Innovations in SMEs fail because of lack of money

A recent study called “innovations in SMEs”, carried out by the KfW banking group in co-operation with the Centre for European Economy Resarch (ZEW) which was presented last week in Frankfurt, reveals that in the period between 2002 and 2004 42 percent of all German small and medium-sized entities (SMEs) have carried out successfully at least one innovative project. This represents an increase of 4 percent as compared to the 2000 to 2002 period. However, the survey also criticizes that the quality of innovations, in particular in the processing industries, which are heavily dependent on research and development, is deteriorating.

In the car manufacturing industry and medical engineering the share of companies introducing successfully a market innovation decreased by 15 percent to 10 percent as compared to the year 2002. Another problem: In particular young companies are increasingly less willing to venture on the development and successful market introduction of innovative products and services. In this category the percentage of innovative companies has virtually halved from 11 to 6 percent.

The most important obstacle for innovations are financing problems. The majority of innovative SMEs (59 percent) financed their innovation activities from previously generated profits or current cashflows. According to the study, it is in particular very small and recently founded companies which do not dispose of the necessary internal financing potential and therefore have to refrain from innovations due to a lack of money.

In such cases suitable sponsoring tools such as the ERP-Startfund and the ERP-Innovations programme made available by the Reconstruction Loan Corporation (KfW) as well as the High-Tech-starter fund set up jointly by the Federal Government, KfW and industry. However, there is also a need for a new kind of impetus in order to improve financing and general conditions for innovations, e.g. a more intensive use of intangible assets such as patents for financing purposes.

The study is available in a long and an abbreviated version and can be downloaded free of charge in PDF format. GERMAN