OREANDA-NEWS. The innovation activity of German SMEs has contracted for the third year in succession. Only 28% of small and medium-sized companies recently invested in innovative products or processes, as confirmed by the new KfW SME Innovation Report. The share of SME innovators is therefore currently lower than in the 2007-2009 period affected so heavily by the financial crisis. The KfW Innovation Report covers innovation activity between 2011 and 2013 – these are the most up-to-date representative figures available. Product innovations have fallen particularly sharply, while process innovations have dipped only slightly.

By foregoing innovations, small and medium-sized enterprises also pass up on the opportunity to exert a positive impact on their business success. According to the KfW study, sales revenues and employment numbers grow roughly two-fifths more quickly in innovative SMEs than in companies which do not aim to achieve any product or process innovations at all. Their return on sales has risen by 7% in two years compared to that of non-innovative small and medium-sized enterprises.

"The current KfW Innovation Report confirms that the sales revenues of innovative SMEs increase more quickly, they generate higher yields and they create more jobs. If small and medium-sized enterprises become less innovative, this spells bad news for the international competitiveness of the German economy and also for Germany as a business location", commented Dr J?rg Zeuner, Chief Economist at KfW.

According to the KfW analysis there are now only about 1.01 million innovative small and medium-sized businesses in Germany at present. 51,000 companies have stopped innovating compared to the previous period reviewed (2010-2012), and there are various reasons for this decline. One of the main triggers is the ongoing economic stagnation in Europe. The main types of company abandoning innovation are otherwise highly innovative SMEs in the manufacturing industry (e.g. those conducting intensive research and development in mechanical engineering, electrical engineering or the pharmaceutical industry) as well as large and international SMEs because the macroeconomic climate is hindering the market placement of their innovations. Even if the economic prospects for 2015 leave no hope of a swift return for these businesses to innovation, they are expected to become innovative again when the economy picks up.

Taking a longer-term perspective, it is not so much the highly innovative companies that are losing their innovative capacity. What is worrying is the development among small firms as well as in sectors where little research is conducted. Since the middle of the 2000s, the innovation output of small companies with fewer than 5 employees has fallen by 39%, and by 38% and 43% respectively for businesses in construction and the services sector. Pricing competition is growing in all industries. The little leeway there was for investment in innovative products and processes is therefore quickly disappearing in sectors with a low research intensity.

"A continued withdrawal of SMEs from innovative activities must be prevented. The stronger the pricing competition, the less room to manoeuvre there is. Difficulties with financing constitute a further obstacle for innovation. This is where economic policy has to stay on the ball", said Zeuner.