The annual RIO Country Report offers an analysis of the R&I system in Germany, including relevant policies and funding, with particular focus on topics critical for EU policies. The report identifies the main challenges of the German research and innovation system and assesses the policy response.
Innovation in SMEs is a central part of all major R&I strategies and Germany’s SME sector is highly developed and a fundamental pillar of the national innovation system. This is evidenced by high shares of SMEs innovating in-house and SMEs introducing product, process, marketing and organisational innovations. In terms of innovation outcomes, firms in Germany generated 13% of their sales from innovative products and services in 2012. This number is higher than the EU-28 average (11.9%).
However, this share has been declining when compared with 17.4% in 2008 and 15.5% in 2010. The EU Innovation Scoreboard 2015 also registered a downward trend for SME innovation indicators with fewer SMEs creating product or process innovations (-3.1%) as well as marketing or organisational innovations (-5.4%) compared to the previous year. This is particularly true for sales of new-to-market and new-to-firm innovations as share of turnover for which a downward trend has been registered over the past ten years. The decline registered for 2014 was -5.5%. The expert commission advising the German government on matters of research and innovation (EFI Commission) also points to a decline in innovation intensity in SMEs, i.e. the percentage of a company’s turnover that is spent on innovation, which almost halved from 2.7% in 1995 to 1.6% in 2012. Over the same period, innovation intensity in large German corporations rose from 3.0 to 4.5%. One of the drivers of this decline seems to be the lower overall level of innovation expenditure by those SMEs that only conduct research occasionally. Expenditure by SMEs that are continuously engaged in R&D has remained stable over the years. Moreover, trends in German corporate employment relevant to innovation show that, on average, the percentage of highly qualified engineers and scientists among the staff of small businesses (<100 employees) fell slightly from approximately 2.7 to 2.6% between 1999 and 2010. During the same period, the percentage of highly qualified staff rose slightly (from 3.8 to 4.2%) in medium sized companies (100 to 500 employees) and strongly (from 6.0 to 7.1%) in large companies (>500 employees). Knowledge intensification in the economy was thus concentrated mainly in large corporations.
The reasons for the drop in the above mentioned indicators have yet to be identified and more research is required into cause and effect relationships before policies can be adjusted or refined.
This trend deserves high priority and political attention and more research into its underlying causes. Possible causes of the comparatively weak expenditure by SMEs include the decline in new business startups in the last few years – which may partly be an initial effect of demographic change - and the worsened situation for financing R&D activities in the wake of the financial and economic crisis. Another possible explanation is that the effects of skilled-labour shortages are much stronger for SMEs than for large corporations.
There is certainly no lack of attention to innovation in SMEs from the part of the policy maker but even though much has been done to create innovation friendly framework conditions, especially for SMEs, there have been calls to the German government to generally pursue a bolder innovation policy and to rise its target for R&D intensity to 3.5% of GDP.