Innovation in small and medium-sized enterprises (SMEs) is at the core of inclusive growth strategies: more innovative SMEs are more productive SMEs that can pay better wages and offer better working conditions to their workers, thus helping reduce inequalities.
Furthermore, recent developments in markets and technologies offer new opportunities for SMEs to innovate and grow. Digitalisation accelerates the diffusion of knowledge and is enabling the emergence of new business models, which may enable firms to scale very quickly, often with few employees, tangible assets or a geographic footprint.
SMEs are, on average, less innovative than large companies. For example, across OECD countries, the median value in the national SME share of business R&D is 35%. Moreover, small firms (10-49 employees) are approximately only half as likely as large firms to have a business website allowing for online ordering and only one-third as likely as large firms to be using Enterprise Resource Planning (ERP), a software platform that integrates core business processes in real-time.
However, aggregate figures conceal an extremely heterogeneous reality. Survey data show that a significant proportion of SMEs engage in all forms of innovation, especially in higher-income countries and that even the smallest employer enterprises (i.e. less than 10 workers) can reach productivity levels above the large-company average.
The contribution of SMEs to innovation has increased in recent decades thanks to changes in the way innovation takes place in the economy. Enterprise innovation is no longer limited to corporate R&D labs and is often the outcome of collaborative efforts in which businesses interact and exchange knowledge and information with other partners as part of broader innovation systems. This shift towards an ‘open innovation’ paradigm has reduced the need for innovation-related capital investments, making business innovation more accessible to SMEs. Furthermore, especially in science-driven sectors (e.g. biotech and nanotech), small businesses are often the source of radical innovations, thanks to their flexibility and to their ability to work outside of dominant knowledge paradigms; for example, SMEs account for about 20% of patents in biotechnology-related fields in Europe. SMEs also constitute the bulk of high-growth firms, which are quintessentially “innovative” enterprises able to grow fast over a short period of time thanks to disruptive changes in their ‘business as usual’ practices.
Differences in SME performance and growth orientation result from how internal strategic resources are leveraged to invest in in-house innovation and to collaborate with external partners. Evidence points to a strong link between better managerial skills and formal management practices (e.g. HRM, standards and certifications, accounting, etc.) on the one hand and productivity growth on the other. By way of example, process innovation often involves cost-reduction strategies, whose success depends on the capabilities of the company management. Similarly, the adoption of Industry 4.0, which involves the use of automation and digitalisation in manufacturing, requires strong managerial skills in SMEs.
Workforce skills are also important, especially in small businesses where a larger proportion of workers than in large companies are involved in the implementation of business innovation on the ‘shop floor’. In this respect, there is evidence that SMEs that provide employees with opportunities to develop problem-solving skills and to make use of their knowledge are more likely than others to succeed in developing new products or processes.
The adoption and effective use of ICT hardware and software is a form of business innovation, but also a prerequisite and further driver of other forms of business innovation. Certain management software (e.g. customer relationship management or enterprise resource planning) can support the professionalisation of small business management, but may require upstream improvements in managerial skills through training and consulting. Some digital technologies are more relevant than others for SMEs. For example, cloud computing can enable businesses to rent computing infrastructure and software services from a third-party provider without upfront investment in ICT capital. It can also alleviate the need for on-site IT staff, and can enable SMEs to make use of other relevant digital technologies such as data analytics, i.e. the use of raw “big data” for business purposes after adequate cleaning and processing. Policies that support investment in ICT should take into consideration the level of development, technology needs and managerial skills of the targeted companies.
The large majority of SMEs do not have an IPR strategy in place, nor do they integrate IPRs into their overall business strategy or model, which is mostly the result of a lack of knowledge and expertise in SMEs. Obstacles to the use of IPR become particularly acute when SMEs operate internationally and may involve legal overheads, multiple filings, regulatory and technical differences across countries, and the robustness of local IP enforcement. Supporting the development of managerial skills is also important to spread the use of IPRs in SMEs. SMEs are also often unaware of the close link between business innovation and business survival and growth, or may not be cognisant of how to engage in innovation; for example, small enterprise owners are often unaware of the extent to which digitalisation can improve their business. Small businesses may also be discouraged to innovate if large (international) players have dominant market positions, which may well be the case in an economy where technology leaders increasingly capture most market shares due to “winner-takes-all” dynamics. Globalisation has increased the importance of cross-border collaboration in innovation, but SMEs find it difficult to identify and connect to appropriate knowledge partners and networks at the local, national and global levels.