The proportion of innovative medium-sized enterprises in Germany is rising again after a good ten years of continuous decline: The innovator rate for 2014/2016 was 27,100,000, according to the current KfW Innovation Report. This means that around 1 million small and medium-sized enterprises in Germany recently invested in innovative products or processes – 200,000 more than in the previously examined period of 2013/2015. However, it is more than questionable whether this encouraging recovery already represents a reversal of the long-term downward trend.
The rate of SME innovation remains far from its peak of €421 billion in 2004/2006. At the same time, the amount spent by SMEs on innovation has been stagnating since the mid-1990s – and even fell again in 2016 to €32.2 billion (2015: €36.7 billion).
Small businesses in particular are declining sharply
Although the rate of innovators has recently increased among companies of all sizes, a long-term comparison reveals that small businesses with fewer than five employees are increasingly withdrawing from innovation activities. Around 80% of all medium-sized companies fall into this size category, and within ten years, the proportion of innovators here has fallen by a good two-fifths. Among large medium-sized companies with more than 50 employees, the proportion of innovative companies also declined significantly over the same period, but only by just under one-fifth. A look at the sectors shows that, in a ten-year comparison, the service sector (-17% points to 27% points) and the construction industry (-14% points to 15% points) have lost particularly significant numbers of innovators.
Less innovation-dependent sales
The continuously declining importance of innovations in SMEs is also reflected in declining revenues generated through innovations. In 2004/2006, 43% of small and medium-sized enterprises generated more than half of their revenues from their innovations; currently, only 25% do so. In contrast, the proportion of SMEs that generate only a maximum of one-tenth of their revenues from innovations has increased significantly over the past decade, from 30% to 59%.
Overall, the decline in the number of innovators among SMEs stems less from highly innovative pioneering companies than from the mass of companies that imitate product or process innovations and thus spread them throughout the economy (-161,000 points to 151,000 within ten years). The share of companies conducting their own research and development (R&D), however, is also below its peak of 161,000 in 2004/2006, but has remained at around 101,000 since 2010.
Companies see no need for innovation
For the new innovation report, KfW Research has for the first time surveyed non-innovative SMEs about why they forego innovative products or processes: With 54 %, the majority of them stated that, in their view, creating innovations is not necessary at the moment and does not bring any benefit to their company.
Indeed, analyses show that returns to innovation have been declining since the turn of the millennium. The reasons for this are manifold: more intense competition is putting increasing pressure on prices and costs, rising technological complexity is making imitation more difficult, and, last but not least, network effects are favoring pioneering companies in digital technologies.
One in five companies (20%) also cites a lack of ideas as the reason for their failure to innovate. The reasons for this lack of ideas are unclear. One reason could be a lack of expertise and skills among employees to seize existing innovation opportunities and develop innovative ideas. The current favorable business situation, with high returns and production capacity utilization, may also contribute to the fact that the question of innovation is not so clearly addressed. Ultimately, new innovation opportunities have not presented themselves to the broader SME sector in recent years: Since the internet boom, a new technological push has failed to materialize.
“Innovation efforts continue to decline”
"Despite the recent encouraging recovery in the innovator rate, it remains clear that SMEs' own innovation efforts continue to decline. This is not good news for the German economy and its international competitiveness – after all, innovations play a major role in employment, profitability, sales, and productivity,"
says Dr. Jörg Zeuner, Chief Economist of the KfW Banking Group. Economic policy must therefore urgently strengthen the development of new technologies and their dissemination in the economy.
"On the one hand, it is important to secure Germany's existing technological lead and to occupy new technology fields. On the other hand, innovation activities must be strengthened across the board among SMEs. This contributes to the diffusion of new technologies and secures the competitiveness of the German economy as a whole. To achieve this, learning and innovation processes must be improved, especially in companies without their own R&D. Training and continuing education, the establishment of adequate innovation management, teamwork, and improved access to new knowledge are helpful measures here. Implementing this also depends on the financial and human resources available to companies."
says Zeuner.
The KfW Innovation Report is available at: www.kfw.de/innovationsbericht
