Innovation activity among small and medium-sized enterprises (SMEs) in Germany is experiencing a significant shift, according to recent findings by KfW Research. The analysis reveals a growing disparity in innovation between larger SMEs and their smaller counterparts. Between 2021 and 2023, 76% of SMEs with at least 50 employees introduced a product innovation to the market. In contrast, only 35% of businesses with fewer than five employees did so during the same period.
The share of innovators among larger businesses has increased by five percentage points compared to the previous period from 2020-2022, reaching pre-COVID-19 levels. However, small businesses saw a decline in innovation activity, dropping by one percentage point from the last period and four percentage points since 2018-2020.
These insights come from a special analysis conducted as part of the KfW SME Panel survey carried out between February and June 2024, involving responses from 9,556 SMEs across various sectors.
Overall, the rate of innovation among all German SMEs stood at 39% for the years 2021 to 2023. This translates to nearly 1.5 million SMEs producing innovations within this timeframe. Innovation expenditure remained stable at just under EUR 34 billion nominally but showed a slight decrease when adjusted for price changes.
A notable trend is that only a small fraction of large medium-sized enterprises are responsible for most innovation spending—2% account for more than half (56%) of total SME sector innovation expenditure.
Dr Volker Zimmermann, an expert in innovation and digitalisation at KfW Research, commented on these developments: “The current development marks a continuation of a trend that can be observed since the middle of the previous decade. In particular, small businesses and companies without any research and development of their own are increasingly less likely to innovate.”
Zimmermann further noted concerns about long-term impacts: “When more and more businesses fail to periodically renew their production processes and update their range of offerings, there is a risk that Germany’s productivity growth and transformative capacity will be weakened in the long term.”
Economic challenges appear to play a role in dampening innovative efforts among many enterprises. Positive economic expectations typically drive inventive activities; however, ongoing pandemic effects continue to hinder such capacity.
Zimmermann highlighted necessary measures: “In order for businesses to innovate more again, the impediments to innovative activity must be removed. These include skilled labour shortages but also funding problems.”
He emphasized supporting non-research-oriented firms: “The vast majority of innovations in the German SME sector emerge from normal day-to-day business – not in research and development departments...economic policymakers also need to pay more attention to needs...not engaged in research."
KfW offers several promotional programs aimed at supporting SMEs on behalf of Germany's Federal Government.