baden-Wuerttemberg is significantly higher compared to a control group with similar structural characteristics.
• In case of significant differences, we will identify the role of the five explanatory factors listed above to explain these differences.