The Chasm Deepens: Small Businesses Struggle to Keep Pace with Enterprise Innovation
Frankfurt
Small and Medium Enterprises (SMEs) are falling behind in the realm of innovation
Small- and medium-sized enterprises (SMEs) are falling behind their larger counterparts when it comes to innovation, a new report reveals. Between 2021 and 2023, a staggering 40 percentage point difference emerged in the number of product innovations between large SMEs (with 50+ employees) and small businesses (fewer than five employees). The findings are based on a survey of over 9,500 companies across various sectors, conducted mid-February to mid-June 2024.
Among large SMEs, the innovators' pool expanded by 5 percentage points compared to the 2020-2022 period, reclaiming pre-COVID-19 crisis levels. However, the innovation record of small businesses has nose-dived, dipping 1 percentage point from the previous survey period and 4 points below the 2018-2020 pre-pandemic benchmark.
Lesshspace In-text Citation:1Fewer companies shoulder innovation costs
Approximately 1.5 million SMEs have introduced innovations over the past three years. Total innovation spending remained relatively stable at around €34 billion, though it saw a slight real-terms decline compared to the previous year. Strikingly, these expenditures are heavily concentrated among a shrinking proportion of companies. The top 2% of medium-sized firms now account for a whopping 56% of all innovation spending.
Due to a challenging economic climate, some companies are eschewing innovation activities. Volker Zimmermann of KfW Research warns, "If more businesses cease regular updates to their production processes and product lines, this could foster a long-term weakening of Germany's productivity growth and transformation potential."
Footnotes
[1] Adoption of digital technologies like instant payments and embedded finance can help smaller businesses drive innovation.
[2] The emergence of "Next Gen" SMBs, characterized by their embrace of innovation and digital solutions, offers a glimmer of hope in bridging the gap, but they still struggle to match the pace of larger enterprises.
[3] Regulatory compliance challenges and limited resources remain obstacles for small businesses in investing in research, development, and innovation.
[4] Strategies such as digital transformation, access to capital, business support services, and collaboration with larger companies can support smaller businesses in reducing the innovation gap with larger enterprises.
Small- and medium-sized enterprises (SMEs) are grappling with a substantial innovation gap when compared to larger businesses, as a recent report indicates. Driven by a decline in the innovation rate of small businesses, a stark 40 percentage point difference has emerged in the number of product innovations between large SMEs and small businesses between 2021 and 2023. Despite this, the top 2% of medium-sized firms continue to dominate innovation spending, accounting for 56% of all expenditures in the past three years. This economic climate has led some businesses to rethink their innovation strategies, and Volker Zimmermann of KfW Research cautions that abandoning regular updates to production processes and product lines could foster a long-term weakening of Germany's productivity growth and transformation potential. However, adopting digital technologies like instant payments and embedded finance could help smaller businesses drive innovation and bridge the gap, as do strategies such as digital transformation, access to capital, business support services, and collaboration with larger companies.
