The study aims at identifying the main drivers and barriers of innovation in the German SME sector. Based on empirical findings, the study derives policy conclusions for strengthening innovation in small and medium-sized firms. The main focus of the project is a comprehensive empirical analysis of innovation and competitive strategies in the firm sector and which types of obstacles the firms are facing when trying to innovate. The study employs data of ZEW's Mannheim Innovation Panel. Small and medium-sized firms are defined as firms with annual sales of no more than €500mn. The analysis covers five areas:

• determinants of innovation activity
• classification of small and medium-sized firms in terms of the innovative activity
• barriers to innovation in different types of small and medium-sized firms
• role and significance of different types of small and medium-sized firms in the German innovation system
• recommendations for economic policy